O.C. Health Care Company Faces Bankruptcy if Debt Deal Fails

Independent auditors report that loss-ridden Comprehensive Care Corp. could be forced into bankruptcy unless investors accept a company proposal to partially repay $9.5 million in overdue debt.

Auditors Ernst & Young highlighted the precariousness of the Newport Beach health care company’s financial position this week in a report accompanying the company’s financial statement for the fiscal year ended May 31. The firm said there is “substantial doubt that the company can continue as a going concern.”

The company, which has lost more than $50 million in the past five years, failed to pay interest on the $9.5 million in long-term debt last fall, prompting investors to demand immediate payment.

The company has since offered to buy back the bonds with a combination of cash and stock valued at about 70% of the bonds’ face value.

Investment advisers said bondholders will probably approve the exchange, assuming the company sticks with terms previously negotiated with investors.

David Yungkau, a Cincinnati broker who represents some major bondholders, said the offer, filed Thursday with federal regulators, looks like a “great deal.” It calls for bondholders to receive 58 cents in cash and 12 cents in stock for every dollar’s worth of debt. In contrast, Yungkau noted, the bonds were trading last year in the range of 30 to 40 cents.

Jay H. Lustig, a Santa Monica money manager whose clients own about 40% of the outstanding bonds, predicted that the agreement will be approved if the company can come up with the cash.

“To me, the only fly in the ointment is if they couldn’t raise the cash to pay the bondholders off,” he said.

After the company missed an interest payment on the debt last fall, bondholders filed a petition seeking to force Comprehensive Care into involuntary bankruptcy. But they backed off after the company and investors negotiated the plan to pay back part of the debt.

Comprehensive Care fell on hard times when it diversified from its basic business of providing treatment programs in mental health and invested in a network of hospitals, said Chriss Street, its chairman and chief executive. In the last fiscal year, the company lost $11.5 million on revenue of $29.3 million. Losses totaled $7.9 million the previous year on revenue of $34.3 million.

In recent years, outside auditors Arthur Andersen & Co. and Peat Marwick also raised questions about the company’s ability to continue as a going concern.

The company is now trying to raise capital and refocus itself by selling the hospitals and emphasizing treatment programs again, Street said. Comprehensive Care also expects to soon receive a refund of more than $9 million for federal taxes paid in prior years, and it has filed for additional refunds of $13 million, he said.