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2 Years of Problems Pushed United Education Into Reorganization


Nora Lee began to worry about her job a few weeks ago. Until Friday, she was the director of financial aid at Pacific Coast Technical Institute in Oakland, a trade school owned by Encino-based United Education & Software. But she noticed that over the past month the parent company hadn't been paying any of the school's bills--except for the utility bills.

Lee said she sensed something was going on, and rumors spread that UES was planning to file for bankruptcy. The week after Thanksgiving, school officials were told by UES that the Oakland school was up for sale, though no explanation was given. That Friday, employees received cashier's checks instead of standard payroll checks. A note enclosed with each check said the checks were different because the company was merely changing banks.

Then early last week, a corporate executive told school employees that as of last Friday, they were all to take unpaid leaves of absence. Employees pressed the executive, saying they had heard the company had filed for bankruptcy. "He stuttered and made a phone call," Lee recalled. "He returned and confirmed we had filed Chapter 11 and said Friday was our last day."

Such is the fall of a once-thriving company.

Last week, Aaron Cohen, UES president and chief executive, announced that UES' chief operating subsidiary that owns 25 of its 26 trade schools had filed for Chapter 11 bankruptcy protection with the federal bankruptcy court in Los Angeles.

"It screams to me of mismanagement," Lee said.

It wasn't that long ago that UES was on the rise. In the fiscal year that ended Jan. 31, 1988, United Education's earnings nearly tripled to $4.4 million while sales more than doubled to $70 million. The company's stock kept climbing. It soared 142% in 1987--making it the top gainer among Valley companies--and it hit a high of $16.38 a share in March, 1988, adjusted for a 3-for-2 stock split.

But since then, United has suffered a series of devastating problems. The federal government uncovered widespread incompetence at UES' student loan processing subsidiary, including failing to notify delinquent borrowers. UES sold off that troubled business, but the company found itself named in lawsuits involving possible debts of $650 million.

Then in October of this year, the state moved to stop guaranteeing student loans at one of UES' trade schools because a federal audit found that courses were too short to meet minimum federal standards, students were misled regarding costs, and students who were academically unprepared were admitted. And last month, a $24-million consumer protection complaint was filed against the company by California Atty. Gen. John Van de Kamp, alleging that one of UES' schools provided shoddy education.

A spokesman said the company did not have sufficient cash flow to keep its schools operating. UES said it plans to sell or close 12 of its 26 schools, or merge them with remaining schools. "It will be a downsized operation," said C. Ronald Kimberling, UES senior vice president. "The schools that will remain will tend to be more profitable institutions."

In the bankruptcy filing, UES said its assets totaled $71.9 million as of Sept. 30, and liabilities totaled $51.7 million.

The company, which reported a $5-million loss on $17.5 million in revenue in the fiscal second quarter that ended July 31, saw its stock fall to 19 cents as of Friday's close.

The Chapter 11 filing means UES will receive some protection from its creditors and from lawsuits against the company, and its business dealings will fall under the jurisdiction of the bankruptcy court. Unlike a Chapter 7 bankruptcy, which is essentially a liquidation, the intent of Chapter 11 is for a company to reorganize. That means UES must come to terms with Security Pacific National Bank and Union Bank--whose loans to UES are secured by the company's assets--as well as its unsecured creditors, to whom UES owes $21 million. Neither bank would comment on UES' bankruptcy filing.

But it might not be easy for UES to get out of bankruptcy court. Jerry Smilowitz, California deputy attorney general, said the state plans to press its $24-million suit against UES, which contends that UES' National Technical Schools home-study computer program, among other things, misled students into thinking they would qualify for computer jobs when they graduated and failed to properly refund loan money after students dropped out. UES has denied the charges.

Smilowitz said the state might try to win a court injunction against UES to prevent it from failing to inform students of the dropout rates of its schools or to force the company to make changes in some of its courses. Although the state's intention is not to shut down the company, Smilowitz said, "there is the possibility that if we get a very restrictive injunction, that could be a killer."

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