Orthodontic Centers of America, Inc.

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Orthodontic Centers of America, Inc.

5000 Sawgrass Village Circle
Ponte Vedra Beach, Florida 32082
U.S.A.
Telephone: (904) 280-4500
Toll Free: (888) 272-2872
Fax: (904) 285-7406
Web site: http://www.ocai.com

Public Company
Incorporated: 1994
Employees: 2,072
Sales: $226.29 million (1999)
Stock Exchanges: New York
Ticker Symbol: OCA
NAIC: 62121 Offices of Dentists

Orthodontic Centers of America, Inc. (OCA) is the leading provider of practice management services to orthodontic practices in the United States. Although OCA’s founder and leader is a certified orthodontist, the company is not involved in the practice of orthodontics. Instead, OCA develops orthodontic centers and manages the business operations of its affiliated orthodontists, who are then free to devote their energies to patient care. OCA-affiliated orthodontists benefit from the economies of scale realized by operating as part of a larger whole and receive marketing and advertising support from OCA. The company manages 537 orthodontic centers located in 43 states, Puerto Rico, Japan, and Mexico. There are 346 orthodontists affiliated with OCA’s practice management system.

Origins

Dr. Gasper Lazzara spent more than 25 years practicing as an orthodontist before he decided to embark on a career as an entrepreneur. Like all entrepreneurs, Lazzara was convinced his business venture would succeed, and like most entrepreneurs, he failed to meet his expectations. In 1980, Lazzara joined forces with another orthodontist and two optometrists associated with Pearle Vision Center, a company that was rapidly turning optometry into an efficient, profit-producing enterprise geared for volume business. Lazzara intended to achieve the same results in orthodontics, and he gathered the financial resources to make his entrepreneurial dream a reality. Pearle Vision invested $700,000 in Lazzara’s enterprise, start-up money that was enriched by the contribution of $75,000 from each of the active partners. With $1 million in seed money, Lazzara and his partners opened 16 dental practices in Florida, establishing the offices within shopping malls. The business foundered, forcing the dissolution of the partnership forged to create the enterprise. Lazzara had failed, but he was not willing to let his first mistake dash his dreams of becoming a successful entrepreneur.

Lazzara made his next bid to infuse economies of scale into the practice of orthodontics in 1985. For his second venture, Lazzara enlisted the help of his longtime accountant, Bartholomew Palmisano Sr., whose unwavering attention to fiscal matters would underpin Lazzara’s innovative approach to the business of straightening teeth. Lazzara used a combination of his personal savings and bank loans to purchase two orthodontic offices in Jacksonville, Florida, which would serve as the proving ground for Lazzara’s business strategy in 1985 and for his company’s other orthodontic ventures in the years to come.

At the heart of Lazzara’ s plan was consolidating the orthodontic industry in which he had labored for decades. The U.S. orthodontic industry was highly fragmented, with 90 percent of the approximately 9,000 practicing orthodontists acting as sole practitioners. Eventually, Lazzara hoped to bring a significant portion of the thousands of offices in operation under the banner of one management company, a company that would later become known as OCA. His plan was based on the theory that if one central organization provided a full range of management services to a host of satellite offices, then the individual offices would realize increased operational efficiency and greater profits, achieving results better than would be achieved as separate businesses. Freed from the responsibilities of managing the business side of their practices, orthodontists, Lazzara concluded, could devote more time to attending to patients, thereby increasing their business volume. Moreover, a systematic approach to dealing with the operational aspects of an orthodontic practice would yield greater efficiency, Lazzara contended, with office design, inventory control, staff bonuses, and other aspects of the business standardized in a fashion similar to successful franchise organizations. Further, with advertising and marketing resources emanating from a central organization, individual orthodontists could expect greater promotional support for their practice than they could provide on their own. Lazzara hoped to prove his point in Jacksonville; if he succeeded, he could begin consolidating the industry, establish his own satellite offices, and create a powerful force in the multibillion dollar U.S. orthodontic industry.

As Lazzara fleshed out the details of his business strategy, the future of his entrepreneurial dream hinged on the results achieved with the pilot Jacksonville practices. Lazzara and Palmisano needed to produce quantifiable results, figures that the pair could use to convince orthodontists of the financial gains to be made by joining a central management organization. Accordingly, Palmisano set up a computer system capable of monitoring the operational functions of the two offices and charting their productivity. With the information gleaned from Palmisano’s electronic scrutiny, fundamental changes were made. Inventories were reduced and invoicing procedures were more tightly controlled, causing patients to pay their bills more promptly. Within a year, the partners could point to tangible results. The operating profit margins of the two practices increased from 10 percent to 30 percent; Lazzara and Palmisano were in business.

In contrast to the latter half of the 1990s, Lazzara expanded his network of affiliated orthodontic centers at a measured pace during his first years in business. By the beginning of the 1990s, nine more orthodontic practices had affiliated themselves with Lazzara’s management services program. The pace of expansion accelerated from there, with 20 more orthodontic centers joining the fold during the next two years, giving Lazzara a total of 31 centers by the end of 1991. At this point in the company’s development, all but five of the orthodontic centers were located within general dentists’ offices. During 1992, when 16 more centers became affiliated practices, Lazzara began implementing a strategy to relocate all of the company’s affiliated centers to freestanding locations, preferring either shopping centers or professional office buildings as site locations.

Reorganization in 1994 Followed by Rapid Expansion

As Lazzara’s organization of affiliated orthodontic centers prepared to enter the mid-1990s, the corporate structure of the organization underwent significant change. The reorganization, executed on October 18, 1994, marked the debut of OCA as the corporate banner for the affiliated centers. Before October 1994, there were two management entities that oversaw the business operations of the affiliated centers, which, following the reorganization, were referred to as OCA’s predecessor entities. In October 1994, OCA was formed to acquire the two predecessor management entities and all of the assets and liabilities of the predecessor operating entities—the orthodontic centers previously affiliated with the two management entities. In the wake of the structural changes, OCA, with Lazzara serving as the company’s chief executive officer and Palmisano serving as its chief financial officer, became the single managerial concern governing the business operations of all of the company’s orthodontic centers. Two months later, Lazzara completed OCA’s initial public offering (IPO), selling 26 percent of the company to the public and netting $18 million from the stock sale.

By the time of OCA’s IPO, there were 46 affiliated orthodontists operating 75 OCA offices, each run according to the detailed specifications formulated by Lazzara and Palmisano. OCA mandated a screening process, excluding cases that required elaborate braces attached to the back of teeth or patients with jaw-joint problems. “We only do bread-and-butter orthodontics,” Lazzara explained in a May 20, 1996 interview with Forbes magazine. In the same interview, Palmisano offered his perspective. “The most expensive cost is an idle staff,” he remarked. Within an OCA center, responsibilities were clearly defined for each staff member, enhancing efficiency. If no patients were scheduled for a particular day, the center’s staff was trimmed to include only a receptionist who answered incoming telephone calls. OCA specified the layout and design of its orthodontic centers, among myriad other details, and offered staff bonuses, with awards based on how successfully each office controlled inventory and brought in new patients.

In exchange for adhering to the operational criteria dictated by OCA and sharing revenue with OCA, affiliated orthodontists reaped the benefits of OCA’s services. For its constituents, OCA developed and implemented an aggressive marketing program that by far exceeded the means of orthodontists who served as sole practitioners. The company utilized local and national television, radio and print advertising, and internal marketing promotions, spending an average of nearly $70,500 per year for each affiliated orthodontist on direct marketing costs and advertising. In comparison, the typical independent orthodontist spent an average of $4,400 per year on marketing and advertising. Because of the considerable gulf separating the marketing budgets of OCA affiliates and independent orthodontists, Lazzara possessed a powerful recruitment tool to induce practicing orthodontists to ally themselves with OCA. On average, an OCA doctor saw 77 patients per day during the mid-1990s versus the industry average of 42 patients per day. Further, affiliated orthodontists in practice for at least a year generated 512 new cases per year, compared with the industry average of 170 new patients per year for non-OCA orthodontists. For the consumer, there was an inducement to use OCA as well. At $2,770, OCA fees during the mid-1990s for straightening teeth were 20 percent below the national average.

Company Perspectives:

OCA succeeds because we‘re disciplined and focused on what we do best—adding value to the practices of the top-quality professionals who choose to affiliate with us. We recruit a select group of established practitioners and, because we handle the marketing and business side of their practice, they are free to do what they do best—deliver quality care. OCA continues to grow precisely because we enable our affiliates to become more efficient and build their practices. We deploy leading edge technology, enabling OCA-affiliated orthodontists to take advantage of significant economies of scale and reduce operating costs. We help build business for them by selectively entering under-served markets, expanding small markets and creating new ones.

The cumulative effect of the perquisites for orthodontists and consumers alike made OCA an attractive alternative to the traditional orthodontic practice. Consequently, the company was poised for national expansion, an inherent aspect of Lazzara’s strategy and one that he financed by selling stock in OCA to the public. Following the company’s IPO at the end of 1994, Lazzara sold the public another 34 percent in 1995, raising $82 million, and completed another public offering in April 1996, selling 12 percent of OCA for $75 million. Against the backdrop of Lazzara’s efforts to raise capital, OCA expanded vigorously. Between the end of 1994 and the end of 1996, the number of OCA centers more than tripled, increasing from 75 to 247, spreading out to cover 28 states. Of the 247 centers composing OCA at the end of 1996, 134 were developed by the company (at an average cost of $230,000) and 113 were existing orthodontic practices whose assets were acquired by the company.

Late 1990s: International Expansion and Diversification

The aggressive pace of expansion during the mid-1990s continued unabated during the late 1990s, elevating OCA to the leadership position in its industry. There were other companies in the orthodontic industry pursuing strategies similar to OCA’s business plan, but strident growth kept the company’s rivals at bay. In 1997, 1998, and 1999, Lazzara added at least 100 new centers each year to his network, giving the company 537 centers by the end of 1999, more than seven times the total recorded five years earlier. The company’s prodigious growth extended its geographic coverage into 43 states, but the most eye-catching aspect of OCA’s expansion during the latter half of the 1990s occurred overseas. Beginning in 1998, Lazzara began expanding internationally, developing orthodontic centers in Japan and Puerto Rico. By the end of 1998, OCA managed six centers in Japan and two centers in Puerto Rico. In 1999, the company expanded aggressively in Japan by adding 18 more centers, bolstered it presence in Puerto Rico by developing three additional centers, and completed its entry into Mexico by establishing two centers. By the end of the decade, Lazzara was exploring additional expansion opportunities in Canada, England, and Spain.

OCA’s physical expansion during the late 1990s was coupled with the expansion of its operational scope, as Lazzara steered the company in a new business direction. Lazzara signed an agreement with BriteSmile, Inc., a developer and manufacturer of teeth-whitening technology and related products. Under the terms of the agreement, OCA conducted a pilot program in 1999 that incorporated BriteSmile’s systems into OCA centers in Jacksonville and in Tucson, Arizona. Pending the success of the trial program, Lazzara intended to provide BriteSmile systems to all affiliated orthodontists wishing to offer teeth-whitening services to their patients. In a related venture, OCA started the trial operation of a cosmetic dental center in Jacksonville in 1999. The experimental center, designed to resemble a boutique or a spa rather than a dental office, offered cosmetic services such as teeth-whitening services and porcelain teeth laminates.

As OCA prepared for the future, the company faced tantalizing expansion opportunities. Despite the prolific growth of OCA and the expansion of other companies similar to OCA, less than ten percent of practicing orthodontists were affiliated with practice management companies. Moreover, among the handful of major practice management companies, OCA was demonstrating an enviable superiority, particularly in relation to one of its main rivals, Apple Orthodontix, Inc. Apple Orthodontix filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code in January 2000. The company’s misfortune proved to be OCA’s gain, as Lazzara signed a definitive agreement to acquire up to 47 orthodontic practices affiliated with Apple Orthodontix. As Lazzara plotted the company’s course beyond the Apple Orthodontix transaction, there was justifiable confidence that the coming years would continue to deliver robust financial growth for OCA.

Principal Subsidiaries

Orthodontic Centers of Alabama, Inc.; Orthodontic Centers of Arkansas, Inc.; Orthodontic Centers of Arizona, Inc.; Orthodontic Centers of California, Inc.; Orthodontic Centers of Colorado, Inc.; Orthodontic Centers of Connecticut, Inc.; Orthodontic Centers of Florida, Inc.; Orthodontic Centers of Georgia, Inc.; Orthodontic Centers of Hawaii, Inc.; Orthodontic Centers of Idaho, Inc.; Orthodontic Centers of Illinois, Inc.; Orthodontic Centers of Indiana, Inc.; Orthodontic Centers of Kansas, Inc.; Orthodontic Centers of Kentucky, Inc.; Orthodontic Centers of Louisiana, Inc.; Orthodontic Centers of Maine, Inc.; Orthodontic Centers of Maryland, Inc.; Orthodontic Centers of Massachusetts, Inc.; Orthodontic Centers of Michigan, Inc.; Orthodontic Centers of Minnesota, Inc.; Orthodontic Centers of Mississippi, Inc.; Orthodontic Centers of Missouri, Inc.; Orthodontic Centers of Nevada, Inc.; Orthodontic Centers of New Hampshire, Inc.; Orthodontic Centers of New Jersey, Inc.; Orthodontic Centers of New Mexico, Inc.; Orthodontic Centers of New York, Inc.; Orthodontic Centers of North Carolina, Inc.; Orthodontic Centers of North Dakota, Inc.; Orthodontic Centers of Ohio, Inc.; Orthodontic Centers of Oklahoma, Inc.; Orthodontic Centers of Oregon, Inc.; Orthodontic Centers of Pennsylvania, Inc.; Orthodontic Centers of Puerto Rico, Inc.; Orthodontic Centers of Rhode Island, Inc.; Orthodontic Centers of South Carolina, Inc.; Orthodontic Centers of Tennessee, Inc.; Orthodontic Centers of Texas, Inc.; Orthodontic Centers of Utah, Inc.; Orthodontic Centers of Virginia, Inc.; Orthodontic Centers of Washington, Inc.; Orthodontic Centers of Washington, DC, Inc.; Orthodontic Centers of West Virginia, Inc.; Orthodontic Centers of Wisconsin, Inc.; Orthodontic Centers of Wyoming, Inc.

Key Dates:

1985:: Dr. Gasper Lazzara acquires two orthodontic offices in Jacksonville, Florida.
1994:: Orthodontic Centers of America, Inc. completes its initial public offering of stock.
1998:: Company begins expanding into international markets.
1999:: Partnership agreement with BriteSmile, Inc. is signed.