ORTHODONTIC CENTERS OF AMERICA INC /DE/, 10-K, 2000-03-30

ORTHODONTIC CENTERS OF AMERICA INC /DE/
10-K, 2000-03-30
SPECIALTY OUTPATIENT FACILITIES, NEC

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999, or

[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
__________.

COMMISSION FILE NO.: 000-25256

ORTHODONTIC CENTERS OF AMERICA, INC.
------------------------------------
(Exact name of registrant as specified in its charter)

<TABLE>

<S> <C>

DELAWARE 72-1278948
-------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>

5000 SAWGRASS VILLAGE CIRCLE, SUITE 25
PONTE VEDRA BEACH, FLORIDA 32082
- - --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (904) 280-4500
--------------

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>

<S> <C>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
COMMON STOCK, $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.01 PAR VALUE PER SHARE
--------------------------------------
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the shares of the Registrant's Common Stock held
by non-affiliates of the Registrant on March 23, 2000 was approximately
$745,612,977, based upon the closing price per share of the Registrant's Common
Stock as reported on the New York Stock Exchange on March 23, 2000. As of March
23, 2000, there were 48,363,907 outstanding shares of the Registrant's Common
Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement relating to the Annual
Meeting of Stockholders of the Registrant to be held during 2000 are
incorporated by reference into Part III of this Report.

<PAGE> 2

PART I

ITEM 1. BUSINESS

OVERVIEW OF THE COMPANY

The Company is the leading provider of practice management services to
orthodontic practices in the United States. The Company develops orthodontic
centers ("Orthodontic Centers") and manages the business operations and
marketing aspects of orthodontic practices, which allows orthodontists who are
affiliated with the Company ("Affiliated Orthodontists") to focus on delivering
quality patient care. Since its inception in 1985, the Company has grown to
manage 537 Orthodontic Centers located in 43 states, Puerto Rico, Japan and
Mexico, with 346 Affiliated Orthodontists at December 31, 1999. From January 1,
1985 to December 31, 1999, the Company developed 288 Orthodontic Centers,
acquired the assets of, and affiliated with, 316 existing orthodontic practices
and consolidated 67 Orthodontic Centers.

Management believes that the Company's success has resulted in large
part from the quality of the Company's Affiliated Orthodontists and the value
that the Company has added to the Affiliated Orthodontists' practices. By
implementing the Company's operating strategy and proprietary operating systems,
management believes that Affiliated Orthodontists have been able to realize
significantly greater productivity, patient base and profitability than
traditional orthodontic practices.

The Company's proprietary office design permits an Affiliated
Orthodontist to treat patients without moving from room to room. The Company's
proprietary patient scheduling system groups appointments by the type of
procedure and dedicates certain days exclusively to new patients. These
operating systems, along with the efficient use of an average of five
orthodontic assistants per Orthodontic Center, have enabled Affiliated
Orthodontists practicing in Orthodontic Centers open throughout 1998 to treat an
average of 78 patients per nine-hour patient treatment day during 1999, as
compared to an average of 45 patients per operating day treated during 1998 by
orthodontists in the United States generally.

The Company develops and implements marketing plans for the Orthodontic
Centers, utilizing local and national television, radio and print advertising
and internal marketing promotions. During 1999, the Company spent an average of
approximately $64,426 per Affiliated Orthodontist on direct marketing costs and
advertising. In contrast, traditional orthodontists, who rely primarily on
referrals from dentists and other patients, spent an average of approximately
$4,400 on marketing and advertising in 1998.

As a result of the Company's marketing and advertising strategy, each
Affiliated Orthodontist who had been affiliated with the Company for at least
one year generated an average of 513 new case starts during 1999, as compared to
the 1998 national average of approximately 200 new case starts per orthodontist.
During 1999, Affiliated Orthodontists generated a total of 126,307 new case
starts. At December 31, 1999, the patient contract balances of the Affiliated
Orthodontists associated with 1999 new case starts totaled approximately $369.1
million.

The Company is not engaged in the practice of orthodontics. The
Affiliated Orthodontists maintain full control over their orthodontic practices,
determine which personnel, including orthodontic assistants, to hire or
terminate and set their own standards of practice in order to promote quality
orthodontic care.

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<PAGE> 3

THE ORTHODONTIC INDUSTRY

Industry Overview

In 1998, orthodontists in the United States initiated treatment for
approximately 1.8 million patients, according to the 1999 Journal of Clinical
Orthodontists Orthodontic Practice Study (the "1999 JCO Study"), a biannual
study of the United States orthodontic industry. Of these patients,
approximately 81.2% were between the ages of nine and 18 and the remaining 18.8%
were primarily adults between the ages of 25 and 35. Based upon the results of a
1994 study conducted by members of the Department of Orthodontics of the
University of Florida and based upon management's experience in the orthodontic
industry, management believes that the total market for orthodontic services
substantially exceeds the number of patients currently seeking treatment.

According to the 1999 JCO Study, the number of orthodontists practicing
in the United States has remained at approximately the same level since 1989.
The United States orthodontic industry includes approximately 9,000
orthodontists and is currently highly fragmented, with approximately 86% of the
practicing orthodontists acting as sole practitioners. According to the 1999 JCO
Study, approximately 9.8% of orthodontists practicing in the United States are
affiliated with a practice management company or other management services
organization. Orthodontists must complete up to three years of postgraduate
studies following completion of dental programs. Many dentists who are not
orthodontists also perform certain orthodontic services. Data relating to these
individuals are not included in the 1999 JCO Study.

The United States orthodontic industry generates approximately $4.0
billion in annual gross revenues, with the average orthodontic practice
generating gross revenues of approximately $600,000 per year. Orthodontics is
generally an elective procedure, with approximately 75% of payments for
orthodontic services made directly by the person receiving treatment and
standard dental insurance covering an additional 25% of such payments. Managed
care represents a small percentage of revenues generated in the orthodontic
industry.

The table below presents certain information included in the 1999 JCO
Study concerning the United States orthodontic industry in each of the years
presented:

1990 1991 1992 1993 1994 1995 1996 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of
practicing
orthodontists ...... 8,720 8,760 8,856 8,958 9,060 9,098 9,115 8,934

Number of new
patient cases ...... 1,308,000 1,314,000 1,416,960 1,478,070 1,540,200 1,592,150 1,640,700 1,786,800

Average fee per
case ............... $ 3,050 $ 3,221 $ 3,401 $ 3,447 $ 3,492 $ 3,649 $ 3,703 $ 3,940
</TABLE>

Management believes, based upon the 1999 JCO Study, that the total
number of new patient cases has increased only moderately because of the
reliance of orthodontists in traditional orthodontic practices on referrals from
general dentists or existing patients for new patients. Orthodontists in the
United States spent an average of approximately $4,400 on marketing and
advertising in 1998. Therefore, to increase revenue many orthodontists have
raised the fees they charge for their services.

Traditional Orthodontic Practice

The traditional orthodontic practice typically includes a sole
orthodontist, who practices at a single primary location or at an average of

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less than one satellite office, with an average of approximately three
orthodontic assistants and two business office personnel. At a typical
orthodontic office, chairs are arranged in an open room in a somewhat circular
pattern. Both the orthodontist and orthodontic assistant must complete treatment
on a particular patient before treating the next patient. The traditional
orthodontic office is structured so that the orthodontist rotates from one
patient to another, as an orthodontic assistant completes the orthodontic work.
In the traditional practice, the orthodontist manages all business aspects of
the practice, as the use of third party management services is not typical.

In a typical orthodontic practice, before braces are applied a patient
is required to complete as many as four preliminary appointments, consisting of
an initial examination and sessions for making impressions of the patient's
teeth, taking x-rays and placing spacers between the patient's teeth. The
patient returns for monthly adjustments before the braces are removed and a
retainer is made to maintain the orthodontic treatment. In 1998, standard case
fees in traditional orthodontic practices averaged approximately $3,880 for
children and approximately $4,200 for adults. The charges for preliminary
appointments, including a required down payment, averaged approximately $970 to
$1,050, or approximately 25% of the total fee. Fees are paid each month by the
patient for services performed at that visit.

According to the 1999 JCO Study, during 1998, the average orthodontist
initiated treatment of approximately 200 patients, treated approximately 45
patients per operating day and maintained approximately 450 active cases. In
addition, the average orthodontic practice consisted of one or two offices and
generated gross fees of approximately $600,000, with the orthodontist realizing
net practice income of approximately $300,000.

OPERATING STRATEGY

The Company seeks to add value to the orthodontic practices that it
manages. Key elements of the Company's operating strategy include:

Emphasizing Quality Patient Care. All Affiliated Orthodontists are
graduates of accredited orthodontic training programs and participate in
advisory committees that meet twice a year to perform peer review studies and to
consult with the Affiliated Orthodontists. In addition, the Company provides
operating systems and support that enhance the ability of Affiliated
Orthodontists to provide quality patient care. Senior clinical technicians and
the clinical staff receive training in procedures which enhance the level of
patient service. Quality of care is monitored through peer review procedures
administered by the Affiliated Orthodontists through their advisory committee.

Stimulating Demand in Local Markets. The Company develops and
implements marketing plans for each Orthodontic Center, utilizing local and
national television, radio and print advertising and internal marketing
promotions. Based upon the success of the Orthodontic Centers in attracting new
patients, management believes that the Company's marketing activities, along
with the affordable payment plans provided by the Orthodontic Centers, have
resulted in many patients receiving treatment who otherwise may not have sought
orthodontic services. During 1999, the Company spent on average approximately
$64,426 per Affiliated Orthodontist on direct marketing costs and advertising.
In contrast, the traditional orthodontist, who relies primarily on referrals
from dentists and other patients, spent an average of approximately $4,400 on
marketing and advertising in 1998. During 1999, each Affiliated Orthodontist who
had been affiliated with the Company for at least one year generated an average
of 513 new case starts, as compared to the 1998 national average of
approximately 200 new case starts per orthodontist. Affiliated Orthodontists
generated a total of 126,307 new case starts during 1999.

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<PAGE> 5

Achieving Operating Efficiencies and Economies of Scale. The Company
implements a variety of operating procedures and systems designed to improve the
productivity and profitability of the Orthodontic Centers and to achieve
economies of scale, while maintaining quality patient care. These include
Orthodontic Center office designs which increase the number of patients the
clinical staff can treat and enhance patient comfort and privacy, a scheduling
system designed to increase capacity utilization at each Orthodontic Center,
efficient use of orthodontic assistants and centralized purchasing and
distribution systems. During 1999, Affiliated Orthodontists practicing in
Orthodontic Centers open throughout 1998 treated an average of 78 patients per
nine-hour patient treatment day. In comparison, orthodontists in the United
States treated an average of 45 patients per operating day in 1998. The Company
provides Affiliated Orthodontists with monthly operating data and quarterly
financial statements for each Orthodontic Center, including management's
analysis of the financial results and recommended changes to improve financial
and operating performance.

Providing Better and More Efficient Service Through Computer
Information Systems and Technology. Since its inception, the Company has
employed technological advances to increase efficiency within the Orthodontic
Centers. The Company's operations are supported by the Company's computer
system, including patient scheduling, billing and collection, financial and
statistical reporting, accounting, inventory control and purchasing. In 1998,
the Company implemented a proprietary patient accounting computer software and
scheduling system. Orthodontic Centers are connected to this system by a private
computer network, through which the Company gathers data and generates
comprehensive reports so that the Company may more accurately project and
analyze results for the Orthodontic Centers. This system has resulted in
improved operating results for the Orthodontic Centers through its financial and
past due account controls, convenient user interface and integrated scheduling
features. The Company has also implemented an on-line inventory order system,
which allows the Orthodontic Centers to order supplies directly from vendors
through the Company's private computer network. The order system is designed to
improve the accuracy of orders placed, reduce vendor shipping time and improve
the flow of information between vendors and the Orthodontic Centers. The Company
plans to continue to use Internet-related and other available technology to
improve efficiency and reduce costs for the Orthodontic Centers.

Increasing Market Penetration With Affordable Payment Plans. The
Orthodontic Centers generally provide a payment plan recommended by the Company
which consists of no down payment, equal monthly payments over the term of the
treatment and a final payment at completion of the treatment. During the first
quarter of 1999, the Orthodontic Centers generally implemented a fee increase,
consisting of no down payment, equal monthly payments of $109 per month over the
term of the treatment and a final payment of $436. During the first quarter of
2000, approximately 30% of the Orthodontic Centers implemented a fee increase,
consisting of no down payment, equal monthly payments of $119 per month over the
term of treatment and a final payment of $476. Management believes that this
payment plan and the Company's marketing activities have resulted in many
patients receiving treatment who otherwise may not have sought orthodontic
services. For a standard case in which treatment continues for between 26 and 32
months (not all cases will require this length of treatment), the total fees
charged by the Affiliated Orthodontists averaged approximately $3,379 in 1999,
which was below the 1998 national average of $3,880 to $4,200 for the same
period of treatment. Management believes that the Orthodontic Centers are able
to charge lower fees because of the operating efficiencies resulting from the
office designs of Orthodontic Centers, the patient scheduling systems, efficient
use of orthodontic assistants and centralized purchasing and distribution
systems.

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GROWTH STRATEGY

The Company's growth strategy is to develop new Orthodontic Centers and
to affiliate with existing practices in both new and existing markets. At
December 31, 1994, 1995, 1996, 1997, 1998 and 1999 there were 46, 78, 133, 205,
275 and 346 Affiliated Orthodontists, respectively. Management believes that
orthodontists choose to affiliate with the Company because the Company provides:
(i) the capital required to open an Orthodontic Center; (ii) the business and
clinical systems and staffing required to operate a new Orthodontic Center;
(iii) the opportunity to increase substantially practice income derived by the
orthodontists; (iv) the opportunity to increase the orthodontists' focus on
patient care rather than administration; and (v) the opportunity to eliminate
the need for business development efforts designed to generate referrals from
general dentists.

Since its inception in 1985, the Company has grown to manage 537
Orthodontic Centers located in 43 states, Puerto Rico, Japan and Mexico, with
346 Affiliated Orthodontists at December 31, 1999. Key elements of the Company's
growth strategy include:

Development of New Orthodontic Centers. From January 1, 1985 to
December 31, 1999, the Company developed 288 Orthodontic Centers, including 36
during 1999. The Company actively markets itself to orthodontists by targeting
practicing orthodontists, military orthodontists and orthodontic students,
including the approximately 200 orthodontists who graduate each year from
accredited United States orthodontic graduate programs, who are interested in
opening new practices. The Company recruits additional orthodontists through
referrals from Affiliated Orthodontists, attending orthodontic conventions,
trade shows and association meetings, visiting orthodontic graduate schools and
advertising in professional journals. The Company also intends to continue to
develop additional Orthodontic Centers with current Affiliated Orthodontists.

Orthodontists who choose to affiliate with the Company are generally
given their choice of markets in the United States in which to locate where the
Company does not have another Orthodontic Center. The Company also performs
market studies to determine the advantages of locating Orthodontic Centers in
new markets.

The average cost of developing a new Orthodontic Center is
approximately $255,000, including the cost of equipment, leasehold improvements,
working capital and losses associated with the initial operations of the
Orthodontic Center. The costs of developing a new Orthodontic Center are shared
by the Company and the particular Affiliated Orthodontist. The Company assists
Affiliated Orthodontists in obtaining financing of their share of such costs
through the Company's primary lender.

Affiliation with Existing Orthodontic Practices. From January 1, 1985
to December 31, 1999, the Company acquired the assets of, and affiliated with,
316 existing orthodontic practices, including 32 during 1999. The Company
actively markets itself to experienced orthodontists through referrals from
Affiliated Orthodontists, attending orthodontic conventions, trade shows and
association meetings and advertising in professional journals. Of these existing
practices, approximately 81% generated less than $500,000 of patient revenue
during the 12 months prior to their affiliation with the Company. Management
believes that focusing on orthodontic practices of this size provides the
Company with the opportunity to achieve higher revenue growth rates and lower
acquisition costs, relative to larger practices. Existing practices that have
affiliated with the Company have experienced increased average gross revenue and
operating income following their affiliation. The Company frequently relocates
existing practices to new facilities. The Company intends to continue to
relocate existing practices to new facilities and also intends to continue to
evaluate additional potential affiliations.

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<PAGE> 7

Traditional Orthodontic Practices. A segment of the Affiliated
Orthodontists operate traditional, internally-marketed orthodontic practices
that generate relatively large amounts of patient fees. At December 31, 1999,
there were 32 such Affiliated Orthodontists operating in 39 Orthodontic Centers,
including seven Affiliated Orthodontists in 12 Orthodontic Centers that were
added during 1999. Although the Company intends to continue to focus primarily
on practices that advertise, management believes that affiliating with selected
traditional practices will provide the Company with additional opportunities for
growth. According to the 1999 JCO Study, most orthodontists practicing in the
United States do not advertise through mass media.

International Expansion. Since 1998, the Company has developed and
managed Orthodontic Centers for Affiliated Orthodontists in Japan, Mexico and
Puerto Rico. At December 31, 1999, there were 24 Orthodontic Centers with 16
Affiliated Orthodontists in Japan, two Orthodontic Centers with one Affiliated
Orthodontist in Mexico and five Orthodontic Centers with two Affiliated
Orthodontists in Puerto Rico. During 1999, the Company added 18 Orthodontic
Centers with 13 Affiliated Orthodontists in Japan, two Orthodontic Centers with
one Affiliated Orthodontist in Mexico, and three Orthodontic Centers with one
Affiliated Orthodontist in Puerto Rico. Expansion into countries outside the
United States involves consideration of the regulatory environment, market
demographics and economic conditions, and the ability to recruit and obtain
financial commitments from orthodontists and business personnel in the market.
Although the Company intends to continue to focus primarily on orthodontic
practices in the United States, the Company intends to continue to add
Orthodontic Centers in Japan, Mexico and Puerto Rico, and may explore additional
expansion opportunities in Canada, England, Spain and other countries as they
arise from time to time.

Ancillary Services. The Company has entered into an agreement with
BriteSmile, Inc. ("BriteSmile"), which develops and manufactures light activated
teeth whitening technology and related products, whereby BriteSmile's teeth
whitening systems may be installed in Orthodontic Centers. During 1999, the
Company conducted a pilot program of BriteSmile's systems at Orthodontic Centers
in Jacksonville, Florida and Tucson, Arizona. Based on the results of this pilot
program, the Company and BriteSmile agreed to provide BriteSmile systems to
Affiliated Orthodontists who desire to offer teeth whitening services. In
addition, the Company plans to commence the trial operation of a cosmetic dental
center in Jacksonville, Florida, which would offer cosmetic dental services,
including teeth whitening services and porcelain teeth laminates, and would be
designed to resemble a boutique or spa rather than a dental office.

Proposed Acquisition. The Company is currently engaged in discussions
with Apple Orthodontix, Inc. ("Apple"), which provides practice management
services to orthodontic practices in the United States and Canada and which
filed a voluntary petition under Chapter 11 of the federal Bankruptcy Code in
January 2000, regarding a proposed transaction in which the Company may
affiliate with up to 47 orthodontic practices currently affiliated with Apple.
As currently proposed, the Company would acquire Apple's service agreements and
practice assets related to these orthodontic practices, in exchange for payment
of cash to Apple. In addition, the Company would issue shares of Common Stock to
Apple-affiliated orthodontists who affiliate with the Company. The Company's
Board of Directors has approved the terms of the transaction as currently
proposed, and the Company anticipates that the parties may execute a definitive
asset purchase agreement within a relatively short period of time. In addition
to execution of a definitive purchase agreement, the transaction would be
subject to, among other things, consent to the transaction by Apple's senior
secured creditors, approval of the transaction by the U.S. Bankruptcy Court and
consent by the orthodontists whose service agreements are proposed to be
acquired. There can be no assurance that any of these events will occur or that
the Company will ultimately affiliate with any of these 47 orthodontic
practices.

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ORTHODONTIC CENTERS

Location

At December 31, 1999, there were 537 Orthodontic Centers located in 43
states, Puerto Rico, Japan and Mexico. The following table sets forth
information regarding these 537 Orthodontic Centers:

STATE/ NUMBER STATE/ NUMBER
COUNTRY/ OF COUNTRY/ OF
TERRITORY ADI(1) CENTERS TERRITORY ADI(1) CENTERS
- - --------- ------ ------- --------- ------ -------

<S> <C> <C> <C> <C> <C>
Alabama............ Birmingham 3 Nevada............. Reno 1
Huntsville 4 New Hampshire...... Nashua 1
Montgomery 1 New Jersey......... Atlantic City 3
Arkansas........... Jonesboro 1 Philadelphia, PA 5
Little Rock 1 Vineland 1
Arizona............ Lake Havasu 1 New Mexico......... Albuquerque 2
Phoenix 10 Farmington 1
Tucson 2 New York........... Albany 2
California......... Chico/Redding 2 Buffalo 1
Eureka 1 New York City 12
Fresno 2 Rochester 2
Los Angeles 5 Syracuse 2
Palm Desert 1 North Carolina..... Charlotte 3
Sacramento 4 Greenville 4
Salinas 3 Raleigh-Durham 4
San Diego 9 Winston-Salem 4
San Francisco 3 North Dakota....... Minot 2
San Jose 3 Ohio............... Cincinnati 6
Colorado........... Colorado Springs 3 Cleveland 15
Denver 10 Columbus 4
Fort Collins 1 Dayton 2
Grand Junction 1 Toledo 2
Connecticut........ Hartford 9 Youngstown 2
Florida............ Fort Lauderdale/Miami 11 Oklahoma........... Oklahoma City 5
Fort Myers 3 Tulsa 2
Gainesville 3 Oregon............. Bend 3
Jacksonville 4 Portland 4
Orlando 9 Pennsylvania....... Baltimore, MD 1
Panama City 1 Harrisburg 3
Pensacola 1 Johnstown/Altoona 3
Tallahassee 1 Philadelphia 11
Tampa 13 Pittsburgh 2
West Palm Beach 4 Scranton 4
Georgia............ Albany 3 Rhode Island....... Providence 1
Atlanta 13 South Carolina..... Charleston 3
Augusta 1 Columbia 3
Columbus 1 Florence 1
Savannah 2 Greenville 3
Hawaii............. Honolulu 1 Savannah, GA 1
Idaho.............. Spokane, WA 1 Tennessee.......... Chattanooga 3
Illinois........... Chicago 4 Johnson City/Bristol/Kingsport 3
Peoria 4 Knoxville 3
Rockford 1 Memphis 4
St. Louis, MO 2 Nashville 6
Indiana............ Indianapolis 4 Texas.............. Austin 5
Louisville, KY 1 Brownsville 3
Kansas............. Kansas City, MO 1 Beaumont 1
Kansas City 2 Corpus Christi 1
Kentucky........... Lexington 3 Dallas/Ft. Worth 8
Louisville 2 El Paso 3
Louisiana.......... Alexandria 2 Houston 13
Baton Rouge 4 Longview/Tyler 2
Lafayette 1 Odessa 2
Monroe 1 San Antonio 3
New Orleans 11 Victoria 2
Shreveport 1 Waco 4
Maine.............. Portland 3 Utah............... Salt Lake City 5
Maryland........... Baltimore 7 Virginia........... Arlington/Washington, D.C. 6
Rockville/Washington, D.C. 6 Harrisonburg 1
Massachusetts...... Boston 10 Norfolk 4
Providence, RI 2 Richmond 3
Springfield 3 Washington......... Portland, OR 2
Michigan........... Detroit 8 Seattle 8
Grand Rapids 4 Spokane 2
Saginaw 2 West Virginia...... Wheeling 2
Minnesota.......... Minneapolis 6 Wisconsin.......... Milwaukee 5
Mississippi........ Columbus 2 Wyoming............ Casper 2
Gulfport 4 Japan.............. Ichinomiya 1
Hattiesburg 1 Kyoto 6
Jackson 4 Sanda 2
Meridian 3 Tokyo 15
New Orleans, LA 1 Mexico............. Mexico City 2
Missouri........... Kansas City 1 Puerto Rico........ San Juan 5
St. Louis 5 ----
Total........ 537
====
</TABLE>

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- - -----------------------------

(1) "ADI" refers to an area of dominant influence (as defined by Arbitron
Ratings Company) and is the broadcast coverage area of television and
radio stations in a given market area. Certain Orthodontic Centers
indicated as being located in a particular ADI are located in a state
other than that shown for the ADI above.

Design

The Orthodontic Centers are generally located either in shopping
centers or professional office buildings. Substantially all of the Orthodontic
Centers include private treatment rooms and large patient waiting areas (rather
than one large treatment area). This allows the Orthodontic Centers to locate in
a broader range of office space than a traditional orthodontic practice. The
Orthodontic Centers typically include up to six treatment rooms and range in
size from approximately 2,000 square feet to 2,500 square feet.

Staffing and Scheduling

An Orthodontic Center is typically open from 8:30 a.m. to 6:30 p.m. for
days on which patients are scheduled and at least one Saturday each month. In
markets in which there are two or more Orthodontic Centers, each Orthodontic
Center in that market is fully staffed only for days on which the Affiliated
Orthodontist is scheduled to work, ranging from two to 20 days per month. Staff
members dedicated to the Orthodontic Centers in that market, including the
business personnel and the orthodontic assistants, rotate with the Affiliated
Orthodontist among the Orthodontic Centers in the market. On all other days, the
Orthodontic Center is staffed only by a receptionist who answers the telephone
and books appointments.

Patients are scheduled based upon this rotation schedule, if
applicable. Therefore, a particular Orthodontic Center will have appointments
available only for pre-established days each month. To promote efficiency,
appointments for particular types of procedures are grouped together on
designated days, with each Orthodontic Center scheduling specified days on which
new patients are treated and other days each month during which current patients
are treated. This system permits utilization of an Orthodontic Center by a
greater number of patients each day patients are treated.

Certain days each month are dedicated solely to seeing new patients.
Longer appointments are scheduled for new patient days to allow for the initial
consultation, preliminary procedures (including teeth impressions and x-rays)
and the placing of spacers between the patient's teeth in anticipation of the
application of the braces at the next appointment. If orthodontic treatment is
recommended by the Affiliated Orthodontist, the patient then signs a contract
for the treatment. The grouping of new patient appointments separately from the
monthly appointments for existing patients avoids inefficiencies which might be
created by the longer appointments required for new patients.

Within two weeks after a patient's initial visit, a patient typically
returns to an Orthodontic Center for application of braces and returns every
four to eight weeks thereafter for adjustments to the braces. The patient makes
a monthly payment prior to receiving his or her chart and proceeding to an inner
waiting room. The Affiliated Orthodontist then reviews the status of the
treatment and prescribes any necessary adjustments to the braces. The patient
then proceeds to a private treatment room, where an orthodontic assistant makes
the prescribed adjustments. The patient then returns to the Affiliated
Orthodontist for final examination and adjustments that must be made by an
orthodontist. Before leaving the Orthodontic Center, the patient schedules
their next appointment

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<PAGE> 10

and receives appropriate written information or instructions regarding his or
her activities during the interim period.

Payment Plan; Case Fees

The Orthodontic Centers generally provide a payment plan recommended by
the Company, which consists of no initial down payment, equal monthly payments
during the term of the treatment and a final payment at the completion of
treatment. During the first quarter of 1999, the Orthodontic Centers implemented
a fee increase, from $98 per month to $109 per month, with an increase in the
final payment from $398 to $436. During the first quarter of 2000, approximately
30% of the Orthodontic Centers implemented a fee increase, consisting of no down
payment, equal monthly payments of $119 per month over the term of treatment and
a final payment of $476. At the initial treatment, the patient signs a contract
outlining the terms of the treatment, including the anticipated length of
treatment and the total fees. The number of required monthly payments is fixed
at the beginning of the case and corresponds to the anticipated number of months
of treatment, which averages 26 months. Payment is required from patients at the
beginning of each appointment.

If a patient terminates the treatment prior to the completion of the
treatment period, the patient is required to pay the balance due for all
services rendered to date pursuant to the patient contract. Patients may also
transfer to another Orthodontic Center for the completion of the treatments, and
continue to pay the required fees under the contract. Since 1991, approximately
1.2% of the Company's net revenue have proven to be uncollectible.

The Orthodontic Centers do not accept payment by Medicare or Medicaid
for services provided. Other payment plans with lower total payments by the
patient are available for patients who have insurance coverage for treatment.
During 1999, approximately 14.4% of the patients treated at the Orthodontic
Centers had some form of insurance coverage, and approximately 12.2% of the
patient revenue of the Affiliated Orthodontists was paid by a third party payor.
The portion of the fee not covered by insurance is the responsibility of the
patient.

SERVICES AND OPERATIONS

The Company generally manages all of the operations of an Orthodontic
Center other than the provision of orthodontic services. The Company provides
marketing, financial, accounting, information systems, billing and collection
services for an Orthodontic Center and employs the Orthodontic Center's business
personnel. Where permitted by applicable statutes or regulations, the Company
also employs the orthodontic assistants.

Marketing and Advertising

The Company markets and advertises the services of Orthodontic Centers
through television, radio and print media advertising. The Company tailors such
advertising to the particular local market. The names of the Orthodontic Center
and the Affiliated Orthodontist are prominently featured in each advertisement.
Since 1998, the Company has combined local advertising with a limited national
advertising campaign featuring television and radio commercials promoting the
Affiliated Orthodontists and Orthodontic Centers. The national campaign has also
been designed to develop brand recognition for the Company's 1-800-4BRACES
toll-free telephone number and 4braces.com Internet website, as well as the
"Orthodontic Centers of America" network of Affiliated Orthodontists. Management
believes that national advertising and brand identity may permit the Company to
market the Orthodontic Centers more efficiently and effectively, and may permit
Orthodontic Centers to operate cost-effectively in larger cities (which
typically have higher local advertising rates). Advertising and direct marketing
expenditures averaged approximately $64,426

10
<PAGE> 11

per Affiliated Orthodontist in 1999 as compared to a national average of
approximately $4,400 per orthodontist for traditional practices in 1998.

The general public traditionally has had little information about
orthodontic fees prior to consultation with an orthodontist. The advertising
produced by the Company stresses an Orthodontic Center's affordable payment plan
and that the Affiliated Orthodontists are specialists in the field of
orthodontics (not general dentists practicing orthodontics). The advertisements
also emphasize the importance of utilizing a specialist for orthodontic care and
that the Orthodontic Centers are conveniently located in each market and operate
for extended hours and on some weekend days to accommodate working parents. The
advertisements include a toll free national 800 number which routes incoming
calls to an Orthodontic Center located in the caller's area. The Orthodontic
Centers typically receive increased inquiries from prospective patients
following a broadcast of the advertisements. Accordingly, the scheduling of
television and radio advertisements is coordinated to achieve optimal use of
advertisement expenditures, with the level of advertising coordinated with
available Orthodontic Center capacity to achieve desired new patient levels at a
particular Orthodontic Center.

The Company's Marketing Department is responsible for servicing the
marketing needs of the Orthodontic Centers. Marketing managers within the
Marketing Department design and implement a specific marketing and advertising
program for the Orthodontic Centers located within an assigned geographic
region. Marketing managers are also responsible for maintaining communication
with the local Affiliated Orthodontists and staff in each Orthodontic Center
regarding marketing effectiveness and trends in the particular market. Other
members of the Company's Marketing Department are responsible for media
relations, graphic design and marketing research relating to markets in which
the Orthodontic Centers are or may be located.

New Center Development and Construction

Since 1985, the Company has developed 288 new Orthodontic Centers,
including 282 since January 1, 1993. The Company's Construction and Leasing
Department is responsible for locating and leasing suitable office space for new
Orthodontic Centers in new markets and new locations within existing markets.
The Construction and Leasing Department also coordinates construction of the
interior of new Orthodontic Centers to accommodate the Company's proprietary
office designs. The Construction and Leasing Department utilizes the services of
a national network of contractors and real estate agents that regularly assist
the Company in developing and constructing Orthodontic Centers.

Training

Affiliated Orthodontists receive initial training regarding the
Company's operating systems at the Company's training offices in Orlando and
Jacksonville, Florida and in Denver, Colorado to enable an Affiliated
Orthodontist to take advantage of the efficiencies created by the Company's
systems. The Company also employs training teams which travel to each new
Orthodontic Center to train the Orthodontic Center's clinical and business staff
with respect to the Company's operating systems. The Company's Training
Department monitors the operations of each new Orthodontic Center during the
first six months of its operations. In certain instances, follow-up visits by
the training team are conducted six months following the opening of an
Orthodontic Center to maintain operating efficiencies.

Operations

The Company's Operations Department is responsible for servicing the
operational needs of the Orthodontic Centers. Operating managers within the
Operations Department respond to various

11
<PAGE> 12

operational questions and requests from Orthodontic Centers located within an
assigned geographic region, including those relating to inventory, supplies,
equipment and office space. The Operations Department provides the Affiliated
Orthodontist and staff of each Orthodontic Center with periodic reports
regarding that Orthodontic Center's performance.

The Company maintains an incentive-based compensation program for its
employees which rewards employees based upon their performance and the operating
results of the Orthodontic Centers, including increased collections and case
starts and cost containment efforts.

Financial and Statistical Reporting

The Company provides Affiliated Orthodontists with management and
financial information systems which improve Orthodontic Center efficiencies and
provide cost savings for Orthodontic Center operations. These systems also
maintain greater uniformity in the manner in which services are provided at the
Orthodontic Centers. The Company utilizes information systems which track data
related to the Orthodontic Centers' operations and financial performance. The
Company monitors all expenditures on advertising and reallocates resources
between markets where advertising expenditures need to be increased or
decreased. The Company's systems also track new patient cases for each of the
Orthodontic Centers to allow programs to be initiated to better ensure that new
patient cases at the Orthodontic Centers are within projected levels. Billing
and collection information is sent daily by the Orthodontic Centers to the
Company for processing.

The Company also provides Affiliated Orthodontists with monthly
operating data and quarterly financial statements. With the quarterly financial
statements, the Company provides an analysis of the financial results and
recommends changes to improve financial performance of the Orthodontic Center.
This analysis allows the Affiliated Orthodontist and the Company to make
periodic adjustments in marketing and operating the Orthodontic Center.

Purchasing and Distribution

Because of the number of Orthodontic Centers, the Company is able to
make bulk purchases of equipment, office furniture, inventory and supplies in
order to reduce per unit costs. The Company negotiates arrangements with
suppliers that provide cost savings to each of the Orthodontic Centers.
Inventory and supplies are purchased by the Company and distributed on a
just-in-time basis to each Orthodontic Center, thereby limiting storage
requirements for inventory and supplies.

Computer Information Systems

Since its inception, the Company has employed technological advances to
increase efficiency within the Orthodontic Centers. The Company's operations are
supported by the Company's computer system, including patient scheduling,
billing and collection, financial and statistical reporting, accounting,
inventory control and purchasing. The Company has upgraded its computer system
in anticipation of growth in the number of Affiliated Orthodontists and
Orthodontic Centers and in order for the Company to continue to offer Affiliated
Orthodontists efficient management services.

In 1998, the Company implemented a proprietary patient accounting
computer software and scheduling system. Orthodontic Centers are connected to
this system by a private computer network, through which the Company gathers
data and generates comprehensive reports so that the Company may more accurately
project and analyze results for the Orthodontic Centers. This system has
resulted in improved operating results for the Orthodontic Centers through its
financial and past due account controls, convenient user interface and
integrated scheduling features.

12
<PAGE> 13

The Company has also implemented an on-line inventory order system,
which allows the Orthodontic Centers to order supplies directly from vendors
through the Company's private computer network. The order system is designed to
improve the accuracy of orders placed, reduce vendor shipping time and improve
the flow of information between vendors and the Orthodontic Centers. The Company
plans to continue to use Internet-related and other available technology, to
improve efficiency and reduce costs for the Orthodontic Centers.

AGREEMENTS WITH AFFILIATED ORTHODONTISTS

The Company provides comprehensive management and marketing services to
Affiliated Orthodontists pursuant to either a service agreement or, in limited
circumstances, a consulting agreement. The selection of either the service
agreement or consulting agreement structure is based upon the dental regulatory
provisions of the particular state in which an Orthodontic Center is located.

Service Agreements

Service agreements are between the Company and an Affiliated
Orthodontist and his or her professional corporation or other entity. Pursuant
to the service agreement, the Company manages the business and marketing aspects
of Orthodontic Centers, provides capital, facilities and equipment (including
utilities, maintenance and rental), implements a marketing program, prepares
budgets and financial statements, orders and purchases inventory and supplies,
provides staff and a patient scheduling system, bills and collects patient fees,
maintains files and records and arranges for certain legal and accounting
services.

Under a service agreement, the Affiliated Orthodontist pays the Company
a fee equal to approximately 24% of new patient contract balances in the first
month of treatment plus the balance ratably over the remainder of the patient
contracts, less amounts retained by the Affiliated Orthodontists. In addition, a
$25,000 annual fee is earned by the Company for 42 Orthodontic Centers.
Operating expenses of the Orthodontic Centers are expenses of the Company and
are recognized as incurred. The amounts retained by an Affiliated Orthodontist
are dependent on his or her financial performance, based in significant part on
the Affiliated Orthodontist's profitability on a cash basis, as provided in the
service agreements.

The service agreements are for terms ranging from 20 to 40 years, with
most terms ranging from 20 to 25 years. Upon expiration or termination by either
party of a service agreement, the Affiliated Orthodontist generally must
purchase certain of the related assets owned by the Company, including all
equipment, improvements and intangible assets, for cash at the then current book
value. The service agreements generally provide that following termination or
expiration of the agreement, the Affiliated Orthodontist will not compete for a
period of two years in an area in which the Affiliated Orthodontist operates an
Orthodontic Center and will limit the methods of advertising in the area in
which the Orthodontic Center is located.

Consulting Agreements

The terms of consulting agreements differ significantly from the terms
of service agreements and will vary depending upon the regulatory requirements
of the particular state in which an Orthodontic Center is located. In a limited
number of states, the Company may provide only consulting services to
orthodontists and may not manage an orthodontist's practice. The consulting fee
payable to the Company is determined at the time of affiliation, is limited to
the consulting services performed and is based on criteria such as the number of
hours of operations of the applicable Orthodontic Centers.

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<PAGE> 14

GOVERNMENT REGULATION

The field of orthodontics is highly regulated, and there can be no
assurance that the regulatory environment in which the Company operates will not
change significantly in the future. In general, regulation of healthcare
companies is increasing.

Each state and country in which the company operates imposes licensing
and other requirements on individual orthodontists, and orthodontic facilities
and services. In addition, federal and state laws regulate health maintenance
organizations and other managed care organizations for which orthodontists may
be providers. In connection with its entry into new markets, the Company may
become subject to compliance with additional regulations.

The operations of the Orthodontic Centers must meet federal, state and
local regulatory standards in the areas of safety and health. Historically,
those standards have not had any material adverse effect on the operations of
the Orthodontic Centers. Based on its familiarity with the operations of the
Orthodontic Centers and the activities of the Affiliated Orthodontists,
management believes that the Orthodontic Centers are in compliance in all
material respects with applicable federal, state and local laws and regulations
relating to safety and health.

The laws of many states prohibit orthodontists from splitting fees with
non-orthodontists and prohibit non-orthodontic entities (such as the Company)
from practicing dentistry, including orthodontics (which in certain states
includes managing or operating an orthodontic office), and from employing
orthodontists or, in certain circumstances, orthodontic assistants. The laws of
some states prohibit advertising of orthodontic services under a trade or
corporate name and require that all advertisements be in the name of the
orthodontist. A number of states also regulate the content of advertisements of
orthodontic services and the use of promotional gift items. A number of states
limit the ability of a non-licensed dentist or non-orthodontist to own or
control equipment or offices used in an orthodontic practice. Some of these
states allow leasing of equipment and office space to an orthodontic practice,
under a bona fide lease, if the equipment and office remain in the complete care
and custody of the orthodontist. Management believes, based on its familiarity
with the operations of the Orthodontic Centers and the activities of the
Affiliated Orthodontists, that the Company's current and planned activities do
not violate these statutes and regulations. There can be no assurance, however,
that future interpretations of such laws, or the enactment of more stringent
laws, will not require structural and organizational modifications of the
Company's existing contractual relationships with the Affiliated Orthodontists
or the operation of the Orthodontic Centers. In addition, statutes in some
states and countries could restrict expansion of the Company's operations in
those jurisdictions. In response to particular state regulatory provisions, the
Company is required to utilize the consulting agreement structure in certain
states. Management plans to use a form of one of its operating agreements in
each of the states and countries in which a development or acquisition proposal
is pending.

The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations and marketing from time to time in response to changes in the
business and regulatory environment. The Company plans to structure all of its
agreements, operations and marketing in accordance with applicable law, although
there can be no assurance that its arrangements will not be successfully
challenged or that required changes may not have a material adverse effect on
operations or profitability.

COMPETITION

The business of providing orthodontic services is highly competitive in
each of the markets in which the Orthodontic Centers operate. Each Affiliated
Orthodontist competes with orthodontists who operate in single and multiple
offices. The Orthodontic Centers also compete with general

14
<PAGE> 15

dentists who provide certain orthodontic services. The provision of orthodontic
services by general dentists has increased in recent years.

There are other companies currently developing and managing orthodontic
practices on a national basis. There are several companies pursuing similar
strategies in other segments of the healthcare industry and companies with
similar objectives and substantially greater financial resources may enter the
Company's markets and compete with the Company.

EMPLOYEES

At December 31, 1999, the Company employed 2,077 persons, including
1,573 full-time employees and 107 employees in the Company's corporate offices.
None of the Company's employees are represented by a collective bargaining
agreement. The Company considers its relationship with its employees to be good.
The Affiliated Orthodontists are not employed by the Company.

INSURANCE

The Company maintains general liability and property insurance. The
costs of insurance coverage varies, and the availability of certain coverage has
fluctuated in recent years. While management believes, based upon its claims
experience, that the Company's current insurance coverage is adequate for its
current operations, there can be no assurance that the coverage will be
sufficient for all future claims or will continue to be available in adequate
amounts or at reasonable rates. The Affiliated Orthodontists purchase and
maintain their own malpractice liability insurance coverage, and are required to
use reasonable efforts to have the Company named as an additional insured party
on their respective insurance policies.

EXECUTIVE OFFICERS OF THE COMPANY

For information regarding the executive officers of the Company, see
"Item 10. Directors and Executive Officers of the Registrant" in this Report.

ITEM 2. PROPERTIES

The Company leases an average of between 2,200 and 2,500 square feet of
office space for each Orthodontic Center. The typical lease for office space is
for a term of approximately five years, and generally provides for renewal
options for additional years. The average rental payment is approximately $2,600
per month. As demand for orthodontic services has increased in a particular
market, the Company has leased and developed new Orthodontic Centers in that
market rather than expand its existing Orthodontic Centers, because the size of
each Orthodontic Center, particularly those located in shopping malls, has been
limited.

The Company leases approximately 5,354 and 2,420 square feet of office
space in Ponte Vedra Beach, Florida for its headquarters under two separate
leases which expire in January 2000 and February 2002, respectively. The Company
also maintains a corporate office in approximately 5,300 square feet of office
space in Metairie, Louisiana under a lease which expires in October 2000.

ITEM 3. LEGAL PROCEEDINGS

On October 15, 1999, Sam Callender, D.D.S. and his limited liability
company ("LLC") filed a complaint in the District Court of the City and County
of Denver, Colorado against the Company, Orthodontic Centers of Colorado, Inc.,
a wholly owned subsidiary of the Company ("OCA Colorado"), and Ronald M.
Roncone, D.D.S. The complaint alleged that the Company and OCA Colorado breached
the terms of the Business Services Agreement between OCA Colorado and Dr.
Callender,

15
<PAGE> 16
and that the Company and Dr. Roncone allegedly made certain fraudulent
representations to Dr. Callender in connection with his decision to enter into
the Business Services Agreement and a related asset purchase agreement with OCA
Colorado. The complaint also alleged that Dr. Roncone and the Company tortiously
interfered with the proposed sale of a portion of Dr. Callender's interest in
his LLC to another orthodontist, and that the Company and Dr. Roncone allegedly
breached certain fiduciary duties to Dr. Callender and his LLC in connection
with that sale. The complaint seeks an unspecified amount of actual and punitive
damages, and a declaratory judgment that Dr. Callender's Business Services
Agreement has been terminated. The Company and OCA Colorado have filed a
counterclaim against Dr. Callender and his LLC, alleging, among other things,
that Dr. Callender and his LLC breached the terms of the Business Services
Agreement, and seeking compensatory and other damages. On November 19, 1999, the
lawsuit was removed to the United States District Court for the District of
Colorado. The Company and OCA Colorado intend to vigorously defend the claims
made by Dr. Callender and his LLC, and believe that these claims lack merit. At
this time the Company cannot predict whether it or OCA Colorado will ultimately
succeed in defending the action, or if they do not succeed, what effect this may
have on the Company's financial condition and operating results.

The Company and its Affiliated Orthodontists may, from time to time, be
a party to litigation or administrative proceedings which arise in the normal
course of its business. The Company does not have pending any other litigation
that, if adversely determined, would have a material adverse effect on the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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<PAGE> 17

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock ("Common Stock") is listed on the New York
Stock Exchange under the symbol "OCA." The following table sets forth, for the
periods indicated, the range of high and low sale prices per share for the
Common Stock, as reported on the New York Stock Exchange.

1999 HIGH(1) LOW(1)
---------- ---------

<S> <C> <C>
First Quarter........................ $ 20.125 $ 12.50
Second Quarter....................... 17.25 10.8125
Third Quarter........................ 18.9375 13.25
Fourth Quarter....................... 18.00 11.00

1998

First Quarter........................ $ 23.25 $ 15.00
Second Quarter....................... 23.50 17.625
Third Quarter........................ 20.9375 13.00
Fourth Quarter....................... 20.375 11.75
</TABLE>

At March 23, 2000, the last reported sale price of the Common Stock was
$17.9375 per share, and the number of holders of record of the Common Stock was
approximately 326.

The Company has never declared or paid cash dividends on the Common
Stock. The Company expects that any future earnings will be retained for the
growth and development of the Company's business and, accordingly, the Company
does not anticipate that any cash dividends will be declared or paid on the
Common Stock for the foreseeable future. The declaration, payment and amount of
future dividends, if any, will depend upon the future earnings, results of
operations, financial position and capital requirements of the Company, among
other factors. The Company's $100.0 million revolving line of credit does not
permit the Company to pay cash dividends.

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<PAGE> 18

ITEM 6. SELECTED FINANCIAL AND OPERATING DATA

The following table sets forth selected financial and operating data of
the Company. The selected financial data in the table are derived from the
Company's consolidated financial statements. The data presented below should be
read in conjunction with the Company's consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Report.

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenue ........................................ $ 41,556 $ 71,273 $ 117,326 $ 171,298 $ 226,290
---------- ---------- ---------- ---------- ----------
Direct expenses:
Employee costs ................................. 11,784 19,895 33,429 46,878 61,224
Orthodontic supplies ........................... 3,167 5,428 8,789 13,287 17,136
Rent ........................................... 3,504 6,114 10,299 14,128 18,624
Marketing and advertising ...................... 4,323 6,644 9,855 15,491 16,874
---------- ---------- ---------- ---------- ----------
Total direct expenses ....................... 22,778 38,081 62,372 89,784 113,858
General and administrative ......................... 5,108 8,703 13,356 18,104 23,270
Depreciation and amortization ...................... 1,448 2,814 5,640 9,124 12,238
---------- ---------- ---------- ---------- ----------
Operating profit ................................... 12,222 21,675 35,958 54,286 76,924
Interest (expense) income, net ..................... 1,995 1,935 1,143 280 (2,204)
---------- ---------- ---------- ---------- ----------
Income before income taxes ......................... 14,217 23,610 37,101 54,566 74,720
Provision for income taxes ......................... 5,182 9,208 14,469 20,753 28,206
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle .................... 9,035 14,402 22,632 33,813 46,514

Cumulative effect of a change in
accounting principle, net of
income tax ..................................... -- -- -- -- 678
---------- ---------- ---------- ---------- ----------
Net income ......................................... $ 9,035 $ 14,402 $ 22,632 $ 33,813 $ 45,836
========== ========== ========== ========== ==========
Net income per share before cumulative
effect of a change in accounting
principle(1) ................................... $ .23 $ .33 $ .50 $ .70 $ .96
Cumulative effect of a change in
accounting principle ........................... -- -- -- -- $ .02
========== ========== ========== ========== ==========
Net income per share(1) ............................ $ .23 $ .33 $ .50 $ .70 $ .94
========== ========== ========== ========== ==========
Weighted average shares outstanding(1) ............. $ 39,094 $ 43,708 $ 45,414 $ 48,502 $ 48,643
========== ========== ========== ========== ==========

OPERATING DATA:
Number of Orthodontic Centers(2) ................... 145 247 360 469 537
Comparable Orthodontic Center net
revenue growth(3) .............................. 16.7% 22.2% 20.0% 19.2% 20.1%
Comparable mature Orthodontic Center
net revenue growth(4) .......................... 11.0% 10.5% 10.1% 9.1% 9.6%
Total case starts .................................. 28,742 44,910 70,611 95,377 126,307
Patient contract balances of
Affiliated Orthodontists(2)(5):
Net receivables for services performed(6) ...... $ 13,758 $ 23,181 $ 41,713 $ 62,151 $ 87,563
For services to be performed ................... 58,418 92,548 139,492 227,501 297,839
---------- ---------- ---------- ---------- ----------
Total patient contract balances ............ $ 72,176 $ 115,729 $ 181,205 $ 289,652 $ 385,402
========== ========== ========== ========== ==========
</TABLE>

DECEMBER 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (IN THOUSANDS)

<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .......................... $ 18,779 $ 11,827 $ 9,865 $ 1,601 $ 5,822
Working capital .................................... 43,778 40,219 68,243 59,634 102,276
Total assets ....................................... 92,573 145,099 228,975 296,798 367,022
Total debt ......................................... 4,490 3,397 10,393 31,332 58,793
Total equity ....................................... 77,313 114,887 190,740 231,159 278,527
</TABLE>

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<PAGE> 19
- - --------------------

(1) Amounts represent the full dilutive effect of the exercise of common
equivalent shares (stock options) outstanding during the year. Basic
earnings per share for the year ended December 31, 1999 was $.96 per
share based upon weighted average shares outstanding of approximately
47,998,000, for the year ended December 31, 1998 was $.71 per share
based upon weighted average shares outstanding of approximately
47,690,000, for the year ended December 31, 1997 was $0.51 based upon
weighted average shares outstanding of approximately 44,576,000, for
the year ended December 31, 1996 was $0.34 based upon weighted average
shares outstanding of approximately 42,388,000 and for the year ended
December 31, 1995 was $0.24 based upon weighted average shares
outstanding of approximately 38,235,000.

(2) Presented as of the end of the period.

(3) Represents the growth in net revenue by Orthodontic Centers which were
affiliated with the Company throughout each of the two periods being
compared. The amount of such growth has been significantly affected by
the number of newly-opened Orthodontic Centers included in the
computation, because newly-opened Orthodontic Centers have experienced
significant growth during their first 26 months of operations. The
average term of a patient contract is approximately 26 months, and
Orthodontic Centers typically reach maturity as patients are added
during the first 26 months of operations. There were 46 such comparable
Orthodontic Centers in 1994, 53 in 1995, 75 in 1996, 130 in 1997, 227
in 1998, and 332 in 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General."

(4) Represents the growth in net revenue by Orthodontic Centers which has
been affiliated with the Company at least 26 months throughout each of
the two periods being compared. There were 28 such comparable mature
Orthodontic Centers in 1994, 43 in 1995, 52 in 1996, 67 in 1997, 104 in
1998 and 208 in 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General."

(5) The average remaining life of the patient contracts at December 31,
1999 was approximately 15 months.

(6) Net of allowance for uncollectible amounts and patient prepayments;
such receivables are assigned by the Affiliated Orthodontists to the
Company in payment of its service fee.

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<PAGE> 20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The following table sets forth certain information relating to the
growth in the number of Orthodontic Centers for the periods shown:

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Centers at beginning of period ......... 31 47 55 75 145 247 360 469
Centers developed during period ........ 5 4 22 44 53 58 54 36
Centers acquired during period ......... 17 5 1 29 68 78 66 32
Centers consolidated during period ..... (6) (1) (3) (3) (19) (23) (11) --
-------- -------- -------- -------- -------- -------- -------- --------
Centers at end of period ............... 47 55 75 145 247 360 469 537
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

Of the 537 Orthodontic Centers at December 31, 1999, 288 were developed
by the Company, 316 were existing orthodontic practices the assets of which were
acquired by the Company and 67 were consolidated. The Company expects that
future growth in Orthodontic Centers will come from both developing Orthodontic
Centers with existing and newly recruited Affiliated Orthodontists and acquiring
the assets of, and affiliating with, existing orthodontic practices.

Generally, when the Company develops a new Orthodontic Center, all
patients treated at the Orthodontic Center are new patients and, in the first
several months after commencing operations, the Orthodontic Center is open only
for a limited number of days each month as new patients are added. The
Orthodontic Centers have generally become increasingly more productive and
profitable as more new patients are added and existing patients return for
monthly follow-up visits. After 26 months of operations, the Orthodontic
Center's growth in patient base has typically begun to stabilize as the initial
patients complete treatment. At December 31, 1999, 214 of the Orthodontic
Centers had operated for less than 26 months. An Orthodontic Center can increase
the number of patients treated by improving the efficiency of its clinical staff
and by adding operating days or orthodontists. The Orthodontic Centers may also
increase revenue by implementing periodic price increases. Established practices
whose assets were acquired by the Company have typically increased their revenue
by applying the Company's operating strategies and systems, including increased
advertising and efficient patient scheduling.

The Company earns its revenue from long-term service or consulting
agreements entered into with Affiliated Orthodontists. Pursuant to the service
agreements, during each month during the term of the service agreement, the
Company earns a fee equal to approximately 24% of the aggregate amount of all
new patient contracts entered into during that particular month, plus the
aggregate of the allocated monthly balance amount of all patient contracts
entered into in prior months, less amounts retained by the Affiliated
Orthodontists. The remaining contract balances are allocated equally over the
remaining months during the terms of the patient contracts, which average 26
months. Since 1991, approximately 1.2% of the Company's annual net revenue has
been uncollectible.

The amounts retained by an Affiliated Orthodontist are dependent on his
or her financial performance, based in significant part on the profitability of
the practice on a cash basis. Amounts retained by an Affiliated Orthodontist who
operates a newly developed Orthodontic Center are typically reduced by operating
losses on a cash basis because of start-up expenses. An Affiliated
Orthodontist's share of these operating losses is added to the Company's fee in
the period during which the operating losses are incurred, with such fees
aggregating approximately $4.0 million

20
<PAGE> 21
during 1999. In addition, a $25,000 annual fee is earned by the Company with
respect to 42 Orthodontic Centers.

The terms of consulting agreements vary depending upon the regulatory
requirements of the particular state in which an Orthodontic Center is located,
and generally differ significantly from the terms of service agreements. In a
limited number of states, the Company may only provide consulting services to
orthodontists and may not manage an orthodontist's practice. The consulting fee
payable to the Company is determined at the time of affiliation, is generally
limited to compensation for the specific consulting services performed and is
generally based on criteria such as the number of hours of operations of the
applicable Orthodontic Centers.

The Company develops and manages the business and marketing aspects of
Orthodontic Centers, including implementing advertising and marketing programs,
preparing budgets, providing staff, purchasing inventory, providing patient
scheduling systems, billing and collecting fees, maintaining records and
providing office space and equipment. Operating expenses of the Orthodontic
Centers are expenses of the Company and are recognized as incurred.

Employee costs consist of wages, salaries and benefits paid to all
employees of the Company, including orthodontic assistants, business staff and
management personnel. General and administrative expenses consist of provision
for losses of patient contracts and receivables, professional service fees,
maintenance and utility costs, office supply expense, telephone expense, taxes,
license fees, and printing and shipping expense.

Patient contracts are for terms averaging 26 months and are payable in
equal monthly installments throughout the term of treatment, except for the last
month when a final payment is made. During the first quarter of 1999, the
Orthodontic Centers generally implemented a fee increase from $98 per month to
$109 per month, with an increase in the final payment from $398 to $436. During
the first quarter of 2000, approximately 30% of the Orthodontic Centers
implemented a fee increase, consisting of no down payment, equal monthly
payments of $119 per month over the term of treatment and a final payment of
$476.

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<PAGE> 22
RESULTS OF OPERATION

The following table sets forth the percentages of net revenue
represented by certain items in the Company's condensed consolidated statements
of income.

YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------

<S> <C> <C> <C>
Net revenue ..................... 100.0% 100.0% 100.0%
Direct expenses:
Employee costs .............. 28.5 27.4 27.1
Orthodontic supplies ........ 7.5 7.8 7.6
Rent ........................ 8.8 8.2 8.2
Marketing and advertising ... 8.4 9.0 7.5
---------- ---------- ----------
Total direct expenses .... 53.2 52.4 50.4
General and administrative ...... 11.4 10.6 10.3
Depreciation and amortization ... 4.8 5.3 5.4
---------- ---------- ----------
Operating profit ................ 30.6 31.7 33.9
Interest (income) expense ....... (1.0) (0.2) 1.0
---------- ---------- ----------
Income before income taxes ...... 31.6 31.9 32.9
Provision for income taxes ...... 12.3 12.2 12.5
---------- ---------- ----------
Net income ...................... 19.3% 19.7% 20.4%
========== ========== ==========
</TABLE>

1999 COMPARED TO 1998

Net Revenue. Net revenue increased $55.0 million, or 32.1%, to $226.3
million for 1999 from $171.3 million for 1998. Approximately $24.0 million of
this increase was attributable to the 205 (net of consolidations) Orthodontic
Centers opened since January 1, 1998, and approximately $31.0 million to the
growth in net revenue of the 332 Orthodontic Centers open throughout 1998 and
1999. The number of patient contracts increased to approximately 268,000 at
December 31, 1999 from approximately 195,000 at December 31, 1998.

Employee Costs. Employee costs increased $14.3 million, or 30.6%, to
$61.2 million for 1999 from $46.9 million for 1998. As a percentage of net
revenue, however, employee costs decreased to 27.1% for 1999 from 27.4% for
1998. The percentage decrease primarily reflects efficiencies achieved through a
general change to longer patient treatment intervals by the Affiliated
Orthodontists.

Orthodontic Supplies. Orthodontic supplies expense increased $3.8
million, or 29.0%, to $17.1 million for 1999 from $13.3 million for 1998. As a
percentage of net revenue, however, orthodontic supplies expense decreased to
7.6% for 1999 from 7.8% for 1998. Cost improvements attained through bulk
purchasing were offset by increased expense associated with an increased
percentage of new patient treatment days, which require greater orthodontic
supplies per patient, associated with the opening of additional Orthodontic
Centers.

Rent. Rent expense increased $4.5 million, or 31.8%, to $18.6 million
for 1999 from $14.1 million for 1998. The increase in this expense was
attributable to Orthodontic Centers affiliated, opened or relocated after 1998.
As a percentage of net revenue, however, rent remained constant at 8.2% for 1998
and 1999.

22
<PAGE> 23

Marketing and Advertising. Marketing and advertising expense increased
$1.4 million, or 8.9%, to $16.9 million for 1999 from $15.5 million for 1998.
The increase in this expense resulted primarily from the addition of Orthodontic
Centers after 1998. As a percentage of net revenue, however, marketing and
advertising expense decreased to 7.5% for 1999 from 9.0% for 1998. The decrease
in this expense as a percentage of net revenue is attributable to the initiation
of certain marketing strategies designed to eliminate costs not related to the
purchase of media advertisements.

General and Administrative. General and administrative expense
increased $5.2 million, or 28.5%, to $23.3 million for 1999 from $18.1 million
for 1998. The increase in general and administrative expense resulted primarily
from the addition of Orthodontic Centers after 1998. As a percentage of net
revenue, however, general and administrative expense decreased to 10.3% for 1999
from 10.6% for 1998. General and administrative expense decreased as a
percentage of net revenue as a result of lower average start-up costs for
Orthodontic Centers developed after 1998.

Depreciation and Amortization. Depreciation and amortization expense
increased $3.1 million, or 34.1%, to $12.2 million for 1999 from $9.1 million
for 1998. As a percentage of net revenue, depreciation and amortization expense
increased to 5.4% for 1999 from 5.3% for 1998. The increase in this expense is a
result of the fixed assets acquired and service agreements entered into for
Orthodontic Centers developed, acquired or relocated after 1998.

Operating Profit. Operating profit increased $22.6 million, or 41.7%,
to $76.9 million for 1999 from $54.6 million for 1998. As a percentage of net
revenue, operating profit increased to 33.9% for 1999 from 31.7% for 1998 as a
result of the factors discussed above.

Interest. The Company incurred net interest expense of $2.2 million
compared to net interest income of $280,000 for 1998. The increase in net
interest expense resulted from the interest incurred on borrowings under the
Company's $100 million revolving line of credit.

Provision for Income Taxes. Provision for income taxes increased $7.5
million, or 35.9%, to $28.2 million for 1999 from $20.8 million for 1998. The
Company's effective income tax rate was 37.8% for 1999 and 38.0% for 1998.

Cumulative Effect of Change in Accounting Principle. Pursuant to
adoption of Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities, by the American Institute of Certified Public Accountants, the
Company recorded a cumulative effect of a change in accounting principle of
$678,000 (net of an income tax benefit of $410,000) during 1999.

Net Income. Net income increased $12.0 million, or 35.6%, to $45.8
million for 1999 from $33.8 million for 1998. As a percentage of net revenue,
net income increased to 20.4% for 1999 from 19.7% for 1998 as a result of the
factors discussed above.

1998 COMPARED TO 1997

Net Revenue. Net revenue increased $54.0 million, or 46.0%, to $171.3
million for 1998 from $117.3 million for 1997. Approximately $33.8 million of
this increase was attributable to the 242 (net of consolidations) Orthodontic
Centers opened since January 1, 1997, and approximately $19.6 million to the
growth in net revenue of the 227 Orthodontic Centers open throughout 1997 and
1998, with the remainder due to increases in other management fees, primarily
the Affiliated Orthodontists' share of the operating losses of newly developed
Orthodontic Centers. The number of patient contracts increased to approximately
195,000 at December 31, 1998 from approximately 130,000 at December 31, 1997.

23
<PAGE> 24

Employee Costs. Employee costs increased $13.5 million, or 40.2%, to
$46.9 million for 1998 from $33.4 million for 1997. As a percentage of net
revenue, however, employee costs decreased to 27.4% for 1998 from 28.5% for
1997. The percentage decrease primarily reflects efficiencies achieved through a
general change to longer patient treatment intervals by the Affiliated
Orthodontists.

Orthodontic Supplies. Orthodontic supplies expense increased $4.5
million, or 51.2%, to $13.3 million for 1998 from $8.8 million for 1997. As a
percentage of net revenue, orthodontic supplies expense increased to 7.8% for
1998 from 7.5% for 1997. Cost improvements attained through bulk purchasing were
offset by increased expense associated with an increased percentage of new
patient treatment days, which require greater orthodontic supplies per patient,
associated with the opening of additional Orthodontic Centers.

Rent. Rent expense increased $3.8 million, or 37.2%, to $14.1 million
for 1998 from $10.3 million for 1997. The increase in this expense was
attributable to Orthodontic Centers affiliated, opened or relocated after 1997.
As a percentage of net revenue, however, rent expense decreased to 8.2% for 1998
from 8.8% for 1997. The decrease in the percentage was attributable to the
growth in revenue for Orthodontic Centers developed or affiliated after January
1, 1998, and the relatively fixed nature of rent expense.

Marketing and Advertising. Marketing and advertising expense increased
$5.6 million, or 57.2%, to $15.5 million for 1998 from $9.9 million for 1997.
The increase in this expense resulted primarily from the addition of Orthodontic
Centers after 1997. As a percentage of net revenue, marketing and advertising
expense increased to 9.0% for 1998 from 8.4% for 1997. The increase in this
expense as a percentage of net revenue is attributable to the initiation of
marketing in larger media markets, which generally have relatively higher
advertising rates, after 1997.

General and Administrative. General and administrative expense
increased $4.7 million, or 35.6%, to $18.1 million for 1998 from $13.4 million
for 1997. The increase in general and administrative expense resulted primarily
from the addition of Orthodontic Centers after 1997. As a percentage of net
revenue, however, general and administrative expense decreased to 10.6% for 1998
from 11.4% for 1997. General and administrative expense decreased as a
percentage of net revenue as a result of lower average startup costs for
Orthodontic Centers developed after 1997.

Depreciation and Amortization. Depreciation and amortization expense
increased $3.5 million, or 61.8%, to $9.1 million for 1998 from $5.6 million for
1997. As a percentage of net revenue, depreciation and amortization expense
increased to 5.3% for 1998 from 4.8% for 1997. The increase in this expense is a
result of the fixed assets acquired and service agreements entered into for
Orthodontic Centers developed, acquired or relocated after 1997.

Operating Profit. Operating profit increased $18.3 million, or 50.9%,
to $54.3 million for 1998 from $36.0 million for 1997. As a percentage of net
revenue, operating profit increased to 31.7% for 1998 from 30.6% for 1997 as a
result of the factors discussed above.

Interest. Net interest income decreased $860,000, or 75.5%, to $280,000
for 1998 from $1.1 million for 1997. The decrease in net interest income
resulted from a decrease in the Company's average investment balance resulting
from the investment of unexpended proceeds from the Company's June 1995 and
November 1997 public offerings and utilization of the Company's credit facility
after January 1, 1998.

Provision for Income Taxes. Provision for income taxes increased $6.3
million, or 43.4%, to $20.8 million for 1998 from $14.5 million for 1997. The
Company's effective income tax rate was 38.0% for 1998 and 39.0% for 1997.

24
<PAGE> 25

Net Income. Net income increased $11.2 million, or 49.4%, to $33.8
million for 1998 from $22.6 million for 1997. As a percentage of net revenue,
net income increased to 19.7% for 1998 from 19.3% for 1997 as a result of the
factors discussed above.

QUARTERLY OPERATING RESULTS

The following table sets forth certain unaudited quarterly operating
information of the Company for 1998 and 1999. The Company believes that the
following information includes all of the adjustments, consisting of normal
recurring accruals and adjustments necessary to convert cash basis accounting
records of the Company to an accrual basis, considered necessary for a fair
presentation of the Company's consolidated financial position and its
consolidated results of operations for these periods in accordance with
generally accepted accounting principles. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full year or predictive of future periods.

QUARTERS ENDED
-------------------------------------------------------------------------------------
1998 1999
----------------------------------------- -----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue ........... $ 37,693 $ 41,527 $ 44,697 $ 47,381 $ 49,048 $ 55,401 $ 59,770 $ 62,071
Operating profit ...... 12,058 13,243 13,922 15,063 16,666 18,923 20,094 21,241
</TABLE>

SEASONALITY

The Orthodontic Centers have experienced their highest volume of new
cases in the summer and certain other periods when schools are not typically in
session. During these periods, children have a greater opportunity to visit an
orthodontist to commence treatment. Consequently, the Orthodontic Centers have
experienced higher revenue during the first and third quarters of the year as a
result of increased patient starts. During the Thanksgiving and Christmas
seasons, the Orthodontic Centers have experienced reduced volume and fourth
quarter revenue for the Orthodontic Centers has been generally lower as compared
to other periods. Seasonality in recent periods has been mitigated by the impact
of additional Orthodontic Centers.

LIQUIDITY AND CAPITAL RESOURCES

Development and acquisition costs, capital expenditures and working
capital needs have been, and will continue to be, financed through a combination
of cash flow from operations, bank borrowings and the issuance of notes and
shares of Common Stock. The Company intends to continue to lease, rather than
purchase, facilities for the Orthodontic Centers, to maximize the Company's
available capital.

Net cash provided by operations for the years ended December 31, 1997,
1998 and 1999 was $9.0 million, $22.1 million and $23.3 million, respectively.
From 1998 to 1999, unbilled patient receivables (net of prepayments) increased
$5.7 million. Additionally, due to a change of income tax payment methods, cash
paid for income taxes during 1999 exceeded the 1999 provision by $7.0 million.
The Company's working capital at December 31, 1998 and December 31, 1999 was
$59.6 million and $102.3 million, respectively, including cash and cash
equivalents of $1.6 million and $5.8 million, respectively. Unbilled patient
receivables (which represent patient revenue earned under patient contracts in
excess of the amount billed under such patient contracts) increased from $46.3
million at December 31, 1998 to $65.8 million at December 31, 1999, with this
increase consistent with the increase in the number of patient contracts and
price of treatment during this period.

Net cash used in investing activities for the years ended December 31,
1997, 1998 and 1999 was $42.7 million, $43.2 million and $43.1 million,
respectively. The Company's capital expenditures consist primarily of the costs
associated with the development of additional Orthodontic Centers. The average
cost of developing a new Orthodontic Center is approximately $255,000, including
the

25
<PAGE> 26

cost of equipment, leasehold improvements, working capital and start-up losses
associated with the initial operations of the Orthodontic Center. These costs
are shared by the Company and the particular Affiliated Orthodontist. The
Company assists Affiliated Orthodontists in obtaining financing for their share
of such costs through the Company's primary lender. The Company provides the
lender a guaranty of these loans. At December 31, 1999, approximately $5.0
million of such advances was outstanding. The Company intends to continue to
make advances of approximately $40,000 to newly-affiliated Affiliated
Orthodontists during the first year of an Orthodontic Center's operations, which
advances bear no interest and typically are repaid during the second year of the
Orthodontic Center's operations. The Company intends to fund such advances and
any continued financing through a combination of bank borrowings, cash from
operations and the remaining net proceeds from the Company's prior public
offerings.

Of the 537 Orthodontic Centers at December 31, 1999, 316 were acquired
through the acquisition of the assets of, and the affiliation with, existing
orthodontic practices. During 1999, the Company entered into preliminary or
final agreements to acquire the assets of, and affiliate with, 25 existing
orthodontic practices operating at 32 locations and made payments to practices
acquired in earlier periods at a cost of approximately $21.7 million, consisting
of an aggregate principal amount of $3.6 million of promissory notes issued by
the Company and an aggregate of 80,000 shares of Common Stock, with the
remainder of approximately $17.2 million being paid in cash. Outstanding
indebtedness at December 31, 1999 under promissory notes issued by the Company
to Affiliated Orthodontists to acquire the assets of existing orthodontic
practices was approximately $8.2 million, with maturities ranging from one to
three years and interest rates ranging from 7.43% to 8.75% per annum.

The Company's financing activities included the repayment of notes to
banks and Affiliated Orthodontists of $6.7 million, $7.9 million and $6.7
million for the years ended December 31, 1997, 1998 and 1999, respectively, and
the proceeds of $38.3 million, $595,000 and $114,000 from the issuance of Common
Stock during the years ended December 31, 1997, 1998 and 1999, respectively.

The Company entered into a $100.0 million revolving line of credit with
a lending group consisting of First Union National Bank, Bank Of America, Bank
One and Citibank in October 1998. In 1999, Wachovia Bank was added to this
lending group. The line of credit provides an aggregate of $100.0 million for
general working capital needs and expansion of the number of Orthodontic
Centers, and bears interest at varying rates above the London Interbank Offering
Rate (LIBOR). Amounts borrowed under the line of credit are secured by a
security interest in all of the Company's assets, including its accounts
receivable and equipment. At December 31, 1999, approximately $50.6 million of
indebtedness was outstanding under the line of credit.

The Company expects that future cash requirements will principally be
for developing additional Orthodontic Centers, acquiring assets from and
affiliating with additional Affiliated Orthodontists, capital expenditures,
repayment of long-term debt, payment of income taxes and general corporate
purposes. The Company's cash needs could significantly change depending upon the
Company's ability to recruit orthodontists, find appropriate sites, enter into
long-term service or consulting agreements and acquire the assets of existing
orthodontic practices. Management believes that the combination of funds
available under the Company's revolving line of credit and cash flow from
operations will be sufficient to meet the Company's anticipated funding
requirements for the next 12 months.

YEAR 2000

Prior to January 1, 2000, the Company conducted significant testing,
planning and system upgrades to address potential malfunctions by computer
systems and embedded computer chips

26
<PAGE> 27

related to calendar dates after December 31, 1999. The Company has not
experienced any material Year 2000 disruptions or malfunctions, and has not been
informed of any material Year 2000 disruptions or malfunctions experienced by
any of its significant vendors or customers, or by the municipal agencies that
provide services to the Company. The Company will continue to monitor its
internal operations and its significant vendors and customers with respect to
Year 2000 problems and intends to take appropriate measures to prevent or
alleviate any malfunction or failures identified. Based upon the Company's
successful operation thus far during the Year 2000, the Company does not
anticipate that it will experience any material problems related to the Year
2000; however, no assurance can be given that this will be the case.

RISK FACTORS

Our disclosure and analysis in this Report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts or by the use of
forward-looking terminology, such as "anticipate," "estimate," "expect," "may,"
"will" and "should." These forward-looking statements include, without
limitation, statements in "Item 1. Business", "Item 3. Market for Registrant's
Common Equity and Related Stockholder Matters" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's future growth, development and acquisition of additional
Orthodontic Centers, affiliation with additional orthodontic practices,
international expansion, new case starts, national advertising and branding,
advancement of funds to Affiliated Orthodontists, continued leasing of
Orthodontic Center facilities, ancillary services, funding of the Company's
expansion, operations and capital expenditures, Year 2000 issues, and payment or
nonpayment of dividends.

Actual results could differ materially from those indicated in such
forward-looking statements because of a variety of risks and uncertainties.
These risks and uncertainties include failure to consummate proposed
developments or acquisitions of Orthodontic Centers, changes in the Company's
operating or expansion strategies, the general economy of the United States and
the specific markets in which the Orthodontic Centers are located or are
proposed to be located, and the following additional risk factors. From time to
time, the Company may identify additional factors in filings with the Securities
and Exchange Commission or in the Company's press releases.

Our Growth Strategy Includes Risks That Could Have an Adverse Effect on
Financial Performance. Since we began operating in 1985, we have expanded to
managing 537 orthodontic centers as of December 31, 1999. We expect to continue
to add additional orthodontic centers. Our growth will depend on a number of
factors, including our ability to identify and affiliate with a sufficient
number of orthodontists to open new orthodontic centers or operate within our
existing network of orthodontic centers in suitable markets and our ability to
obtain good locations for orthodontic centers within those markets. Our growth
will also be influenced by our ability to identify and affiliate with a
sufficient number of existing orthodontic practices and to integrate these
practices into our existing operations. We may be unable to identify and recruit
suitable orthodontists. A shortage of available orthodontists with the skills we
require would have a material adverse effect on our expansion opportunities. Our
ability to obtain adequate financing to fund our expansion strategy will also
affect our growth. Further, if we experience difficulties in managing additional
orthodontic practices effectively, recruitment and expansion will suffer.
Finally, future government regulations may inhibit our continued growth. There
can be no assurance that our expansion strategy will continue to succeed or that
we will not have to modify our expansion strategy.

Governmental Organizations Extensively Regulate Orthodontists and Us.
The orthodontic industry and orthodontic practices are regulated extensively at
the state and federal levels. We do not control the practice of orthodontics by
our affiliated orthodontists, nor their compliance with

27
<PAGE> 28

legal requirements applicable to orthodontists and their practices. Many states
prohibit us, as a non-professional corporation, from practicing orthodontics. In
certain states, managing or operating an orthodontic office is included within
the definition of practicing orthodontics. Many states also prohibit a
non-professional corporation from splitting professional fees with
orthodontists, owning or controlling the assets of an orthodontic practice,
employing orthodontists, maintaining an orthodontist's patient records or
controlling the content of an orthodontist's advertising. Many states also
prohibit orthodontists from paying any portion of fees received for orthodontic
services in exchange for a patient referral. In addition, many states impose
limits on the tasks an orthodontist may delegate to other staff members. These
laws and their interpretation vary from state to state and are enforced by
regulatory authorities with broad discretion.

We cannot be sure that a review of our business relationships by courts
or other regulatory authorities will not result in determinations that could
adversely affect our operations. The regulatory environment may change in a way
that restricts our existing or future operations. An affiliated orthodontist may
successfully challenge the legality of our long-term service and consulting
agreements, or a court or regulatory authority may limit our ability to enforce
provisions contained in such agreements. The laws and regulations of certain
states and countries in which we seek to expand may require us to change our
contractual relationships with orthodontists in a manner that would restrict our
operations in those states and countries or prevent us from acquiring the assets
of orthodontists or managing their practices in those states and countries.
Further, the laws and regulations of states and countries in which we currently
maintain operations may change or be interpreted in the future to either
restrict or adversely affect our relationships with orthodontists in those
states and countries.

Our Financial Success Depends on Our Affiliated Orthodontists. We do
not employ orthodontists or control the practices of our affiliated
orthodontists. We receive fees for services we provide to orthodontic practices
under service and consulting agreements. Our long-term agreements with
affiliated orthodontists have terms ranging from 20 to 40 years, with most
ranging from 20 to 25 years. Affiliated orthodontists may terminate such
agreements for "cause," which generally includes our material breach of the
long-term agreement. Our revenue is derived primarily from our service
agreements with affiliated orthodontists. Our revenue is therefore dependent on
revenue generated by our affiliated orthodontists, who are essential to our
success. Changes in the healthcare industry, such as the growth of managed care
organizations and provider networks, may result in lower compensation for the
services of our affiliated orthodontists. The loss of a substantial number of
our agreements with affiliated orthodontists or a material loss of revenue by
our affiliated orthodontists, for whatever reason, could materially and
adversely affect our financial results and results of operations.

Other Orthodontists and Dentists Compete With Our Affiliated
Orthodontists, and Other Companies Compete With Us. Orthodontics is a highly
competitive business in each market in which our orthodontic centers operate.
Each affiliated orthodontist faces competition from other orthodontists and
general dentists in the communities they serve. Many of these other
orthodontists and general dentists have more established practices. Managing
orthodontic practices is also a highly competitive business. We compete with
other companies with strategies similar to ours in developing and managing
orthodontic practices throughout the United States. Competitors with greater
access to financial resources may enter our markets and compete with us. We may
not be able to compete successfully with existing or new competitors. Also,
additional competition may make it more difficult for us to affiliate with
additional orthodontists on terms that are favorable to us.

Our Financial Success May Be Damaged By Successful Claims Against Our
Affiliated Orthodontists. We manage the practices of orthodontists who provide
orthodontic services to the public and are exposed to the risk of professional
liability and other claims. Such claims, if

28
<PAGE> 29

successful, could result in substantial damage awards. Such awards might exceed
the limits of any applicable insurance coverage. Insurance against losses of
this type can be expensive. Insurance rates vary from state to state. We do not
control the practice of orthodontics by our affiliated orthodontists or their
compliance with the legal and other requirements applicable to orthodontists and
their practices. Each affiliated orthodontist has undertaken, however, to comply
with all applicable laws. Under our long-term agreements with affiliated
orthodontists, they must reimburse us for any damages we suffer arising out of
claims against our affiliated orthodontists. We maintain liability insurance
coverage, and we are generally named as an additional insured party under the
liability insurance policies required to be maintained by each of our affiliated
orthodontists. However, a successful malpractice claim against us or an
affiliated orthodontist could have a material adverse effect on our financial
position and results of operations.

Our Financial Results May Suffer If We Have Recorded Intangible Assets
That Are Not Recoverable. As a result of our acquisitions of assets or capital
stock of, and affiliations with, affiliated orthodontists, we recorded
intangible assets, net of accumulated amortization, of approximately $167.3
million on our balance sheet at December 31, 1999. We cannot assure you that we
will realize the value of these intangible assets. We expect to engage in
additional transactions that will result in our recognition of additional
intangible assets and amortization expense. Part of the amortization generated
by these intangible assets is not deductible for tax purposes. As a matter of
policy, we evaluate on a regular basis whether events and circumstances have
occurred that indicate that all or a portion of the carrying amount of such
intangible assets may no longer be recoverable. Accounting rules require that if
some of the carrying amount of such intangibles is no longer recoverable, we
must take an additional charge to our earnings. Although, as of December 31,
1999, we do not believe that our net unamortized balance of intangible assets
acquired and anticipated to be acquired is impaired, any future determination
that a significant impairment has occurred would require us to write off the
impaired portion of unamortized intangible assets. Such a write-off could have a
material adverse effect on our financial condition and results of operations.

Our Success Depends on Retaining Key Personnel. Our success depends
upon the continued active participation of our senior management, particularly
our chairman of the board and co-chief executive officer, Dr. Gasper Lazzara,
Jr., our co-chief executive officer and president, Bartholomew F. Palmisano,
Sr., our chief operating officer, Michael C. Johnsen, and our chief financial
officer, Bartholomew F. Palmisano, Jr. The loss of the services of any of these
officers could have a material adverse effect on our financial position and
results of operations. Our success also depends on our ability to attract and
retain other highly qualified managerial personnel.

Our Stock Price May Be Adversely Affected by the Control by Our
Principal Stockholders. At December 31, 1999, our co-chief executive officers,
Dr. Lazzara and Bartholomew F. Palmisano, Sr., collectively controlled or owned
approximately 16.6% of our outstanding shares of common stock. As a result of
their holdings, Dr. Lazzara and Mr. Palmisano together have a disproportionate
ability to affect the election of the members of our board of directors and to
determine the outcome of all matters requiring stockholder approval. They
therefore have a disproportionate control over our affairs and management. This
concentration of ownership may limit the price that investors are willing to pay
for shares of our common stock. This control may therefore adversely affect the
market price of our common stock.

Anti-Takeover Provisions May Prevent a Change in Our Control. Certain
provisions of our restated certificate of incorporation, bylaws and Delaware law
may discourage a change in our control, even if a change in control is in the
stockholders' best interests. For example, certain board actions require a
supermajority vote rather than a simple majority vote. In addition, our restated
certificate of incorporation allows our board of directors to determine the
preferences and rights of preferred stock which we may issue without any vote or
approval of the holders of our common stock. The rights of common stockholders
will be subject to and may be adversely affected by the rights of

29
<PAGE> 30

the holders of any preferred stock that we may issue in the future. The issuance
of such preferred stock could make it more difficult for a third party to
acquire a majority of our outstanding voting stock. Through the issuance of
preferred stock with certain powers, the board of directors may prevent changes
in our management and control. The board of directors is divided into three
classes of directors. Directors from each class serve staggered three-year
terms, which may affect the ability of stockholders to replace a majority of the
incumbent directors.

Our Stock Price May Fluctuate. From time to time, the market price of
our common stock may fluctuate significantly in response to variations in our
financial results or announcements of material events or that of our
competitors. Regulatory changes, developments in the healthcare and practice
management industry, changes in general conditions in the economy or the
financial markets or other developments affecting us could also cause the market
price of our common stock to fluctuate substantially.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company's market risk sensitive
instruments is the potential loss arising from adverse changes in interest rates
and foreign currency exchange rates. All financial instruments held by the
Company and described below are held for purposes other than trading.

Interest Rate Risk. The Company's lines of credit and the advances for
operating losses included in amounts due from orthodontic entities in the
Company's consolidated financial statements expose earnings to changes in
short-term interest rates since the interest rates on the financial instruments
are variable. For lines of credit, if (i) the variable rates on the Company's
financial instruments were to increase by 1% from the rate at December 31, 1999;
and (ii) the Company borrowed the maximum amount available under its lines of
credit ($105 million) for all of 2000; solely as a result of the increase in
interest rates, the Company's interest expense would increase, resulting in a
$389,000 decrease in net income, assuming an effective tax rate of approximately
38%.

For the Company's advances to orthodontic entities for operating
losses, if the (i) the variable rates on the Company's advances were to decrease
by 1% from the rate at December 31, 1999, and (ii) advances were outstanding for
all of 2000, solely as a result of the decrease in interest rates, the Company's
interest income would decrease, resulting in a $61,000 decrease in net income,
assuming an effective tax rate of approximately 38%. Comparatively, if the
interest rate had decreased 1% as of December 31, 1998, the Company's interest
income for the year ended December 31, 1999 would have decreased by
approximately $39,000, assuming an effective tax of approximately 38%.

This analysis does not consider the effects of the reduced level of
overall economic activity that could exist in such an environment. Further, in
the event of a change of such magnitude, management would likely take actions to
further mitigate its exposure to the change.

Foreign Exchange Risk. The Company typically does not hedge its foreign
currency exposure. Management does not believe its exposure to foreign currency
rate fluctuations is material.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Appendix A hereto.

30
<PAGE> 31

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

31
<PAGE> 32

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to the directors and executive officers of the
Company is incorporated herein by reference to the sections captioned "Election
of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive Proxy Statement relating to the Annual Meeting of
Stockholders of the Company to be held during 2000.

The following table sets forth certain information with respect to the
executive officers of the Company:

Name Age Positions with the Company
- - ---- --- --------------------------

<S> <C> <C>
Dr. Gasper Lazzara, Jr. ........................... 57 Chairman of the Board, Co-Chief Executive
Officer, Director

Bartholomew F. Palmisano, Sr. ..................... 53 Co-Chief Executive Officer, President,
Treasurer, Director

Michael C. Johnsen................................. 47 Chief Operating Officer, Director

Bartholomew F. Palmisano, Jr. ..................... 29 Chief Financial Officer, Secretary
</TABLE>

DR. GASPER LAZZARA, JR. Dr. Lazzara has served as Chairman of the Board
and a director of the Company since its inception in July 1994. He has served as
Co-Chief Executive Officer of the Company since September 1998, and he served as
Chief Executive Officer of the Company from July 1994 to September 1998. Dr.
Lazzara also served as President of the Company from July 1994 to June 1997.
From 1989 to 1994, Dr. Lazzara served as president or managing partner of
certain of the Company's predecessor entities. He is a licensed orthodontist
and, prior to founding the Company, maintained a private orthodontic practice
for over 25 years. He is a member of the American Association of Orthodontists
and is a Diplomat of the American Board of Orthodontists.

BARTHOLOMEW F. PALMISANO, SR. Mr. Palmisano has served as Co-Chief
Executive Officer of the Company since September 1998, as President of the
Company since October 1999 and as Treasurer and a director of the Company since
its inception in July 1994. He served as Chief Financial Officer, Senior Vice
President and Secretary of the Company from its inception in July 1994 to
September 1998. From 1989 to 1994, Mr. Palmisano served as the chief financial
officer of certain of the Company's predecessor entities. Mr. Palmisano is a
licensed certified public accountant and an attorney.

MICHAEL C. JOHNSEN. Mr. Johnsen has served as Chief Operating Officer
of the Company since June 1997, and as a director of the Company since 1994. Mr.
Johnsen served as Vice President of Operations of the Company from its inception
in July 1994 to June 1997. From 1988 to 1994, Mr. Johnsen served as Vice
President of Operations of certain of the Company's predecessor entities. Mr.
Johnsen is Dr. Lazzara's brother-in-law.

BARTHOLOMEW F. PALMISANO, JR. Mr. Palmisano has served as Chief
Financial Officer and Secretary of the Company since September 1998. He served
as Chief Information Officer of the Company from July 1994 to September 1998. He
earned a B.A. in Economics and graduated with honors from Stanford University in
1992. He was employed as an accountant with Arthur Andersen & Co. in 1992. Mr.
Palmisano is the son of Bartholomew F. Palmisano, Sr.

32
<PAGE> 33

ITEM 11. EXECUTIVE COMPENSATION

Information relating to executive compensation is incorporated herein
by reference to the section captioned "Executive Compensation" in the Company's
definitive Proxy Statement relating to the Annual Meeting of Stockholders of the
Company to be held during 2000. The sections captioned "Comparative Performance
Graph" and "Compensation Committee Report on Executive Compensation" included in
such Proxy Statement are expressly not incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information relating to the security ownership of certain beneficial
stockholders and management of the Company is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement relating to the Annual
Meeting of Stockholders of the Company to be held during 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to certain relationships and related transactions
with respect to the Company is incorporated herein by reference to the section
captioned "Certain Relationships and Related Transactions" in the Company's
definitive Proxy Statement relating to the Annual Meeting of Stockholders of the
Company to be held during 2000.

33
<PAGE> 34

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Index to Consolidated Financial Statements, Financial Statement
Schedules and Exhibits

The following consolidated financial statements of the Company are
included in Appendix A hereto.

(1) FINANCIAL STATEMENTS:

<TABLE>

<S> <C>
Report of Independent Auditors................................................................A-1

Consolidated Balance Sheets
December 31, 1999 and 1998....................................................................A-2

Consolidated Statements of Income - Years Ended
December 31, 1999, 1998 and 1997..............................................................A-4

Consolidated Statements of Equity - Years Ended
December 31, 1999, 1998 and 1997..............................................................A-5

Consolidated Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997..............................................................A-6

Notes to Consolidated Financial Statements -
December 31, 1999.............................................................................A-7
</TABLE>

(2) FINANCIAL STATEMENT SCHEDULE:

All schedules are omitted, because they are not applicable or not
required, or because the required information is included in the Company's
consolidated financial statements or notes thereto.

(3) EXHIBITS:

EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS

3.1 -- Bylaws of the Registrant(1)

3.2 -- Restated Certificate of Incorporation of the Registrant(2)

4.1 -- Specimen Stock Certificate(1)

10.1 -- Form of Service Agreement (confidential treatment granted as
to a portion of the agreement)(1)

10.2 -- Form of Management Agreement (confidential treatment granted
as to a portion of the agreement)(1)

10.3 -- Form of Consulting Agreement(1)

10.4 -- Employment Agreement, dated as of November 21, 1994, between
the Registrant and Gasper Lazzara, Jr., D.D.S.(1)

10.5 -- Employment Agreement, dated as of November 21, 1994, between
the Registrant and Bartholomew F. Palmisano, Sr.(1)

34
<PAGE> 35

EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS

10.6 -- Orthodontic Centers of America, Inc. 1994 Incentive Stock Plan
(1)

10.7 -- Orthodontic Centers of America, Inc. 1994 Non-Qualified Stock
Option Plan for Non-Employee Directors (1)

10.8 -- First Union National Bank Defined Contribution Master Plan and
Trust Agreement, and Adoption Agreement relating thereto,
between the Registrant and First Union National Bank (1)

10.9 -- Orthodontic Centers of America, Inc. 1995 Restricted Stock
Option Plan (3)

10.10 -- Orthodontic Centers of America, Inc. 1996 Employee Stock
Purchase Plan (4)

10.11 -- Orthodontic Centers of America, Inc. 1997 Key Employee Stock
Purchase Plan Participation Agreement, dated as of November 5,
1997, between the Registrant and Michael C. Johnsen (5)

10.12 -- Orthodontic Centers of America, Inc. 1997 Key Employee Stock
Purchase Plan Participation Agreement, dated as of November 5,
1997, between the Registrant and Bartholomew F. Palmisano, Jr.
(6)

10.13 -- Revolving Credit and Security Agreement, dated as of October
8, 1998, among the Registrant and certain subsidiaries of the
Registrant, as Borrowers, the Lenders named therein, First
Union National Bank, as Agent, Bank of America, FSB, as
Documentation Agent, and Citibank, N.A., as Syndication Agent
(6)

21.1 -- List of subsidiaries of the Registrant (filed herewith)

23.1 -- Consent of Ernst & Young LLP (filed herewith)

27.1 -- Financial Data Schedule (filed herewith)

- - --------------------

(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration Statement No.
33-85326.

(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-3, Registration Statement No.
333-36799.

(3) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.

(4) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.

(5) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.

(6) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.

35
<PAGE> 36

The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:

1. Employment Agreement, dated as of November 21, 1994, between the
Registrant and Gasper Lazzara, Jr., D.D.S. (Exhibit 10.4)

2. Employment Agreement, dated as of November 21, 1994, between the
Registrant and Bartholomew F. Palmisano, Sr. (Exhibit 10.5)

3. Orthodontic Centers of America, Inc. 1994 Incentive Stock Plan
(Exhibit 10.6)

4. First Union National Bank Defined Contribution Master Plan and Trust
Agreement, and Adoption Agreement relating thereto, between the Registrant and
First Union National Bank (Exhibit 10.8)

5. Orthodontic Centers of America, Inc. 1996 Employee Stock Purchase
Plan (Exhibit 10.10)

6. Orthodontic Centers of America, Inc. 1997 Key Employee Stock
Purchase Plan Participation Agreement, dated as of November 5, 1997, between the
Registrant and Michael C. Johnsen (Exhibit 10.11)

7. Orthodontic Centers of America, Inc. 1997 Key Employee Stock
Purchase Plan Participation Agreement, dated as of November 5, 1997, between the
Registrant and Bartholomew F. Palmisano, Jr. (Exhibit 10.12)

(b) Reports on Form 8-K

No current reports on Form 8-K were filed during the fourth quarter of
1999.

36
<PAGE> 37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Ponte
Vedra Beach, State of Florida, on March 29, 2000.

ORTHODONTIC CENTERS OF AMERICA, INC.

By: /s/ Gasper Lazzara, Jr., D.D.S.
--------------------------------------
Gasper Lazzara, Jr., D.D.S.
Chairman of the Board and Co-Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.

SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ Gasper Lazzara, Jr., D.D.S. Chairman of the Board, Co-Chief Executive March 29, 2000
- - -------------------------------------------- Officer, Director (principal executive
Gasper Lazzara, Jr., D.D.S. officer)

/s/ Bartholomew F. Palmisano, Sr. Co-Chief Executive Officer, President, March 29, 2000
- - -------------------------------------------- Director
Bartholomew F. Palmisano, Sr.

/s/ Bartholomew F. Palmisano, Jr. Chief Financial Officer, Secretary March 29, 2000
- - -------------------------------------------- (principal financial and accounting officer)
Bartholomew F. Palmisano, Jr.

/s/ Michael C. Johnsen Chief Operating Officer, Director March 29, 2000
- - --------------------------------------------
Michael C. Johnsen

/s/ Ashton J. Ryan, Jr. Director March 29, 2000
- - --------------------------------------------
Ashton J. Ryan, Jr.

/s/ A Gordon Tunstall Director March 29, 2000
- - --------------------------------------------
A Gordon Tunstall

/s/ Edward J. Walters, Jr. Director March 29, 2000
- - --------------------------------------------
Edward J. Walters, Jr.

</TABLE>

37
<PAGE> 38

Consolidated Financial Statements

Orthodontic Centers of America, Inc.

Years ended December 31, 1999, 1998, and 1997
with Report of Independent Auditors

<PAGE> 39

Orthodontic Centers of America, Inc.

Consolidated Financial Statements

Years ended December 31, 1999, 1998, and 1997

Contents

<TABLE>
<S> <C>
Report of Independent Auditors.........................................................................A-1

Audited Consolidated Financial Statements

Consolidated Balance Sheets............................................................................A-2
Consolidated Statements of Income......................................................................A-4
Consolidated Statements of Shareholders' Equity........................................................A-5
Consolidated Statements of Cash Flows..................................................................A-6
Notes to Consolidated Financial Statements.............................................................A-7
</TABLE>

<PAGE> 40

Report of Independent Auditors

The Board of Directors
Orthodontic Centers of America, Inc.

We have audited the accompanying consolidated balance sheets of Orthodontic
Centers of America, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Orthodontic Centers of America, Inc. at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in 1999.

/s/ ERNST & YOUNG LLP

New Orleans, Louisiana
March 27, 2000

A-1
<PAGE> 41

Orthodontic Centers of America, Inc.

Consolidated Balance Sheets
(In thousands, except share data)

<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,822 $ 1,601
Investments 983 1,187
Patient receivables, net of allowance for uncollectible billings of
$6,403 in 1999 and $5,356 in 1998 25,976 20,163
Unbilled patient receivables, net of allowance for uncollectible amounts
of $3,241 in 1999 and $2,209 in 1998 65,793 46,314
Amounts receivable from orthodontic entities 7,944 5,817
Deferred income taxes 4,455 4,399
Supplies inventory 8,195 5,890
Prepaid expenses and other assets 1,920 1,663
-------- --------
Total current assets 121,088 87,034

Property, equipment and improvements, net 64,566 48,565
Amounts receivable from orthodontic entities, less current portion 12,586 8,412
Intangible assets 167,348 152,438
Other assets 1,434 349

-------- --------
Total assets $367,022 $296,798
======== ========
</TABLE>

A-2
<PAGE> 42

<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,104 $ 1,948
Accrued salaries and other accrued liabilities 3,647 2,932
Patient prepayments 4,206 4,326
Income taxes payable 935 7,921
Amounts payable to orthodontic entities 1,900 1,600
Current portion of notes payable to affiliated orthodontists 6,020 5,118
Current portion of long-term debt -- 3,555
---------- ----------
Total current liabilities 18,812 27,400

Notes payable to affiliated orthodontists, less current portion 2,141 6,159
Long-term debt, less current portion 50,632 16,500

Deferred income taxes 16,910 15,580

Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, no
shares outstanding -- --
Common stock, $.01 par value per share; 100,000,000 shares authorized
at December 31, 1999 and 1998; 48,066,000 and 47,849,000 shares issued and
outstanding at December 31, 1999 and 1998, respectively 481 478
Additional paid-in capital 161,465 159,936
Retained earnings 124,435 78,599
Due from key employees for stock purchase program (5,236) (5,236)
Capital contribution receivable from shareholders (2,618) (2,618)
---------- ----------
Total shareholders' equity 278,527 231,159
---------- ----------
Total liabilities and shareholders' equity $ 367,022 $ 296,798
========== ==========
</TABLE>

See accompanying notes.

A-3
<PAGE> 43

Orthodontic Centers of America, Inc.

Consolidated Statements of Income
(In thousands, except per share data)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------- ---------- ----------

<S> <C> <C> <C>
Net revenue $ 226,290 $ 171,298 $ 117,326

Direct expenses:
Employee costs 61,224 46,878 33,429
Orthodontic supplies 17,136 13,287 8,789
Rent 18,624 14,128 10,299
Marketing and advertising 16,874 15,491 9,855
---------- ---------- ----------
Total direct expenses 113,858 89,784 62,372

General and administrative 23,270 18,104 13,356
Depreciation and amortization 12,238 9,124 5,640
---------- ---------- ----------
Operating profit 76,924 54,286 35,958

Interest expense (2,599) (337) (234)
Interest income 395 617 1,377
---------- ---------- ----------
Income before income taxes 74,720 54,566 37,101
Provision for income taxes 28,206 20,753 14,469
---------- ---------- ----------
Net income before cumulative effect of change in accounting
principle 46,514 33,813 22,632
Cumulative effect of change in accounting principle, net of
income tax benefit of $410,000 678 -- --
---------- ---------- ----------
Net income $ 45,836 $ 33,813 $ 22,632
========== ========== ==========

Net income per share:
Basic before cumulative effect of a change in accounting
principle $ .97 $ .71 $ .51
Cumulative effect of a change in accounting principle $ (.02) $ -- $ --
---------- ---------- ----------
Basic $ .95 $ .71 $ .51
========== ========== ==========
Diluted before cumulative effect of a change in
accounting principle $ .96 $ .70 $ .50
Cumulative effect of a change in accounting
principle $ (.02) $ -- $ --
---------- ---------- ----------
Diluted $ .94 $ .70 $ .50
========== ========== ==========

Weighted average shares outstanding:
Basic 47,998 47,690 44,576
========== ========== ==========
Diluted 48,643 48,502 45,414
========== ========== ==========
</TABLE>

See accompanying notes.

A-4
<PAGE> 44

Orthodontic Centers of America, Inc.

Consolidated Statements of Shareholders' Equity
(In thousands, except share data)

<TABLE>
<CAPTION>
DUE
FROM KEY CAPITAL
EMPLOYEES CONTRIBUTIONS
ADDITIONAL FOR STOCK RECEIVABLE TOTAL
COMMON PAID-IN RETAINED PURCHASE FROM SHAREHOLDERS'
STOCK CAPITAL EARNINGS PROGRAM SHAREHOLDERS EQUITY
-------- ---------- -------- --------- ------------- -------------

<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 439 $ 92,294 $ 22,154 $ -- $ -- $114,887
Public offering of common stock (2,600,000
shares) 26 45,720 -- (5,236) (2,618) 37,892
Issuance of shares under stock option plans,
including tax benefit of $848 (151,000
shares) 1 1,278 -- -- -- 1,279
Issuance of shares of common stock to obtain
management agreements (779,000 shares) 8 14,042 -- -- -- 14,050
Net income -- -- 22,632 -- -- 22,632
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 474 153,334 44,786 (5,236) (2,618) 190,740
Issuance of shares under stock option plans,
including tax benefit of $1,151 (223,000
shares) 2 2,396 -- -- -- 2,398
Issuance of shares of common stock to obtain
management agreements (253,000 shares) 2 4,206 -- -- -- 4,208
Net income -- -- 33,813 -- -- 33,813
-------- -------- -------- -------- -------- --------
Balance at December 31, 1998 478 159,936 78,599 (5,236) (2,618) 231,159
Issuance of shares under stock option plans,
including tax benefit of $506 (123,000 shares) 1 619 -- -- -- 620
Issuance of shares of common stock to obtain
management agreements (80,000 shares) 2 910 -- -- -- 912
Net income -- -- 45,836 -- -- 45,836
-------- -------- -------- -------- -------- --------
Balance at December 31, 1999 $ 481 $161,465 $124,435 $ (5,236) $ (2,618) $278,527
======== ======== ======== ======== ======== ========
</TABLE>

See accompanying notes.

A-5
<PAGE> 45

Orthodontic Centers of America, Inc.

Consolidated Statements of Cash Flows
(In thousands, except share data)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 45,836 $ 33,813 $ 22,632
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for bad debt expense 2,079 2,295 1,851
Depreciation and amortization 12,238 9,124 5,640
Deferred income taxes 1,273 (2,767) (2,225)
Cumulative effect of change in accounting principle 678 -- --
Changes in operating assets and liabilities:
Patient receivables (6,860) (7,848) (7,659)
Unbilled patient receivables and patient prepayments (20,631) (14,885) (12,724)
Supplies inventory (2,305) (2,663) (1,429)
Prepaid expenses and other (1,342) 228 (132)
Amounts receivable from/payable to orthodontic entities (2,420) (1,756) (590)
Accounts payable and other current liabilities (5,199) 6,568 3,682
-------- -------- --------
Net cash provided by operating activities 23,347 22,109 9,046

INVESTING ACTIVITIES
Purchases of property, equipment and improvements (22,520) (17,638) (14,952)
Purchase of available-for-sale investments -- -- (21,758)
Proceeds from sales or maturities of available-for-sale investments 204 19,674 20,000
Intangible assets acquired (17,178) (42,216) (25,219)
Advances to orthodontic entities (3,951) (4,906) (2,838)
Payments from orthodontic entities 370 1,927 2,094
-------- -------- --------
Net cash used in investing activities (43,075) (43,159) (42,673)

FINANCING ACTIVITIES
Repayment of notes payable to affiliated orthodontists (6,742) (7,864) (6,658)
Proceeds from long-term debt 30,577 20,055 --
Issuance of common stock 114 595 38,323
-------- -------- --------
Net cash provided by financing activities 23,949 12,786 31,665
-------- -------- --------
Change in cash and cash equivalents 4,221 (8,264) (1,962)
Cash and cash equivalents at beginning of year 1,601 9,865 11,827
-------- -------- --------
Cash and cash equivalents at end of year $ 5,822 $ 1,601 $ 9,865
======== ======== ========

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,499 $ 337 $ 234
======== ======== ========
Income taxes $ 33,931 $ 19,287 $ 14,460
======== ======== ========

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Long-term debt and common stock issued to obtain management agreements $ 4,512 $ 13,609 $ 27,704
======== ======== ========
</TABLE>

See accompanying notes.

A-6
<PAGE> 46

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements

Years ended December 31, 1999, 1998 and 1997

1. DESCRIPTION OF BUSINESS

Orthodontic Centers of America, Inc. (the "Company") manages orthodontic centers
on an international basis. The Company managed 537, 469, and 360 orthodontic
centers as of December 31, 1999, 1998, and 1997 respectively. As of December 31,
1999, the Company managed 506 centers located in 43 states in the United States
and 31 centers in Puerto Rico, Japan, and Mexico.

The Company provides business operations, financial, marketing and
administrative services to orthodontic practices. These services are provided
under service, management and consulting agreements with the orthodontist and
their wholly owned orthodontic entities (hereafter referred to as "Management
Agreements"). These Management Agreements are for terms ranging from 20 to 40
years. The practicing orthodontists own the orthodontic entities.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Orthodontic
Centers of America, Inc. and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

A-7
<PAGE> 47
Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENTS

Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. All investments held at December 31, 1999 and 1998 are classified as
available-for-sale because management does not have positive intent to hold
until maturity. Available-for-sale investments are carried at amortized cost,
which approximates fair value. At December 31, 1999, investments were included
in current assets as management expects to use the proceeds from the sale of the
investments in its current operations. At December 31, 1999, the Company's
amortized cost of investments held consisted of $983,440 of government bonds. At
December 31, 1998, the Company's amortized cost of investments held consisted of
$1,187,000 of municipal bonds. The unrealized gains and losses on these
investments at December 31, 1999 and 1998 were not significant. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity and included in interest income. The cost of
investments sold is based on the specific identification method. Interest on
investments classified as available-for-sale is included in interest income.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheets for cash and cash equivalents approximates their fair value.

INVESTMENTS: The fair values for marketable debt securities are based on
quoted market prices.

AMOUNTS RECEIVABLE FROM ORTHODONTIC ENTITIES: The carrying amounts reported
on the balance sheets for amounts receivable from orthodontic entities
approximate their fair values.

A-8
<PAGE> 48

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LONG-TERM DEBT: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements, and approximate their carrying values.

REVENUE RECOGNITION

Management fees are earned by the Company under the terms of the Management
Agreements. Such fees are equal to approximately 24% of new patient contract
balances in the first month of new contracts plus a portion of existing contract
balances, less amounts retained by the orthodontic entities. The orthodontic
entities retain all orthodontic center revenue not paid to the Company as the
management fee. The amounts retained by the orthodontic entities are dependent
on their financial performance, based in significant part on the orthodontic
entities' cash receipts and disbursements.

Under the terms of the Management Agreements, the orthodontic entities assign
their receivables (billed and unbilled) to the Company in payment of their
management fees. The Company is responsible for collection. Unbilled patient
receivables represent the earned revenue in excess of billings to patients as of
the end of each period. There are no unbilled receivables which will not be
billed. The Company is exposed to certain credit risks. The Company manages such
risks by regularly reviewing the accounts and contracts, and providing
appropriate allowances. Provisions are made currently for all known or
anticipated losses for billed and unbilled patient receivables. Such deductions
totaled $2,079,000, $2,295,000, and $1,851,000 for the years ended December 31,
1999, 1998, and 1997, respectively, and have been within management's
expectations. At December 31, 1999, 1998 and 1997, there were approximately
268,000, 195,000 and 130,000, respectively, active patient contracts with
balances outstanding. Patient prepayments represent collections from patients or
their insurance companies which are received in advance of the performance of
the related services.

SUPPLIES INVENTORY

Supplies inventory is valued at the lower of cost or market determined on the
first-in, first-out basis.

A-9
<PAGE> 49

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and improvements are stated at cost. Depreciation expense is
provided using the straight-line method over the estimated useful lives of the
assets, which are 5 to 10 years. Leasehold improvements are amortized over the
original lease terms which are generally 5 to 10 years. The related depreciation
and amortization expense for the years ended December 31, 1999, 1998 and 1997
was $6,519,000, $4,575,000 and $3,549,000, respectively.

INTANGIBLE ASSETS

Amortization expense for the years ended December 31, 1999, 1998, and 1997, was
$5,719,000, $4,549,000, and $2,091,000, respectively. Accumulated amortization
was $13,713,000 and $7,994,000 as of December 31, 1999 and 1998, respectively.
Intangible assets and the related accumulated amortization are written off when
fully amortized.

Intangible assets include the costs of obtaining Management Agreements, which
are amortized over the life of the agreements which is generally 20 to 40 years
with most terms ranging from 20 to 25 years. Such Management Agreements
represent the exclusive right to provide business operations, financial,
marketing and administrative service to an orthodontic entity during the term of
the Management Agreement. In the event the Management Agreement is terminated,
the related orthodontic entity is generally required to purchase all of the
related assets, including the unamortized portion of intangible assets, at the
current book value.

The recoverability of management is assessed periodically and takes into account
whether the management should be completely or partially written off or the
amortization period accelerated. In evaluating the value and future benefits of
management, the recoverability from operating income is measured. Under this
approach, the carrying value of agreement would be reduced if it is probable
that management's best estimate of future operating income before agreement
amortization will be less than the carrying amount of agreement over the
remaining amortization period. The Company assesses long-lived assets for
impairment under FASB Statement No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121). Under
those rules, management associated with assets acquired in a purchase business
combination is included in impairment evaluations when events or circumstances
exist that indicate the carrying amounts of those assets may not be recoverable.

MARKETING AND ADVERTISING COSTS

Marketing and advertising costs are expensed as incurred.

INCOME TAXES

Income taxes for the Company, are determined by the liability method in
accordance with Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes."

A-10
<PAGE> 50
Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK COMPENSATION ARRANGEMENTS

The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees."

COSTS OF START-UP ACTIVITIES

In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities." The SOP was effective beginning on January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and any
future start-up costs be expensed as incurred. The effect of adopting SOP 98-5
resulted in the Company recording a charge on January 1, 1999 for the cumulative
effect of an accounting change of $1,088,000 net of taxes of $410,000 to expense
costs that had previously been capitalized.

3. TRANSACTIONS WITH ORTHODONTIC ENTITIES

The Company has entered into an agreement with a financial institution where (i)
the financial institution finances operating losses and capital improvements for
newly developed orthodontic centers directly to the orthodontic entity, subject
to the financial institution's credit approval of the orthodontic entity, and
(ii) the Company remains a guarantor of the related debt. At December 31, 1999
and 1998, the Company was a guarantor for approximately $4,356,000 and
$6,095,000, respectively, under this agreement. In certain cases, the Company
funds these operating losses and capital improvements without the use of the
agreement with its financial institution. Amounts advanced to an orthodontic
entity by the Company to fund operating losses are required to be repaid to the
Company over five years once the orthodontic entity generates operating profits.

A-11
<PAGE> 51

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

3. TRANSACTIONS WITH ORTHODONTIC ENTITIES (CONTINUED)

Amounts receivable from orthodontic entities are classified on the consolidated
balance sheets based upon the expected date of collection. Collection of amounts
due from orthodontic entities is highly dependent on the entities' financial
performance. Therefore, the Company is exposed to certain credit risk. However,
management believes such risk is minimized by the Company's involvement in
certain business aspects of the orthodontic entity.

Amounts payable to orthodontic entities represents the extent that the patient
receivables assigned to the Company exceed the management fee earned and other
amounts currently due the Company.

4. PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and improvements consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------- --------

<S> <C> <C>
Leasehold improvements $ 45,237 $ 32,728

Furniture and fixtures 35,603 27,395
Other equipment 110 53
Centers in progress 2,666 1,036
-------- --------
83,616 61,212
Less accumulated depreciation and amortization 19,050 12,647
-------- --------
$ 64,566 $ 48,565
======== ========
</TABLE>

A-12
<PAGE> 52

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

5. LONG-TERM DEBT AND NOTES PAYABLE

Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------- --------

<S> <C> <C>
Notes payable to affiliated orthodontists, interest rates
from 8% to 10%, with maturity dates ranging from 2000
to 2004, unsecured $ 8,161 $ 11,277

Senior Credit Facility 50,632 16,500

Line of credit -- 3,555
-------- --------
58,793 31,332
Less current portion 6,020 8,673
-------- --------
$ 52,773 $ 22,659
======== ========
</TABLE>

The aggregate maturities of long-term debt as of December 31, 1999 for each of
the next five years are as follows (in thousands): 2000--$6,020; 2001--$1,580;
2002--$429; 2003--$50,720; and 2004--$44.

The Company has a syndicated $100,000,000 Senior Revolving Credit Facility
Agreement (the "Senior Credit Facility"). The Senior Credit Facility provides
for an interest rate based on LIBOR, plus the Applicable Margin, as defined in
the Senior Credit Facility. The interest rate outstanding as of December 31,
1999 ranged from 7.43% to 8.75% per annum, with a maturity date of October 2003.
The Company may utilize the proceeds to refinance certain existing indebtedness,
to finance certain acquisitions of assets of existing orthodontic centers, and
for working capital. The amounts borrowed under the Senior Credit Facility are
secured by security interests in all of the Company's assets, including its
accounts receivable and equipment. The Company is required to maintain certain
financial and nonfinancial covenants under the terms of the Senior Credit
Facility, including a maximum leverage ratio, minimum fixed charge coverage
ratio and minimum consolidated net worth ratio. At December 31, 1999, the
Company was in compliance with the covenants and restrictions of the Senior
Credit Facility.

A-13
<PAGE> 53

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

5. LONG-TERM DEBT AND NOTES PAYABLE (CONTINUED)

At December 31, 1999, the Company also had a $5,000,000 line of credit with a
financial institution. There was no outstanding balance on this line of credit
as of December 31, 1999. The line of credit is available for general working
capital needs, the development of new orthodontic centers and the acquisition of
assets from existing orthodontic centers. The Company is required to maintain
certain financial covenants under the terms of this line of credit. The line of
credit agreement also restricts certain activities of the Company, including
limiting the declaration of dividends to current earnings. At December 31, 1999,
the Company was in compliance with the covenants and restrictions of the
agreement.

6. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data).

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31
1999 1998 1997
-------- -------- --------

<S> <C> <C> <C>
Numerator:
Income before cumulative effect of accounting
change for basic and diluted earnings per share $ 46,514 $ 33,813 $ 22,632

Cumulative effect of a change in accounting
principle, net of income tax benefit
of $410,000 (678) -- --
-------- -------- --------

Net income for basic and diluted earnings
per share $ 45,836 $ 33,813 $ 22,632
======== ======== ========
Denominator:
Denominator for basic earnings per share $ 47,998 $ 47,690 $ 44,576
Effect of dilutive securities
Employee stock options 645 812 838
-------- -------- --------
Denominator for diluted earnings per share $ 48,643 $ 48,502 $ 45,414
======== ======== ========
</TABLE>

A-14
<PAGE> 54

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

7. LEASES

Facilities for the orthodontic centers and administrative offices are rented
under long-term leases accounted for as operating leases. The original lease
terms are generally 5 to 10 years with options to renew the leases for specified
periods subsequent to their original terms. The leases have other various
provisions, including sharing of certain executory costs and scheduled rent
increases. Minimum rent expense is recorded on a straight-line basis over the
life of the lease. Minimum future rental commitments as of December 31, 1999 are
as follows (in thousands):

<TABLE>
<S> <C>
2000 $ 8,887
2001 6,451
2002 5,248
2003 3,371
2004 2,257
Thereafter 5,290
-----------
$ 31,504
===========
</TABLE>

Many of the lease agreements provide for payments comprised of a minimum rental
payment plus a contingent rental payment based on a percentage of cash
collections and other amounts. Rent expense attributable to minimum and
additional rentals along with sublease income was as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------

<S> <C> <C> <C>
Minimum rentals $ 13,769 $ 10,446 $ 7,704
Additional rentals 5,014 3,783 2,682
Sublease income (159) (101) (87)
-------- -------- --------
$ 18,624 $ 14,128 $ 10,299
======== ======== ========
</TABLE>

A-15
<PAGE> 55

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

8. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the consolidated deferred tax liabilities and assets were as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Intangible assets $ 16,622 $ 14,959
Property and equipment 288 184
Other -- 437
-------- --------
Total deferred tax liabilities 16,910 15,580

Deferred tax assets:
Patient receivables and prepayments 4,455 4,399
-------- --------
Total deferred tax assets 4,455 4,399
-------- --------
Net deferred tax liabilities $ 12,455 $ 11,181
======== ========
</TABLE>

Components of the provision (benefit) for income taxes before the tax effect of
the change in accounting were as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------

<S> <C> <C> <C>
Current $ 26,933 $ 23,520 $ 16,694
Deferred 1,273 (2,767) (2,225)
-------- -------- --------
Total $ 28,206 $ 20,753 $ 14,469
======== ======== ========
</TABLE>

The reconciliation of income tax computed at the federal statutory rates to the
provision for income taxes before the tax effect of the change in accounting is
(in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------

<S> <C> <C> <C>
Tax at federal statutory rates $ 25,237 $ 18,460 $ 12,985
Other, primarily state income taxes 2,969 2,293 1,484
-------- -------- --------
Total $ 28,206 $ 20,753 $ 14,469
======== ======== ========
</TABLE>

A-16
<PAGE> 56

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

9. BENEFIT PLANS

STOCK OPTION PLANS

The Company has reserved 3,400,000 of the authorized shares of common stock for
issuance pursuant to options granted and restricted stock awarded under the
Orthodontic Centers of America, Inc. 1994 Incentive Stock Plan (the "Incentive
Option Plan"). Options may be granted to officers, directors and employees of
the Company, for terms not longer than 10 years at prices not less than fair
market value of the common stock on the date of grant. Grant options generally
become exercisable in four equal installments beginning two years after the
grant date, and expire 10 years after the grant date.

The Company has reserved 600,000 of the authorized shares of common stock for
issuance pursuant to options granted and restricted stock awarded under the
Orthodontic Centers of America, Inc. 1995 Non-Qualified Stock Option Plan for
Non-Employee Directors (the "Director Option Plan"). The Director Option Plan
provides for the grant of options to purchase 2,400 shares of common stock on
the first trading date each year to each nonemployee director serving the
Company on such date, at prices equal to the fair market value of the common
stock on the date of grant. Grant options generally become exercisable in four
equal annual installments beginning two years after the grant date, and expiring
10 years after the grant date, unless canceled sooner due to termination of
service or death.

The Company has reserved 2,000,000 of the authorized shares of common stock for
issuance pursuant to options granted under the Orthodontic Centers of America,
Inc. 1995 Restricted Stock Option Plan (the "Orthodontist Option Plan"). Options
may be granted to orthodontists who own an orthodontic entity which has a
service, management or consulting agreement with the Company, at prices not less
than 100% of the fair market value of the common stock on the date of grant.
Grant options generally become exercisable in four equal annual installments
beginning two years after grant date, and expire 10 years after grant date.

The Company has reserved 200,000 of the authorized shares of common stock for
issuance under the 1996 Employee Stock Purchase Plan (the "Employee Purchase
Plan"), which allows participating employees of the Company to purchase shares
of common

A-17
<PAGE> 57

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

9. BENEFIT PLANS (CONTINUED)

stock from the Company through a regular payroll deduction of up to 10% of their
respective normal monthly pay. Deducted amounts are accumulated for each
participating employee and used to purchase the maximum reported on the New York
Stock Exchange on the applicable purchase date or the first trading date of
year, whichever is lower. Additionally, the Company has reserved 2,000,000
shares of common stock for issuance to affiliated orthodontists through a stock
purchase program that allows participating affiliated orthodontists to acquire
shares of common stock from the Company.

FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the
Company to disclose pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options under the
fair value method. The fair value was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions.

<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----

<S> <C> <C> <C>
Risk-free interest rate 6.25% 6.11% 6.75%
Dividend yield
Volatility factor .505 .490 .608
Weighted average expected life
6.65 YEARS 7.43 years 8.01 years
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

A-18
<PAGE> 58

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

9. BENEFIT PLANS (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. No compensation cost
has been recognized for its stock options in the financial statements. Had the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (in thousands, except per
share data):

<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------

<S> <C> <C> <C>
Pro forma net income $ 44,431 $ 33,111 $ 22,249
Pro forma earnings per share:
Basic $ .93 $ .69 $ .50
Diluted $ .91 $ .68 $ .49
</TABLE>

A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:

<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- --------- -------- --------- --------

<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 3,272,886 $10.72 3,130,072 $ 9.57 1,661,753 $ 3.65
Granted 1,254,018 14.26 373,943 16.36 1,609,713 15.44
Exercised (122,775) 4.87 (181,729) 3.54 (130,753) 3.29
Forfeited (70,544) 17.42 (49,400) 4.72 (10,641) 5.95
---------- ---------- ----------

Outstanding-end of year 4,333,585 11.63 3,272,886 10.72 3,130,072 9.57
========== ========== ==========
Exercisable at end of year 1,664,468 10.21 901,575 6.47 336,543 3.25
========== ========== ==========
Weighted average fair value of
options granted during the year $ 9.26 $ 12.05 $ 10.56
========== ========== ==========
</TABLE>

A-19
<PAGE> 59

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

9. BENEFIT PLANS (CONTINUED)

Of the options outstanding at December 31, 1999, approximately 1,048,000 were
issued on or about the date of the Company's initial public offering and have
exercise prices which range from $2.75 to $3.25, a weighted average exercise
price of $3.04, and a weighted average remaining contractual life of 5 years.
The remaining options outstanding at December 31, 1999 have exercise prices
which range from $2.75 to $21.62, a weighed average exercise price of $14.37,
and a weighed average remaining contractual of 7.17 years.

KEY EMPLOYEE STOCK PURCHASE PLAN

The Company implemented the Orthodontic Centers of America, Inc. 1997 Key
Employee Stock Purchase Plan (the "Key Employee Purchase Plan") to encourage
ownership of the Company's common stock by executive officers and other key
employees of the Company and thereby align their interests with those of the
Company's shareholders. Under the Key Employee Purchase Plan, from time to time,
the Company's executive officers and certain other key employees will be
permitted to purchase (from the Company, during an offering or on the open
market, as determined by the Company) shares of the Company's common stock with
an aggregate value of up to five times the applicable employee's annual base
salary. The purchase price of such shares will equal the public offering price
or the reported last sale price per share of common stock on the business day
immediately preceding the date of purchase, as applicable.

For each employee participating in the Key Employee Purchase Plan, the Company
will finance 50% of the purchase price through a loan from the Company. Each
such loan will be evidenced by a promissory note and will be a full recourse
obligation of the employee, secured by all of the shares of common stock
acquired by the employee in connection with the loan. Each such loan will bear a
market rate of interest and the outstanding principal and accrued interest under
the loan will be payable, in one lump-sum payment, on the earlier of (i) the
fifth anniversary of the date of the loan or (ii) termination of the applicable
employee's employment with the Company. A proportionate amount of the
outstanding principal and accrued interest under the loan will be payable upon
the sale or transfer by the employee of shares of common stock purchase in
connection with the loan.

A-20
<PAGE> 60

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

9. BENEFIT PLANS (CONTINUED)

The Key Employee Purchase Plan includes a risk-sharing provision, whereby during
their term of employment with the Company a participating employee will be
responsible for 100% of any losses, but is entitled to only 50% of any gains
(with the Company being entitled to the other 50% of such gains), occurring with
respect to the sale by the employee of shares of common stock purchased under
the Key Employee Purchase Plan and held for less than three years. In addition,
with respect to the sale by the employee of shares purchased under the Key
Employee Purchase Plan and held for more than three but less than five years,
the employee will be entitled to 100% of any gains and the principal amount of
the loan to the employee from the Company will be reduced by 50% of any losses
during the term of the employee's employment with the Company.

Upon the purchase of common stock by an employee under the Key Employee Purchase
Plan, the Company will also grant options to such employee under the Company's
1994 Incentive Option Plan to purchase an aggregate of three times the number of
shares of common stock so purchased. The options will be exercisable beginning
on the seventh anniversary of the date of grant at an exercise price equal to
the purchase price paid in the purchase to which the options relate. If,
however, on the fifth anniversary of the date of grant, the employee is employed
by the Company and has repaid in full all indebtedness to the Company and its
affiliates incurred in connection with such purchase, the exercisable date of a
proportionate number of options (equal to three times the number of shares of
common stock purchased under the Key Employee Purchase Plan in connection with
the grant of the options and held by the employee on such fifth anniversary)
will be accelerated to such fifth anniversary.

In 1997, 295,000 shares of common stock were purchased under the Key Employee
Purchase Plan. The 50% of the loan not financed by the Company was financed
personally by major shareholders on terms comparable to the loan from the
Company. This loan has been recorded as a capital contribution to the Company
with the corresponding amount due from the key employees recorded as a deduction
from shareholders' equity. The loan to be financed personally by shareholders
was paid by the Company at the time of the offering and has not been repaid at
December 31, 1999. Therefore, a capital contribution receivable from the
Shareholders had been recorded at December 31, 1999 as a reduction from
shareholders' equity. The total amount due from key employees in conjunction
with the Key Employee Purchase Plan as of December 31, 1999 was $5,236,000. As
the loans are repaid, a pro rata portion of the principal payment will be
distributed to the shareholders who financed the loans.

A-21
<PAGE> 61

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

9. BENEFIT PLANS (CONTINUED)

DEFINED CONTRIBUTION PLAN

The Company sponsors a 401(k) plan for all employees who have satisfied minimum
service and age requirements. Employees may contribute up to 15% of their
earnings to the plan. The Company matches 40% of an employee's contribution to
the plan, up to a maximum of $600 per year. Plan expense totaled $59,000,
$52,000, and $49,000 for years ended December 31, 1999, 1998, and 1997,
respectively.

10. ACQUISITION OF MANAGEMENT CONTRACTS

The following table summarizes the Company's finalized agreements with
orthodontic entities to obtain Management Agreements and to acquire other assets
for the years ended December 31:

<TABLE>
<CAPTION>
COMMON STOCK
ORTHODONTIC CENTERS TOTAL NOTES REMAINDER SHARE VALUE
ENTITY (NET OF ACQUISITION PAYABLE (PRIMARILY (AT AVERAGE SHARES
DECEMBER 31 AFFILIATIONS CONSOLIDATION) COSTS ISSUED CASH) COST) ISSUED
----------- ------------ -------------- ------------ ------------ ------------ ------------ ---------

11. COMMITMENTS AND CONTINGENCIES

The field of orthodontics is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. In general, regulation of health care companies is
increasing.

Every state imposes licensing and other requirements on individual
orthodontists, and orthodontic facilities and services. Management believes,
based on its familiarity with the operations of the Orthodontic Centers and the
activities of the Affiliated Orthodontists, that the Company's current and
planned activities do not violate these statutes and regulations. There can be
no assurance, however, that future interpretations of such laws, or the
enactment of more stringent laws, will not require structural and organizational

A-22
<PAGE> 62

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

modifications of the Company's existing contractual relationships with the
Affiliated Orthodontists or the operation of the Orthodontic Centers. In
addition, statutes in some states could restrict expansion of Company operations
in those jurisdictions. In response to particular state regulatory provisions,
the Company is required to utilize the consulting agreement structure in certain
states. Management plans to use a form of one of its operating agreements in
each of the states in which a development or acquisition proposal is pending. In
addition, federal and state laws regulate health maintenance organizations and
other managed care organizations for which orthodontists may be providers. In
connection with its entry into new markets, the Company may become subject to
compliance with additional regulations.

The operations of the Orthodontic Centers must meet federal, state and local
regulatory standards in the areas of safety and health. Historically, those
standards have not had any material adverse effect on the operations of the
Orthodontic Centers. Based on its familiarity with the operations of the
Orthodontic Centers and the activities of the Affiliated Orthodontists,
management believes that the Orthodontic Centers are in compliance in all
material respects with all applicable federal, state and local laws and
regulations relating to safety and health.

The Company regularly monitors developments in laws and regulations relating to
dentistry. The Company may be required to modify its agreements, operations and
marketing from time to time in response to changes in the business and
regulatory environment. The Company plans to structure all of its agreements,
operations and marketing in accordance with applicable laws, although there can
be no assurance that its arrangements will not be successfully challenged or
that required changes may not have a material adverse effect on operations or
profitability.

In the normal course of business, the Company becomes a defendant or plaintiff
in various lawsuits. Although a successful claim for which the Company is not
fully insured could have a material effect on the Company's financial condition,
management is of the opinion that it maintains insurance at levels sufficient to
insure itself against the normal risk of operations.

A-23
<PAGE> 63

Orthodontic Centers of America, Inc.

Notes to Consolidated Financial Statements (continued)

12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a tabulation of the unaudited quarterly results of operations
for the years ended December 31, 1999 and 1998 (in thousands, except per share
data):

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1999 1999 1999 1999
---------- ---------- ---------- ----------

<S> <C> <C> <C> <C>
Net revenue $ 49,048 $ 55,401 $ 59,770 $ 62,071
Operating profit 16,666 18,923 20,094 21,241
Net income 9,479 11,523 12,095 12,738
Net income per share:
Basic $ .20 .24 .25 .26
Diluted .19 .24 .25 .26
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1998 1998 1998 1998
---------- ---------- ---------- ----------

<S> <C> <C> <C> <C>
Net revenue $ 37,693 $ 41,527 $ 44,697 $ 47,381
Operating profit 12,058 13,243 13,922 15,063
Net income 7,543 8,266 8,701 9,303
Net income per share:
Basic $ .16 $ .17 $ .18 $ .20
Diluted .16 .17 .18 .19
</TABLE>

A-24
<PAGE> 64

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<S> <C>