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Executives

Anna Marie Dunlap - Senior Vice President, Investor Relations

Jack Massimino - Chairman and CEO

Bob Owen - Chief Financial Officer

Ken Ord - Chief Administrative Officer

Analysts

Jeff Silber - BMO Capital Markets

Jeff Meuler - Baird Capital

Kelly Flynn - Credit Suisse

James Samford - Citigroup

Zach Fadem - Barclays Capital

Jerry Herman - Stifel Nicolaus

Paul Ginocchio - Deutsche Bank

Corinthian Colleges Inc. (COCO) F1Q2013 Results Earnings Call October 31, 2012 12:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the First Quarter 2013 Corinthian Colleges Earnings Conference Call. My name is Sayed, and I will be your conference coordinator for today. Later, we will conduct the question-and-answer session. As a reminder, this conference call is being recorded for replay purposes.

I would now like to introduce your host for today’s conference, Ms. Anna Marie Dunlap, Senior Vice President of Investor Relations. Please proceed, ma'am.

Anna Marie Dunlap

Thank you, Sayed. Good day, everyone, and thanks for joining us. And for those of you who suffered through the on-slot that was Hurricane Sandy, we are especially appreciated that having you with us on the call today. We sincerely hope that you and New York made it through the storm safely.

I am here today with Jack Massimino, Chairman and Chief Executive Officer; Bob Owen, our Chief Financial Officer; and Ken Ord, Chief Administrative Officer.

This call is being webcast and an audio version of the call and transcript will be available on Corinthian’s website for 30 days. In an addition, a telephonic replay of this call will be available until Tuesday, November the 6th. The details for accessing the replay are included in the press release we issued this morning.

As a reminder, please note that during this conference call we may make projections or other forward-looking statements regarding a variety of issues. These statements are based upon current information and expectations. Actual results may differ materially based on a number of risk factors, which we have identified in our filings with the SEC.

And with that, Jack, I'll turn it over to you.

Jack Massimino

Thanks, Anna Marie, and particularly thanks all of you for being on the call. I know it’s been [how] few days certainly on the east coast. During the first quarter we continue to make progress on the number of front. We improve the overall student value proposition by reducing tuition for programs where we have flexibility under the 90/10 Rule. In addition, our third-party lender substantially reduced interest rates on loans to our students.

We are also pleased to report new student growth of 3.5% for the quarter, higher than our previous guidance of flat new student enrollment. Our ending student population increased 1.1% from September 30th last year to September 30th this year.

We continue to experience strong growth in our exclusively online learning programs and new enrollment was better than expected in the average ground schools. We are focused on rejuvenating growth in our ground schools and toward that end we are in the process of launching several new diploma programs.

In addition, we began offering free GED test preparation services at most of our Everest campuses in October. Our first quarter revenue of $408.6 million and diluted earnings per share of $0.06 were both above guidance.

As a reminder, these figures are based upon continue operations and exclude the impairment and severance charge. Bad debt was higher than planned in the quarter, the reasons that Bob will explain later on in the call. We expect bad debt to normalize in the second quarter.

As we move through our discussion today, I'll cover the highlights of the quarter related to student outcomes and enrollment trends, progress on our growth plans and cohort default rate. Bob will then review the first quarter operational and financial metrics, and provide guidance for the second quarter of fiscal 2013.

I’ll begin with student outcome, as we discuss on our last call, we helped 33,000 of our calendar 2011 graduates find employment in their chosen filed. That equates for the graduates placement rate of 68.1%, which were slightly ahead of the previous calendar year.

Although, we continue to work on placing the remaining graduates in the 2011 cohort; we’re now focused primarily on helping our calendar 2012 graduates find work. Our placement run rate for calendar 2012 graduates was up slightly at the end of the first quarter, compared with the same period last year.

We also continue to monitor student achievement at our campuses and take action as necessary to ensure that our completion and placement standards are met. As previously announced, we are keeping out the Everest Decatur and Everest Arlington campuses for outcomes reason.

In addition, we our unable to meet student completion and placement standards at the Everest, Milwaukee campus, and have begun teach-out that school as well. We expect all three campuses to be taught out and place in discontinued operations in the second quarter of this fiscal year.

To improve the student value proposition and to be more competitive, we implemented a number of pricing changes in the first quarter. In Florida, we reduce pricing for diploma program and in Heald, we reduced pricing for full-time students.

The pricing change in Heald has resulted in a shift towards more full-time students. This is consistent with our experience and reducing pricing for full-time students in our online learning program.

As most stage has shown time is the enemy when it comes to degree completion. So we are pleased to see more student shift to full-time status at Heald, as well as in our online learning program.

As discussed on previous calls, we are in the process of introducing six new diploma programs across our Everest campuses. These programs are being offered at a lower price point the most of our existing diploma programs. We have also extended the number of instructional hours in the new programs provide more focus on career readiness, particularly the soft skills that employers expect.

During the quarter, our third-party lender reduced interest rates on gap financing for our students. Effective September 1st interest rates on all new loans range from 2.9% to 9.9%. As a result, the average payments that students make on their loans while in school will drop by approximately 40%.

Take, together, the tuition and interest rate reductions will lower debt and make school more affordable for our students, and they are expected to help increase enrollments in our ground schools overtime.

As we’ve discussed on past calls, given the loss of ATB students, many of our campuses are growing well below capacity. Reducing prices is not only good for students, the extent that it increases enrollment, lower pricing makes good economic sense for our campuses as well.

It also worth noting that we’d be in a position to make reductions and even larger number of program are not for the restrictions imposed by the 90/10 Rule. The 90/10 Rule do not as a supports believe an indicator of program quality, instead it forces school to maintain high tuition, particularly when they serve a high percentage of well income students.

Next, I'll move to discussion and enrollment trends. As I said during my introductory remarks, new enrollment increased by 3.5% in the first quarter of fiscal 2013, above our previous guidance of negative 1% to positive 1%.

The increase was driven primarily by higher than expected online enrollment. In addition, we had better than expected new enrollments in the Everest ground schools, which partially offset the reduction and ability to benefit students. In the first quarter of this year, we have approximately 1,100 fewer new availability to benefit students than the same quarter last year.

There are number of reasons for the continued success of our online learning program. We believe that our market niche in online associated degrees as less competitors than the market for higher level degrees and our pricing for full times students continues to be competitive.

We expect growth in online enrollments to continue to the balance of this fiscal year. Although, we do anticipate the rate of growth to be lower than it has been over the past few quarters.

As discussed on previous calls, title for fundings for new ability to benefit students was eliminated as of July 1st and at that point, we stopped enrolling new ATB students. To help offset the loss of ATB students and achieve more consistent growth in the ground schools we continue to pursue a number of initiatives.

I’ve already discussed our tuition pricing changes and the interest rate reduction on third-party student loans. Although, it’s too soon to gauge the full impact, these reductions appear to having a positive impact on new enrollment.

In October, we began to rollout of our new diploma programs in the areas of business, criminal justice and information technology. Although, the bulk of our new programs will be launched in the third and fourth quarters, we expect to launch 34 new programs in the second quarter. 20 of these programs are launching ahead of our original schedule.

In October, we successfully launched our initiative to offer free GED preparation services to the general public. Our new program called GED ADVANTAGE is now offered at most of our Everest campuses in the United States. The GED ADVANTAGE program has been well received by community group, including the National Urban League, the Los Angeles Urban League and the California Workforce Association.

In addition in our press release announcing GED ADVANTAGE, the head of the national GED Testing Service signed our program as the model for others. The testing service tells us that it knows of no other campus-based GED program in the country with the scope, geographic representation and potential reach of GED ADVANTAGE.

We are pleased to have their support and will continue on our path in having more American obtain a GED. As we discussed on past calls, we believe that some portion of those to complete our GED ADVANTAGE program and succeed in passing the GED exam, could potentially go on to enroll in post-secondary education at Everest or elsewhere.

Looking ahead, we expect new enrollment in the second quarter to be essentially flat, compared to the same period last year. Second quarter last year was a challenging comparable, as it include near record growth in our online learning as well as

1,500 new ability to benefit students.

Our balance is based on the expectation that the tuition reductions we’ve implemented, coupled with lower interest rates on third-party loans will continue to have a positive impact on enrollment. We also expect to begin to see a benefit from the new programs that we are rolling out in the second quarter. For the full year, we continue to expect new enrollment growth to be upside.

I’ll turn now an update on cohort default rates. In September, we received final two year cohort default rates for the 2010 cohort from the Department of Education. The weighted average for all of our institutions were 6.6%, 10 basis points better than the preliminary default rates previously reported.

Also in September, we received final three-year cohort default rates for the 2009 cohort, for reasons discussed on previous calls. The weighted average of all of our institutions was 28.8%, much higher than the 2010 three year default rates was expected to be.

Given our substantial progress in reducing the two year default rates for 2012 cohort, we believe that none of our institutions will exceed the required thresholds under the new three year management rules.

With that, I’ll turn to Bob for a more detailed review of the first quarter and second quarter guidance.

Bob Owen

Thanks, Jack. Now let me profess my comments by saying that the results I’m about to review are for continuing operations, and exclude the impairment and severance charges unless otherwise noted. More details on our financials can be found in our press release, and in our first quarter 10-Q, which we expect to file later this week.

I’ll start with the discussion of first quarter revenue. Net revenues in the first quarter, increased by 2.6% compared with the same quarter of the prior year. The increase was primarily due to a 40 basis point increase in the average student population, the acquisition of QuickStart, which contributed approximately $2.6 million in revenue in the quarter and lastly a, 2.2% increase in the average revenue rate per student during the period.

As Jack said earlier, total new student enrollments increased by 3.5% in the first quarter versus the same quarter last year. The total student population at September 30, 2012 was 92,070 students, up 1.1% from 91,107 students at September 30, 2011.

In the first quarter, the average student population was 90,938, again up 40 basis points from the same quarter last year. Our exclusively online student population was 30,287 at September 30th of this year, up 15.6% from 26,200 at September 30, 2011.

We reported first quarter diluted earnings per share from continuing operations of $0.06 versus $0.00 in the same quarter last year, excluding after-tax impairment, facility closing and severance charges.

The operating margin, again excluding impairment and severance charges in both quarters improved to 3.4% in the first quarter this year from 0.7% in the same quarter last year. The improvement is primarily the result of lower operating expenses, partially offset by higher bad debt which I will discuss in a few minutes.

Next, I’ll move to cost trends, starting with marketing and admissions. As a percent of revenue, marketing and admissions decreased to 24.4% in the first quarter from 25% in the same quarter a year ago. In terms of total dollars, marketing and admissions expenses were nearly flat.

Our marketing expenses per start increased in the first quarter compared with the same quarter last year, while total marketing and admissions expenses per start declined by 3.2%, primarily the result of efficiencies in admissions.

General and administrative expenses decreased by $2.2 million, or 6.8% in the first quarter this year versus the same quarter last year. As a percent of revenue, G&A expenses were 10.5% versus 11.6% last year. The decrease as a percent of revenue is primarily due to continued costs savings measures.

As we’ve discussed on past calls, we’ve implemented approximately $150 million in annualized cost savings over the past two years, some portion of those savings are in the G&A category.

Educational services expense increased by $2.5 million, or 1% in the first quarter versus the same period last year. The increase was primarily attributable to higher bad debt. As a percent of revenue, educational services expenses were 61.7% in the first quarter of fiscal 2013 versus 62.7% in the same quarter last year. The decrease as a percent of revenue is primarily due to lower compensation and facility expenses, offset by higher bad debt.

With respect to facilities, we’ve renegotiated leases and reduced existing campus square footage by approximately 56,000 square feet over the past year, which help reduced rent expense. This reduction and square footage excludes the campuses currently for sale or in teach-out.

Bad debt increased to 4.8% of revenue in the first quarter of this year versus 4.2% in the same quarter last year. The increase is mainly the result of a delay in drawing down Title IV funds associated with the conversion of the final group of schools to the CampusVue Student Information System.

You may recall that in the last part of that -- that the last part of that conversion occurred late in the fourth quarter of last fiscal year, and we expect our bad debt to be approximately 3.5% to 4% in the second quarter.

Moving now to capital expenditures. In the first quarter, capital expenditures totaled $7.4 million versus $11.2 million in the same quarter last year. For fiscal 2013, we continued to expect capital expenditures to total approximately $40 million to $45 million.

Moving now to balance sheet and cash flow statement. At September 30, 2012, we had approximately $37.6 million in cash and cash equivalents, compared to $72.5 million at June 30th. The decrease is primarily due to the repayment of cash borrowed at fiscal year-end, partially offset by the timing of cash receipts and other payments.

Total debt as of September 30, 2012 was $112 million, which included capitalized lease obligations of $12.8 million and borrowings under a student notes receivable sale agreement of $17.9 million.

Total debt as of June 30, 2012 was $149 million, which included capitalized lease obligations of $13 million and borrowings under the student notes receivable sales agreement of $13 million.

Net day sales outstanding in the first quarter were 31 days. This is higher than normal for reasons I’m about to explain.

Moving to the cash flow statement, cash flow from operations was $20.4 million in the first quarter of fiscal ’12 versus $54.1 million in the same quarter last year. Operating cash flows in the quarter were negatively impacted by the delay in drawing down Title IV funds associated with the conversion of the final group of schools to the CampusVue Student Information system.

In addition, we delayed drawing down Title IV funds in Florida where we are pursuing an OPEID consolidation. We have since resumed drawing down funds as the consolidation is still pending. Combined these delays in drawing down Title IV funds negatively impacted working capital and cash flows by approximately $50 million.

To close out my comments, I'll turn now to second quarter guidance. As a reminder, our guidance is based upon continuing operations and excludes any one time charges. In addition, we expect the three schools currently in teach out to be reclassified to discontinued operation in the second quarter.

We expect second quarter results to be as follows. We expect new student enrollment to be essentially flat, which we define as up or down 1% versus the second quarter of the prior year. We expect revenue to range from $402 million to $412 million in the second quarter.

We expect diluted earnings per share of approximately $0.05 to $0.07 in the second quarter. We assume approximately 87.1 million diluted shares outstanding in the second quarter and the tax rate is expected to be approximately 40%.

I’ll now turn the time back to Jack for closing remarks.

Jack Massimino

In closing, during the quarter, we continue to focus on student outcome and the value proposition of our program as well as initiatives that rejuvenate growth in the ground schools. We reduced tuition for numerous programs within the constraints of the 90/10 rule. Our third-party student loan provider reduced interest rates on their loans to our students.

These reductions help make our program more affordable while helping to increase enrollment. We continue to focus on increasing operational efficiency and keeping expenses in line with our student population.

We’re addressing the loss of ability to benefit students with the rollout of several new diploma-level programs and our new GED ADVANTAGE program which is now in place at most of Everest campuses in U.S. We expect continued growth on our online learning division and positive new enrollment growth for the company as a whole this year.

Let’s move now to the question-and-answer session. As in the past, please limit yourself to one question and one follow-up. As time permits, we’ll get back to you for a third round of question. Sayed, I’ll turn it back to you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Silber from BMO Capital Markets.

Jeff Silber - BMO Capital Markets

In your remarks and in the press release, you talked about reducing tuition for several programs. Can you give us a little more color in terms of roughly where these programs are priced right now?

Jack Massimino

Yeah. Jeff, I would say that we’re in lower middle court town and are pricing in our market places. It really does to plan market to market or in a best place in Florida because we have more flexilibity on market-to-market. We’re in better place in Florida because we have more flexibility on 90/10.

The changes we made to both online and to heal in term of full time cost reductions. Tuition reduction in terms of full-time cost reductions. Tuition reductions really puts us in the lower quartile there as well. So I think we’re in a pretty good place competitively.

Jeff Silber - BMO Capital Markets

Okay. Great and just a couple of quick numbers questions as a follow-up, what should we modeling for revenue per student. And I was also wondering why the other expense line item was so high and what that should be going forward. Thanks?

Jack Massimino

Okay. So revenue per student, again we said went up a little over -- about 2% this quarter. That’s being driven by an increase in percentage of our associated degree students moving to online given the price incentives we’ve given. So I would expect that to continue for the balance of the year. So slight increases in revenue per student.

As far as other expense, I think I covered this a little around the color at the end of the year but that’s primarily the cost of their running program. And that’s what driving the cost up as we’ve sold our receivables. We’re not entitled to the interest income and so we’re getting no incremental offset to the cost from interest come. And we should expect that I believe, I said, to be around $20 million or so this year.

Jeff Silber - BMO Capital Markets

Okay. Thanks. My apologies but thanks for the reminder.

Operator

Thank you. Our next question comes from Jeff Meuler from Baird Capital.

Jeff Meuler - Baird Capital

I wonder, could you guys just provide a little bit of color on what drove the third-party lending partner to reduce the interest rates. Obviously, it’s a benefit for the students but just wondering what their motivation was, what led to that?

Jack Massimino

You know, I think Jeff, it’s pretty straightforward. You answered it in the question. I mean, it’s a better benefit to our students. I think they felt very good about the rates that they are going to get under the new program. It gives them the kind of return that they are obviously looking for, given the population. I think they feel good about it and were willing to make that change. And it’s very helpful obviously because the students are going to see about a 40% reduction in their interschool payments. So it’s a good deal all the way around.

Jeff Meuler - Baird Capital

Okay. And then how was the intake into the GED ADVANTAGE program but I know it’s early but when students come to you and you explain that. They may not be eligible for Title IV funds but that you have this alternative for them to go to GED ADVANTAGE Program. How has the reception been thus far?

Bob Owen

Okay. The reception is good but it’s early and it’s very early. And we’ll have more information for you in the next cycle. We’d have had three months under our belt. So we’ll know a lot more about how it’s going. But I would say that the students are interested in it. Obviously, they are making contact about it. We’re testing students, don’t forget on the front end to determine eligibility. They have to come in at the certain level to be eligible for the program.

Jeff Meuler - Baird Capital

Okay. And then maybe just one more. How should we think about what the expected free cash flow impact will be from what you have in current, in disco ops and what you’re planning to put into disco opts and what are you planning to put into disco ops because obviously there is mix of teach outs, potential sales et cetera. So how should we think about? If you netted altogether disco ops what the expected free cash flow impact will be on the organization?

Jack Massimino

Jeff, I think, first of, for the course of the year, you could think about it maybe in a little different way. It’s going to be a couple of pennies in the quarter. So about $0.08 for the year would be the way I would think about the implications with disco Scraps programs and that’s all inclusive.

Jeff Meuler - Baird Capital

Okay. Thank you.

Jack Massimino

Yeah.

Operator

Thank you. Our next question comes from Kelly Flynn from Credit Suisse.

Kelly Flynn - Credit Suisse

Thanks. I just have a couple of questions, first of all on the interest rate teens shown from the private lenders I just want to clarify if Corinthian provided any incentives or additional guarantees to facilitate the changes. Is there any kind of offset that made it more possible for them to do that?

Jack Massimino

Yeah. Kelly, there was. I mean, we are all participating in process. I would not say it was really significant as very bally but we certainly participated in that process.

Kelly Flynn - Credit Suisse

Okay. Cool. And then just on revenue per student, you talk about 2% for the year. Can you explain if QuickStart plays a role in that or is that excluding QuickStart. And then maybe just spend a little time on QuickStart and kind of what the strategy is behind that I in more detail. Thanks.

Jack Massimino

So Kelly QuickStart doesn’t have any impact on that revenue per student calculation. Really what’s driving that is the change in the full-time students both at here and then in online. Remember that when students go to school on a shareholder short period of time, our revenue per student, per month actually goes up. The students get the benefit over the long haul. They get the discount. So it goes down for them from a total tuition perspective for us on a monthly basis however. Tuition per student goes up. So that’s really what’s driving that.

I’ll talk for a moment about QuickStart. QuickStart is a transaction. I think we all know we completed recently. They are a Microsoft trainer. So when Microsoft issues a new 10.6.7.2345 people need to be trained on the exception for their new program. They actually train about 20,000 Microsoft users last year.

And so we think there is a big opportunity here for them to go national. Currently, they are on west coast operation, primarily California, some in Oregon, some out in Washington. We see the opportunity really to takes this organization and take it across the entire country.

So we look at it in two ways, one, it provides non-titled VI revenue which is our diversification strategy. And number two is on a standalone basis by itself, we think it is very viable long-term operation for the organization.

Kelly Flynn - Credit Suisse

Okay.

Bob Owen

And as far as modeling, Kelly, we said there is about $2.6 million in this quarter. We had QuickStart for two months. You can assume $2.5 million to $4 million of revenue included in our guidance go-forward per quarter.

Kelly Flynn - Credit Suisse

Okay. So just actually thank you for that. I just want to clarify on the revenue per student. I mean, if you just calculate revenue per student it’s got to be getting help from QuickStart because QuickStart is contributing revenue. So are you saying, we should model 2% growth and then add QuickStart on top of that or how should we think about, actually QuickStart and the revenue per student impact?

Bob Owen

I think you’ve got it, Kelly.

Jack Massimino

I think that’s right, Kelly.

Bob Owen

Yeah.

Kelly Flynn - Credit Suisse

The 2% plus QuickStart, okay.

Bob Owen

Well, QuickStart right.

Kelly Flynn - Credit Suisse

All right. Thank you.

Operator

Thank you. And our next question comes from James Samford from Citigroup.

James Samford - Citigroup

Just wanted to dig in a little bit on the 90/10, just I am just trying to reconcile. How you are able to reduce your tuition rates, as you are and also lower or at least stay within the 90/10 consigns. What you are doing there that that other companies have been able to do?

Jack Massimino

Well, first of all James is something we started probably 18 to 24 months ago. We made a judgment that we probably work than a get a lot of regulatory release certainly in the near-term. And so we decided to taste the bull by the horns and make some changes ourselves.

And so part of our revenue diversification strategy, clearly is focused around 90/10 issue, so that’s a part of it. Another part of it is, we’ve got foreign student coming into our programs so those we are making an effort there. So, a number of those things really QuickStart is a good example, what we've done with our ASFG or Genesis loan program helps us in that regard as well. So there are three or four things that we have been doing over the last 18 to 24 months that we had a positive impact for us.

And I want to buy market, on a market-by-market basis. It’s not across our entire organization. But directionally, it’s making a difference for us and allows us to do. We’ve always said, we would do, if we could solve 90/10 in a marketplace to some level, we would in fact reduce our pricing and that’s what we’ve done.

James Samford - Citigroup

And what’s the anticipated sort of overall debt burden that a student will have come out with out of your associated programs?

Jack Massimino

Jeff -- James, let me we’ll pull that together for -- I’ll answer that before we get off the call today. I don’t have it right at our finger tips, but I can get it.

James Samford - Citigroup

Okay. And then I’ll just kept to just a persistent questions. It looks like it was down a little bit this quarter just want to see if that was after a series of quarter of positive persistence improvement, I am just anything which read into that?

Jack Massimino

No, read anything into it.

Bob Owen

Nothing serious taken place.

James Samford - Citigroup

All right. Thanks.

Operator

(Operator Instructions) Our next question comes from Gary Bisbee from Barclays Capital.

Zach Fadem - Barclays Capital

It’s Zach Fadem for Gary. Have you given much thought to changing your campus based, your Everest campus pricing to similar structure is the online programs and now here where you giving a discount for full-time students?

Jack Massimino

Well, students are full-time in our Everest ground schools already Zach. And so, there are 9 to 10 months and we’ve actually done some discount around some of the programs and the new ones we rolling out are coming out of the lower price point in our existing programs.

So, there are already at a full-time -- from a full-time perspective, because 9 to 10 months in line. And they’ve got go to school month to finish it, if you are in a degree program you can coming and go out, what we are trying to do is get those students to go full time. So that’s the differentiating factor.

Zach Fadem - Barclays Capital

Okay. Thanks for clarifying that. And just a question on your GED prep classes, how are you marketing yourself to attract these students and is there any early indication or what you expect in potential enrollment in these?

Jack Massimino

No. I don’t think there is at this stage not an early indication, but the way we marketed, we are not marketing. And I mean we’ve done from public relations in the marketplace, but effectively we have students coming in over the trends and who are not eligible for the program, because they don’t have a high school diploma and as a result that the group that we are focused on at this point, we don’t need to go spend any advertising or marketing money in this event. I do want to answer James’ question on the Everest Associates. Our medium debt is about $27,000 for an associate program.

Zach Fadem - Barclays Capital

Okay. Thanks a lot, guys.

Operator

Thank you. Our next question comes from Jerry Herman from Stifel Nicolaus.

Jerry Herman - Stifel Nicolaus

Thanks, guys. Good morning, everybody. Question about the private loan business, you guys have been in that store a while. Can you talk a little about the performance of those loans relative to expectations maybe the number of dollars that you can gauge or actually in repayment? Now, their performance again has been relative to expectations?

Jack Massimino

Jerry, I’ll answer part of that and then turn it over to technical stuff to Bob. But if we need a little bit of clarification, we are not in the private loan business. We have a third-party lender that provides those loans for our students. So with that, I will turn it over to Bob.

Bob Owen

But as far as the performance goes Jerry, again, we’ve got a fair amount of experience under about. We’ve been doing this for by 10 years or at least we have lenders, everybody lending to our students for long time. And we’ve got the data and the performance is basically what we expect. We haven’t seen any big improvements or deterioration in the performance of the loans.

Jerry Herman - Stifel Nicolaus

Okay. Great. And then just with regard to expenses. Help us where -- what line items were impacted by the impairment and severance and I guess I am really getting to is G&A at sort of a reasonable run rate for the rest of the year and likewise marketing and advertising?

Bob Owen

So, we are not giving guidance right for the rest of the year. But impairment and severance that was primarily an asset write-off, which wouldn’t of -- which we put in a separate line, that’s helpful. So it didn’t affect any line particularly.

Jerry Herman - Stifel Nicolaus

Okay. Great. And run rate now commentary?

Bob Owen

No. That’s a good try, Jerry.

Jerry Herman - Stifel Nicolaus

All right, guys. Thanks.

Bob Owen

Thanks.

Operator

(Operator Instructions) Our next question comes from Paul Ginocchio from Deutsche Bank.

Paul Ginocchio - Deutsche Bank

I think last quarter you said that free cash flow would be better this year than last. I wonder if you want to sort of the size free cash flow generation for fiscal '13 a little closer than maybe last quarter?

Jack Massimino

Well, I think again, Paul, we are not giving guidance for the year. Bob, gave you pretty good update on where we are for the first quarter. Our comment last quarter stand, I just don’t think we are going to give that much more information on at this point. You will get more information in January and obviously by the end of the year, by April, we’ll have it worked out.

Paul Ginocchio - Deutsche Bank

Okay. And sorry, if I missed it. Did you size the enrollment of the discontinued operations?

Jack Massimino

Yeah. We can do that for you. I mean, if you pull the discontinued out, our growth in the quarter was 5.5% as opposed to 3.5%.

Paul Ginocchio - Deutsche Bank

Okay. And as you look across all your campuses, what percent would be at risk of going that maybe being close for performance?

Jack Massimino

I think where we are with regard to that, Paul. We’ve done pretty thorough evaluation of those schools. We don’t have any additional ones on the hit list. I mean as programs mature we are always evaluating and we will continue to do that as long as I am here and the teams here. So, I mean, that just part of our normal process, anything plan at this point.

Paul Ginocchio - Deutsche Bank

Okay. And then just finally, related any contingent liabilities around the closures in Milwaukee, is that given -- all being on sort of -- within a liabilities on the balance sheet that comes out with the 10-Q?

Bob Owen

Well, so since we haven’t close Milwaukee that we haven’t. We’re not allowed to take any lease liability, until the point in time that we have tight out the campus. So at this point, we compared the fixed assets but the any accrual for remaining lease obligation will occur in Q2 when we move it to disc ops. So it’s not on the balance sheet at this point.

Jack Massimino

Thanks, Paul. And so with that, operator, we’d like to thank everybody who participated on the call today. We really understand your circumstances back there. Hopefully, everything is working out for all of you. And we look forward to seeing many of you at the upcoming conferences at the time of our second quarter call in late January. Thanks again for your time and for coming on to the call today. We really do appreciate it.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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