While shareholders were bombarding Paracelsus Healthcare Corp. with lawsuits, the company said it may close or sell as many as eight hospitals to smooth its bumpy start as a publicly traded enterprise.
By the end of last week, at least two shareholder suits had been filed against the Houston-based hospital chain, claiming its executives misrepresented its financial condition before the company's August merger with Champion Healthcare Corp.
The suits were filed within days of Paracelsus' Oct. 9 announcement that the company would post a significantly larger loss than initial estimates. On Oct. 10, trading in the company's stock was halted for the entire day on the New York Stock Exchange. A day later the stock plummeted more than 50% (Oct. 14, p. 17).
"This is a disgrace to the investment community," said Vincent Cappucci, an attorney with Bernstein Litowitz Berger & Grossmann, a New York law firm representing Atlanta-based Essex Imports, a major shareholder. "The damages are certainly in the tens of millions of dollars on the equity side and perhaps greater on the debt side."
Essex filed suit Oct. 11 in the District Court of Harris County (Texas) in Houston. A related suit was filed in California Superior Court for Los Angeles County against Paracelsus by shareholders Rajeshwar Gaonkar and Thomas R. Bell. They say Paracelsus didn't truthfully disclose to shareholders the financial condition of properties, including its Los Angeles hospitals.
Paracelsus acknowledged poor performance at its Los Angeles facilities-five acute-care and three psychiatric hospitals-and said they may be sold or closed after internal auditors and investigators complete their review of the company's records.
The company wouldn't disclose the size of its expected loss.
"When we started doing the operational reviews, the trends in Los Angeles were lower than we anticipated," said Deborah Frankovich, vice president and treasurer of Paracelsus. "It was a surprise when we looked at the trend in July (before the merger) and then saw the difference in August. (Investigators) will start with L.A. and determine where else they need to focus on."
The Los Angeles facilities were owned by Paracelsus before the merger. Paracelsus, then based in Pasadena, had been privately held since it was founded in 1981. The company went public in August concurrent with its merger with Houston-based Champion.
"Indications are that the problems are on the Paracelsus side, although it's possible the errors are on the Champion side as well," Cappucci said.
Frankovich said closing facilities is "an option," as is shopping the hospitals to other firms. "I think there are some strategic buyers in that market," Frankovich said.
However, shareholders were skeptical of the company's reasons for the downward estimate of results.
"How could just a little component (like the L.A. facilities) drop the price so much?" asked William Granger, medical director at Crossroads Regional Hospital, a Paracelsus psychiatric hospital in Alexandria, La.
Granger said he lost more than $15,000 from shares he purchased. "I got blindsided and I'm really unhappy," Granger said.
Paracelsus shares began trading at $8.50 after its initial public offering in August. By last week, they had plummeted more than 50% to between $4 and $5 per share.
Cappucci said that since Aug. 14, the average daily trading volume had been 168,000 shares, but on Oct. 11 it was 2.1 million shares. "It's certainly not like an IBM or blue-chip stock," he said.
The company's earnings report for the third quarter ended Sept. 30 is scheduled to be released around Nov. 15.
With $700 million in 1995 revenues, the new Paracelsus became the nation's sixth-largest investor-owned company. It owns and operates 31 hospitals.
Defendants in the Essex suit are the company and top executives from Champion and Paracelsus who received huge payouts as a result of the merger.
Manfred G. Krukemeyer, M.D., a 34-year-old surgeon who lives in Osnabruck, Germany, and serves as the new company's chairman, received $21 million. Charles Miller, Champion's CEO and the new Paracelsus president and chief operating officer, got $1.2 million.
"We're considering action that would freeze the offering proceeds," which would include the executives' bonuses, Cappucci said.
Angelo Mozilo, chairman and CEO of Countrywide Home Loans of Pasadena, Calif., who was appointed to the board concurrent with the merger, resigned. He told Dow Jones News Service he was "shocked and dismayed" at the situation.