Bad news always come together: two of my portfolio holdings, TALK and OCA, each received an unfavorable legal decision. (I blogged about the TALK case in another post.)
As appeared in OCA's press release, a federal court rules that the "the overall relationship between OrthAlliance and the orthodontic practices violated a Washington statute governing the corporate practice of dentistry and that OrthAlliance's management agreements with the practices, and the employment agreements between the orthodontists and their professional corporations were illegal."
One of the clouds over OCA's head is its acquisition of OrthAlliance created lots of defection among OrthAlliance practices, which sued on the ground that the contracts are not enforceable. As a result, those practices stopped payment to OCA and OCA suffered from stagnant top line and bottom line.
While this ruling is certainly annoying, I don't think it poses a big problem for OCA. After all, Washington State only represents 9 out of 371 affiliated practices (according to the last 10-K OCA filed) and OCA already stopped recognizing revenue from those litigating practices. There should be no top line hit whatsoever.
The bigger problem, however, is still on the receivables. OCA's receivables are rising rapidly recently. Although I can understand some of the receivables are due to seasonality, I received read a report from Advest, Inc. which argued that only 19% of the YOY receivable growth can be explained vs an actual increase of 50% ($63M to $95M in nine months in 2003). This week's earning release will be crucial, and if receivable disappoints, I will not be hesitate to liquidate at least a portion of my 1,500 share holdings.
If there is a silver lining, it is the somewhat strange Stockholder Rights Plan announced by OCA on March 3. The plan is essentially poison pill that will dilute shares if there is a tender offer for 20% or more OCA stock. Does it mean that the board is already contacted by a potential bidder?