Sellers at Assisted Living Concepts

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By AVI SALZMAN  | Barrons

Two execs sold $1.1 million in shares of the residences operator.

THE CHAIRMAN AND VICE CHAIRMAN of Assisted Living Concepts (ticker: ALC) sold nearly all of the shares they owned in the company over the past two weeks.

The sales come as the assisted-living company’s shares have fallen 51% on the year and its strategies to boost profits have failed to pay off for investors and drawn increasing scrutiny from government officials.

David Hennigar, the chairman of the company, sold 80,000 shares for $313,000, for an average per-share price of $3.91 between Dec. 19 and 24. Melvin Rhinelander, the vice chairman, sold 201,700 shares for $822,000, or an average price of $4.08 per share from Dec. 22 to Dec. 26.

According to their filings with the Securities and Exchange Commission, the directors no longer own any of the publicly traded class A shares of the company directly. Each continues to hold some class B shares, which can be converted into 1.075 class A shares — Hennigar owns 15,400 and Rhinelander owns 2,000 (held as custodian for a child). Class B shares have special voting rights and do not trade publicly.

And Hennigar also has a stake in a fund that controls the voting power in the company, though he does not control the fund’s vote.

The company’s proxy statement said that Hennigar’s class A shares were held in a margin account and his class B shares were pledged as collateral for a loan as of March 21.

Laurie Bebo, the company’s president and CEO, says in an interview with Barron’s Online that the two directors sold for tax purposes and "they certainly expect to be back in the stock when they can do that."

Assisted Living Concepts, which owns 216 residences with more than 9,000 units, was spun out in 2006 of a company called Extendicare, which now operates as a real-estate investment trust. Hennigar had served as the chairman of Extendicare and Rhinelander had served as its president and chief executive officer prior to the spinoff.

The company has tried unsuccessfully this year to expand its profit margins. At the end of 2006, it served a particularly large number of Medicaid patients — nearly 30% of its patients were on the joint federal and state program. The company receives about two-thirds as much from Medicaid as it does from private patients, says Derrick Dagnan, an analyst at Avondale Partners who rates the stock at Hold. The company’s goal was to shift its patient base, bringing in more of the lucrative private payers and increasing its margins. But that strategy has not panned out, Dagnan said.

The company has decreased the portion of Medicaid patients it serves, but has not added enough private payers, he said. Occupancy rates reached about 85% at the end of 2006, but fell to 68% in the third quarter this year, which ended on Sept. 30, he says.

"That’s very low for an assisted-living facility," Dagnan says, pegging the industry average at about 86%.

The company has also run into trouble with government agencies that have questioned its tactics. The New Jersey Department of the Public Advocate, for instance, started investigating Assisted Living Concepts after hearing about residents being involuntarily discharged once they had exhausted their life savings and were forced to go on Medicaid. That investigation, which has included more than 100 interviews with current and former residents and families, is ongoing, says a spokeswoman for the public advocate’s office. Bebo says the company’s license does not compel it to continue to serve patients once they go on Medicaid and it is suing New Jersey’s Department of Health and Senior Services to try to quash the investigation.

"We’re happy that people want to stay with us but we can’t continue to accept everyone rolling over to Medicaid," she says.

Assisted Living Concepts has run into similar problems in Washington state, Dagnan said.

Reducing the Medicaid patient base "looks good to an investor but not on a local level," Dagnan says. "To a consumer it can be a nightmare."


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