As filed with the Securities and Exchange Commission on April 1, 2016

Registration No. 333-206774

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

McGraw-Hill Education, Inc.

(Exact name of registrant as specified in its charter)

Delaware

2731

80-0899290

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

2 Penn Plaza

New York, NY 10121

(646) 766-2000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

David B. Stafford, Esq.

Senior Vice President and General Counsel

McGraw-Hill Education, Inc.

2 Penn Plaza

New York, NY 10121

(646) 766-2626

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With copies to:

Monica K. Thurmond, Esq.

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, NY 10019-6064

(212) 373-3000

Michael Kaplan, Esq.

Byron Rooney, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x (Do not check if a smaller reporting company)	Smaller reporting company	¨

CALCULATION OF REGISTRATION FEE



Title of each class of securities to be registered	Proposed maximum aggregate offering price(1)(2)	Amount of registration fee(3)
Common stock, par value $0.01 per share	$100,000,000	$11,620

(1)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

(2)	Includes offering price of any additional shares that the underwriters have an option to purchase.

(3)	Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. The Issuer may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, APRIL 1, 2016

PRELIMINARY PROSPECTUS

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McGraw-Hill Education, Inc.

Common Stock

This is the initial public offering of the common stock of McGraw-Hill Education, Inc., a Delaware corporation (the “Issuer”). We are offering shares of our common stock. No public market currently exists for our common stock.

We have been approved to list our common stock on the New York Stock Exchange under the symbol “MHED.”

We anticipate that the initial public offering price will be between $ and $ per share.

Investing in our common stock involves risks. Please see “Risk Factors” beginning on page 23 of this prospectus.


	Per share	Total
Price to the public	$	$
Underwriting discounts and commissions(1)	$	$
Proceeds to us (before expenses)	$	$

(1)	Please see “Underwriting (Conflicts of Interest)” for a description of all underwriting compensation payable in connection with this offering.

We have granted the underwriters the option to purchase up to additional shares of common stock on the same terms and conditions set forth above if the underwriters sell more than shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory authority has approved or disapproved of these securities nor have any of the foregoing authorities passed upon or endorsed the merits of these securities or the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about , 2016.



Credit Suisse	Morgan Stanley	BMO Capital Markets	Goldman, Sachs & Co.	Barclays



Jefferies	Nomura	RBC Capital Markets	Wells Fargo Securities



Piper Jaffray		Apollo Global Securities

The date of this prospectus is , 2016.

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TABLE OF CONTENTS


	Page
PRESENTATION OF FINANCIAL INFORMATION		ii

USE OF NON-GAAP FINANCIAL INFORMATION		ii

MARKET AND INDUSTRY DATA		iii

TRADEMARKS		iv

PROSPECTUS SUMMARY		1

THE OFFERING		17

SUMMARY HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA		19

RISK FACTORS		23

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS		37

USE OF PROCEEDS		39

DIVIDEND POLICY		40

CAPITALIZATION		41

DILUTION		42

SELECTED HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA		44

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		49

INDUSTRY		97

BUSINESS		100

MANAGEMENT		119

COMPENSATION DISCUSSION AND ANALYSIS		124

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		154

PRINCIPAL STOCKHOLDERS		156

DESCRIPTION OF CAPITAL STOCK		158

DESCRIPTION OF MATERIAL INDEBTEDNESS		163

SHARES ELIGIBLE FOR FUTURE SALE		168

U.S. FEDERAL INCOME TAX CONSIDERATIONS		170

UNDERWRITING (CONFLICTS OF INTEREST)		174

LEGAL MATTERS		180

EXPERTS		180

WHERE YOU CAN FIND MORE INFORMATION		180

INDEX TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS OF MCGRAW-HILL EDUCATION, INC. AND SUBSIDIARIES		F-1

We and the underwriters have not authorized anyone to give you any information other than that contained in this prospectus. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus and any accompanying free writing prospectus is not an offer to sell or a solicitation of an offer to buy securities anywhere or to anyone where or to whom we or the underwriters are not permitted to offer or sell securities under applicable law. The

delivery of this prospectus and any accompanying free writing prospectus does not, under any circumstances, mean that there has not been a change in our affairs since the date of this prospectus. Subject to our obligation to amend or supplement this prospectus as required by law and the rules and regulations of the SEC, the information contained in this prospectus and any accompanying free writing prospectus is correct only as of the date of such document, regardless of the time of delivery of this prospectus and any accompanying free writing prospectus or any sale of these securities.

PRESENTATION OF FINANCIAL INFORMATION

This prospectus contains financial statements of McGraw-Hill Education, Inc. (formerly known as Georgia Holdings, Inc.). On March 22, 2013, MHE Acquisition, LLC, acquired all of the outstanding equity interests of certain subsidiaries of The McGraw-Hill Companies, Inc. (“MHC”) pursuant to the Purchase and Sale Agreement, dated as of November 26, 2012 and as amended on March 4, 2013 (collectively, the “Acquired Business”). As a result of this transaction, investment funds affiliated with Apollo Global Management, LLC acquired 100% of MHE Acquisition, LLC. We refer to the purchase of the Acquired Business and the related financing transactions as the “Founding Acquisition.” Following the Founding Acquisition, MHC has been known as McGraw Hill Financial, Inc. See “Prospectus Summary—Corporate Structure” for further information on the Founding Acquisition and our resultant corporate structure.

The Successor period ended December 31, 2013 refers to the period from March 23, 2013 to December 31, 2013, and the Predecessor period ended March 22, 2013 refers to the period from January 1, 2013 to March 22, 2013. The term “Successor” refers to McGraw-Hill Education, Inc. following the Founding Acquisition and the term “Predecessor” refers to McGraw-Hill Education, LLC prior to the Founding Acquisition.

USE OF NON-GAAP FINANCIAL INFORMATION

We have provided Adjusted Revenue, EBITDA, Adjusted EBITDA and Free Cash Flow From Operations and the ratios related thereto in this prospectus because we believe they provide investors with additional information to measure our performance. We use Adjusted Revenue as a performance measure because full payment for digital and print solutions is normally collected close to the time of sale whereas revenue from multi-year deliverables is recognized ratably over the term of the customer contract. We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance and understanding certain significant items.

Adjusted Revenue, EBITDA, Adjusted EBITDA and Free Cash Flow From Operations are not presentations made in accordance with U.S. GAAP, and our use of terms, varies from others in our industry. Adjusted Revenue, EBITDA, Adjusted EBITDA and Free Cash Flow From Operations should not be considered as alternatives to revenue, income from continuing operations, income from operations, or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance or cash flows as measures of liquidity. Adjusted Revenue, EBITDA, Adjusted EBITDA and Free Cash Flow From Operations have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Further, EBITDA:

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excludes certain tax payments that may represent a reduction in cash available to us;

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does not reflect any cash capital expenditure requirements for assets being depreciated and amortized that may have to be replaced in the future;

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does not reflect changes in, or cash requirements for, our working capital needs; and

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does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness.

In addition, Adjusted EBITDA:

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includes estimated cost savings and operating synergies, including some adjustments not permitted under Article 11 of Regulation S-X;

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does not include one-time expenditures, including costs required to realize the synergies referred to above;

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reflects the net effect of converting deferred revenues (inclusive of deferred royalties) to a cash basis assuming the collection of all receivable balances;

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does not include management fees paid to entities and investment funds affiliated with Apollo Global Management, LLC, which will discontinue upon completion of this offering; and

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does not reflect the impact of earnings or charges resulting from matters that we and the lenders under our senior secured credit facilities may consider not to be indicative of our ongoing operations.

Free Cash Flow From Operations reflects Adjusted EBITDA, as reduced for:

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the change in working capital from operations; and

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capital expenditures.

Our definitions of Adjusted EBITDA and Free Cash Flow From Operations allows us to add back certain non-cash and other charges or costs that are deducted in calculating net income from continuing operations. However, these are expenses that may recur, vary greatly and can be difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes.

Because of these limitations, we rely primarily on our U.S. GAAP results and use Adjusted Revenue, EBITDA, Adjusted EBITDA and Free Cash Flow From Operations only supplementally. See “Prospectus Summary—Our Key Metrics” and “Management’s Discussion and Analysis—Non-GAAP Measures.”

MARKET AND INDUSTRY DATA

We include in this prospectus statements regarding factors that have impacted our and our customers’ industries, such as our customers’ access to capital. Such statements regarding our and our customers’ industries and market share or position are statements of belief and are based on market share and industry data and forecasts that we have obtained from industry publications and surveys, including Condition of College and Career Readiness, ACT; AAP Annual Report 2014 - Pre-K-12 Education, Association of American Publishers; AAP 2014 Higher Education Annual Report, Association of American Publishers; Student Attitudes Toward Content in Higher Education, (c) 2015 Book Industry Study Group, Inc. (“BISG”); The College Textbook Market Disruption and Transformation, Boston University; The English Effect, British Council; Employment Projection Program 2012-2022, Bureau of Labor Statistics; Remediation: Higher Education’s Bridge to Nowhere; Four-Year Myth: Make College more Affordable, Complete College America; publications by 5 Minute English; Preparing Students for College and Career Success, Foundation for Excellence in Education; Recovery Job Growth and Education Requirements Through 2020, Georgetown University Public Policy Institute; 2020 Vision, A History of the Future, GSV Advisors; Worldwide and U.S. Corporate eLearning 2014–2018 Forecast: eLearning at an Inflection Point, International Data Corporation (“IDC”); Global Bandwidth Index December 2014, Juniper Networks; publications by the National Association of State Budget Officers (“NASBO”); The Condition of Education 2015, The National Center for Education Statistics; National Student Clearinghouse

iii

Research Center (“NSCRC”) Term Enrollment Estimates, Fall 2015; SIMBA Publishing for the PreK-12 Market 2015-2016, PreK-12 Testing Market Forecast 2014-2015, Simba Information; publications by Student Monitor; Global E-learning Market 2015-2019, Technavio; publications by Training Magazine; publications by UNESCO; publications by Veronis Shuler Stevenson; MPI College Data Report 2015; and Management Practice Inc. (“MPI”), as well as internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such information. Neither we nor the underwriters have independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. In addition, while we believe that the market share, market position and other industry information included herein is generally reliable, such information is inherently imprecise. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors” in this prospectus.

TRADEMARKS

This prospectus contains references to our trademarks and service marks. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ^® or ^TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

PROSPECTUS SUMMARY

The following summary highlights certain information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and historical financial statements included elsewhere herein. Because this is a summary, it is not complete and may not contain all of the information that may be important to you in making an investment decision. Before making an investment decision, you should carefully read the entire prospectus, including the information presented under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined consolidated and consolidated financial statements and related notes presented elsewhere in this prospectus.

Unless otherwise indicated by the context, references in this prospectus to (i) the “Company,” the “Issuer,” “we,” “our,” “us,” “MHE” and “McGraw-Hill Education” refer to McGraw-Hill Education, Inc., a Delaware corporation, together with its consolidated subsidiaries; (ii) “MHGE” refers to MHGE Parent, LLC, a Delaware limited liability company, together with its consolidated subsidiaries; and (iii) “MHSE” refers to McGraw-Hill School Education Intermediate Holdings, LLC, a Delaware limited liability company, together with its consolidated subsidiaries.

The Science of Learning

We help unlock the potential of each learner by accelerating learning through intuitive, engaging, efficient and effective experiences. We define the Science of Learning as the understanding of how individuals learn and apply that understanding, grounded in research, to our content, technology and user experience to produce learning solutions that directly and positively impact individual student outcomes. As a learning science company, our goal is to empower educators and learners with information and intuitive learning environments in which to engage more personally with each other and with critical concepts in order to promote more effective and efficient learning.

Company Overview

We are a leading provider of outcome-focused learning solutions, delivering both curated content and digital learning tools and platforms to the students in the classrooms of approximately 250,000 higher education instructors, 13,000 pre-kindergarten through 12^th grade (“K-12”) school districts and a wide variety of academic institutions, professionals and companies in over 135 countries. We have evolved our business from a print-centric producer of textbooks and instructional materials to a leader in the development of digital content and technology-enabled adaptive learning solutions that are delivered anywhere, anytime. We believe we have established a reputation as an industry leader in the delivery of innovative educational content and methodologies. For example, in the higher education market, we were the first in our industry to introduce digital custom publishing, which permits instructors to tailor content to their specific needs. We also created LearnSmart, one of the first digital adaptive learning solutions in the higher education market, which leverages our proprietary content and technology to provide a truly personalized learning experience for students. Today we have over 1,400 adaptive products in higher education. Since 2009, all of our major K-12 programs have also been created in an entirely digital format.

participated in during 2015. In addition, Harrison’s Principles of Internal Medicine is one of the most widely-sold global medical reference solutions to the professional market, with our complementary digital offering AccessMedicine available in almost every medical school in the United States. We sell our products and solutions across multiple platforms and distribution channels, including our large network of nearly 1,450 sales professionals.

As learners and educators have become increasingly outcome-focused in their search for more effective learning solutions, we have embraced adaptive learning tools as a central feature of our digital learning solutions. Adaptive learning is based on educational theory and cognitive science that emphasizes personalized delivery of concepts, continuous assessment of gained and retained knowledge and skills, and design of targeted and personalized study paths that help students improve in their areas of weakness while retaining competencies. We have developed a unique set of digital solutions by combining innovative adaptive learning methods with our proprietary content and digital delivery platforms. These solutions provide immediate feedback, and we believe they are more effective than traditional print textbooks in driving positive student outcomes. Students’ year-over-year performance can be impacted by many factors outside the instructional materials used in class. We believe that even taking into account these factors, our learning solutions can contribute to significant improvements in students’ classroom performance as well as improved student retention. For the instructor, time spent on active learning experiences increases significantly as a result of a reduction in time spent on administrative tasks and the availability of critical data to help better focus in class instruction.

We have conducted numerous case studies for several of our learning solutions for colleges that used Connect/LearnSmart, SmartBook and ALEKS, and in each case where our solutions have been implemented, our case studies have yielded positive findings when compared to class performance in periods immediately prior to implementation, many of which have been considerable. For example, according to a 2013 study by the Department of Chemistry, University of California, Riverside, it was found that general chemistry students who completed a pre-course assignment on ALEKS, an adaptive-responsive homework system could expect their average final exam score to increase by over 13 points when compared to nonparticipating students. Students who completed a precourse assignment on a traditional responsive homework system saw an average increase in their final exam score by 8 points versus those who did not participate. Students who worked on the online homework for the entire quarter saw even greater gains in their final exam scores compared to non-participants.

In the United States higher education market, where the pace of digital adoption is the most rapid of all of our end markets, the success of our sales of adaptive offerings has led to a 160 basis point increase in higher education market share from 2012 to 2015 according to Management Practice, Inc. (“MPI”), an independent education research firm.

Our four operating segments are:

(1)

Higher Education (44% of total revenue in 2015): We are a top-three provider in the United States higher education market with a 21% market share for the year ended December 2015 according to MPI. We provide students, instructors and institutions with adaptive digital learning tools, digital platforms, custom publishing solutions and traditional printed textbook products. The primary users of our solutions are students enrolled in two- and four-year non-profit colleges and universities, and to a lesser extent, for-profit institutions. We sell our Higher Education solutions to well-known online retailers, distribution partners and college bookstores, who subsequently sell to students. We also increasingly sell directly to students via our proprietary e-commerce platform, which currently represents one of our three largest distribution channels in this segment, with revenue having grown from $105 million for the year ended December 31, 2014 (Successor) to $140 million for the year ended December 31, 2015 (Successor). For the year ended December 31, 2015 (Successor), 45% of Higher Education revenue was derived from digital learning solutions.

(2)

K-12 (32% of total revenue in 2015): We are a top-three provider in the United States K-12 curriculum and learning solutions market with a 24% market share for the year ended December 2015 according to the Association of American Publishers (“AAP”). We sell our learning solutions directly to K-12 school districts across the United States. While we offer all of our major curriculum and learning solutions in digital format, given the varying degrees of availability and maturity of our customers’ technological infrastructure, a majority of our sales are derived from selling blended print and digital solutions. We believe that the quality of our blended offerings has been driving significant growth in both print and digital revenue. For the year ended December 31, 2015, 17% of K-12 revenue was derived from digital learning solutions.

(3)

International (17% of total revenue in 2015): We leverage our global scale, including approximately a 470 person sales force, brand recognition and extensive product portfolio to serve students in the higher education, K-12 and professional markets in over 135 countries outside of the United States. Our products and solutions for the International segment are produced in nearly 60 languages and primarily originate from our offerings produced for the United States market and that are later adapted to different international markets. Sales of digital products are growing significantly in this market, and we continue to increase our inventory of digital solutions. For the year ended December 31, 2015, 10% of International revenue was derived from digital learning solutions.

(4)

Professional (7% of total revenue in 2015): We are a leading provider of medical, technical, engineering and business content for the professional, education and test preparation communities. Our digital subscription products had a 94% annual retention rate in 2015 and are sold to over 2,700 customers, including corporations, academic institutions, libraries and hospitals. For the year ended December 31, 2015, 46% of Professional revenue was derived from digital learning solutions, including digital subscription sales.

For the year ended December 31, 2015, we generated revenue of $1,835 million and a net (loss) of $(175) million. For the year ended December 31, 2015, we generated Adjusted Revenue of $2,055 million and Adjusted EBITDA of $486 million. See “Summary Historical Combined Consolidated Financial Data.”

Our Digital Learning Solutions

Since the acquisition of our business in 2013 by funds affiliated with Apollo Global Management, LLC (together with its subsidiaries, “Apollo”), we have invested significantly in our digital learning solutions and our in-house Digital Platform Group (“DPG”). DPG was formed in 2013 to drive innovation and develop, maintain and leverage our digital learning solutions, technology tools and platforms across our entire business. To maintain and grow our leading digital position, we have increased our annual digital learning solutions spending, including operating and capital expenditures, from less than $90 million in 2012 to approximately $150 million in 2014 and approximately $180 million in 2015. We believe that the effectiveness of our product platforms and DPG support capability give us a competitive advantage because we are not reliant on third parties and do not need to rationalize and integrate multiple product platforms obtained through acquisitions with siloed technology support models. In addition, our digital capabilities have allowed us to drive market share growth, promote recurring usage by instructors, sell directly to students and disintermediate used and rental printed textbooks.

DPG’s mission-driven technology team manages concurrent, enterprise-wide projects leading to continuous innovation, an effective software development life-cycle, reduced cycle times and consistent on-time releases. DPG has also increased the reliability and performance of our learning solutions platforms through an intense focus on ongoing product assessment and improvement. Due to our focus on developing innovative digital solutions, we have been able to attract top technology talent and currently employ 475 full-time employees in DPG, including more than 210 engineers, over 75 user experience designers, 80 technical product managers, over 20 data scientists and software solutions architects and over 80 customer-facing and other associated support staff across our digital hubs in Boston, Seattle, Irvine, New York City and Columbus.

We have complemented our internally developed digital learning solutions with select acquisitions, including ALEKS, LearnSmart and Engrade. These acquisitions, along with our internal capabilities, enable us to own and control all of the key technologies necessary to implement our digital strategy.

We believe that user engagement data on our learning platforms is one of the most important metrics available to track learning progress. According to Student Attitudes Toward Content in Higher Education (2015, BISG), 80% of the higher education faculty in the United States who use an integrated digital learning system rely on completion of digital homework assignments to measure student progress. Therefore, we monitor growth in paid activations and number of homework assignments assigned and submitted as indicators of student and instructor engagement, all of which have experienced significant growth. In 2015, homework assigned by instructors and homework submitted by students increased by 47% and 14%, respectively. In addition, we believe the value that our learning solutions provide can be seen in the growth of our digital revenue. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), digital revenue was $544 million, $479 million, $311 million and $82 million, respectively. This represents 30%, 26%, 20% and 33% of total revenue, respectively, or an increase of 13% from 2014 to 2015 and 22% from 2013 to 2014.

We organize our digital learning solutions in two categories: Open Digital Learning Environment and Adaptive / Intelligent Content.

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Open Digital Learning Environment

Our Open Digital Learning Environment solutions are designed to facilitate student-instructor interaction. These solutions allow instructors to create and assign materials, build lesson plans, use third party content, integrate into a student information system, manage grading and track student engagement and progress. Unlike traditional methods of learning, our solutions allow students the flexibility to interact with course content and the instructor anytime and anywhere. We believe these products promote higher student retention and better outcomes. Our solutions include:

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Connect: an open learning environment for the higher education market with 3.0 million paid activations as of December 31, 2015, an increase of 16% over the prior year. Using the Connect solution, instructors created nearly 10.3 million assignments, and students submitted over 88.7 million assignments, representing year-over-year growth rates of 47% and 14%, respectively;

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Engrade Pro: an open platform for K-12 education that unifies data, curriculum and educational tools to drive student achievement and inform district educational strategy; and

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ConnectEd: an open learning environment delivering our content for K-12.

Adaptive / Intelligent Content

We believe that our digital adaptive technologies, which are delivered in our open digital learning environment, help students study more effectively and efficiently by guiding them through a personalized experience. Individual learning plans are continually adapted to the student’s needs to focus their attention on what they need to learn the most, at precisely the time they need to learn it. Key offerings of our Adaptive/Intelligent Content include:

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LearnSmart: an adaptive learning program that personalizes learning and designs targeted study paths for students, which is primarily sold in the higher education market and is being expanded to our K-12 and International operating segments. In the higher education market, LearnSmart is utilized in a wide variety of courses, including managerial accounting, economics, communications, Spanish and social studies;

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ALEKS: an adaptive learning math product for the K-12 and higher education markets, with 1.7 million paid activations as of December 31, 2015, an increase of 14% over the prior year;

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SmartBooks: an adaptive reading product introduced in Higher Education in 2013 designed to help students understand and retain course material by guiding each student through a highly personal study experience. The student reads the chapters in SmartBooks and is prompted by LearnSmart questions to identify recommended areas of focus. This product is primarily sold in the higher education market across a variety of courses. We began to release SmartBooks in the K-12 and international markets during 2015; and

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Connect Insight: a visual analytics dashboard, available to both instructors and students, that provides actionable information about student performance to help improve class effectiveness. Connect Insight presents assignment, assessment, and topical performance results along with a time metric that is easily visible for aggregate or individual results. Using visual data displays that are each framed by an intuitive question, Connect Insight gives both instructors and students the ability to take a just-in-time approach to teaching and learning.

Our business model is transitioning to digital learning solutions with the benefit of the transition most observable in our Higher Education business. While the overall market adoption of digital has been slower in K-12 than Higher Education, we continue to gain momentum in the move toward digital in K-12. The following charts illustrate the growth in digital revenue as a percentage of the total revenue generated by Higher Education and K-12, our two largest business segments, during the period from 2010 to 2015. In 2015, these two segments generated 76% of our total revenue.

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Our Market Opportunity

The Market for Learning Solutions is Large and Growing

We compete in the market for educational services in the United States and abroad. It is one of the largest sectors in the United States economy and, according to GSV Advisors, spending on education in 2015 was $1.6 trillion and are forecast to increase to $2.0 trillion in 2020. Global educational expenditures in 2015 were $4.9 trillion and are forecast to increase to $6.3 trillion in 2020, according to GSV Advisors. Our learning solutions address multiple segments in the education market including higher education, K-12, professional education and international.

We are a leading provider in the market for new instructional solutions in the United States higher education segment, which was estimated to be approximately $4.0 billion in 2015, according to MPI. This market includes digital learning solutions, as well as traditional and custom print textbooks, but excludes used and rental print textbooks. Used and rental materials are commonly purchased by students as a substitute for new materials. Based on estimates for used and rental substitutes, the overall market for textbooks is significantly larger than the market for new instructional materials. According to a report from Veronis Shuler Stevenson, used textbook purchases represent approximately 30% of the overall market and rental textbooks represent approximately 8% of the overall market for instructional materials based on a report from Student Monitor. We believe the increased use of digital products will drive significant growth in our addressable market given digital products are not provided in a used or rental form.

We expect another key long-term driver of growth in the higher education market to be increasing student enrollment, which has been steadily growing over the last several decades. Enrollment at degree-granting institutions in the United States was approximately 20 million in Fall 2014, representing a 2% CAGR since 2000 and a 2% CAGR since 1970, according to the National Center for Education Statistics (“NCES”). Although there was a decline in enrollment from 2012 to 2014, prior to that there have been only four years since 1970 during which enrollment declined by more than 1% over the prior year, and in three cases (1976, 1984, 1993), enrollment growth resumed within three years.

Our addressable K-12 market in the United States was approximately $5.6 billion for the 2015-2016 school year, including adoption and open territory states, according to Simba Information. Additionally, in a recent Simba Information report, the classroom formative assessment market is estimated at $1.4 billion in 2013-2014. According to the latest available data from NCES, K-12 enrollment in the United States as of 2011 was nearly 55 million, and enrollment is projected to grow at a compound annual growth rate of 0.4% from 2013 to 2023. We define our K-12 market as divided among basal (core or alternative required grade-level taught subjects that are delivered in a specific order with increasing difficulty), supplemental (academic instruction provided outside the required programs) and intervention products (targeted instruction to students lacking proficiency in a subject matter, or those who have special learning or behavioral needs). Eighteen states, known as adoption states, approve and procure new basal programs, usually every five to eight years on a state-wide basis for each major area of study, before individual schools or school districts are permitted to schedule the purchase of materials. In all remaining states, known as open territories, each individual school or school district can procure materials at any time, though they usually do so on a five to eight year cycle. Growth in the K-12 market is driven by demand for new materials to address college and career readiness standards, increasing state and local budgets for educational materials, and rising student enrollment. Property tax revenue, the primary source for state and local funds for purchases of instructional materials, has been increasing in the United States along with a rise in property values. A rebound in state and local tax revenues has allowed many locales to increase their K-12 spending to address years of pent-up demand created during the recession that started in 2008. Funding levels as reported by NASBO have been somewhat volatile recently, though it appears that funding is improving, particularly at a state level, as tax revenues improve. In 2015, there was a 4.6% annual increase in state level funding, and it is expected by NASBO to increase by 4.1% in 2016.

As the United States economy continues to recover, we expect the market for professional education resources to grow, particularly among industry sectors that are experiencing more rapid growth in jobs. The Professional and Business Services and Healthcare and Social Assistance industry sectors are expected to add nearly 6 million jobs between 2014 and 2024, more than all other United States industries combined, according to the Bureau of Labor Statistics (“BLS”). We derive a substantial portion of our Professional revenue from these two markets.

The global e-Learning market, including higher education, K-12 and professional training, is expected to grow from $74 billion in 2015 to $131 billion by 2019, with educational content accounting for approximately 80% of the total, according to Technavio. This large international education market is increasingly focused on digital content due to the growing penetration of the smartphone. Individuals in developing countries are nearly twice as likely to use connected devices (i.e. mobile phones or tablets) for educational purposes on a regular basis as those in developed markets, according to Juniper Networks. Today, through our significant investment in digital solutions and DPG, we plan to increasingly capitalize on these strong market trends.

Needs of the Global Knowledge-Based Economy are Driving Increased Demand for Education

The accelerating shift toward a knowledge-based economy is fueling demand for higher levels of education around the world. The importance of higher education in the United States is clear. 65% of all jobs in the United States will require some form of postsecondary education or training by 2020, up from 28% in 1973 and 59% in 2010, according to Georgetown University Public Policy Institute. As higher education becomes more important to the success of the global economy, governments have increased their emphasis on student preparation and postsecondary readiness through funding requirements of primary and secondary education programs.

The trend towards increased globalization has generated demand for higher levels of educational attainment in international markets as well. There are more than 50 countries in which English is either the official or the primary language and, in many developing countries, educational agendas emphasize the use of English as a universal language for commerce and other sectors of the economy. English is spoken at a useful level by approximately 1.75 billion people worldwide, and is projected to increase to 2.0 billion by 2020, according to the British Council. We believe this trend will increase the readily addressable market for our educational solutions, which are often initially created for English-speaking students before being adapted for international markets.

We expect the investment in education to continue to grow as student enrollment rises around the world. According to UNESCO, global higher education enrollment was nearly 198 million students in 2013, doubling since 2000, and K-12 global enrollment was almost 1.5 billion students in 2013, representing an increase of 20% since 2000.

Increasing Requirement for Higher Student Outcomes and Accountability of Education Providers

Despite the significant government expenditures in education, low college graduation rates and insufficient job placement in the United States have resulted in additional social and economic costs including rising aggregate and per capita student loan debt and increasing incidents of default. In addition, American students are not always learning the skills and knowledge they need to succeed in an increasingly competitive global marketplace.

According to Complete College America, excluding top schools, only 19% of students on average graduate from 4-year schools “on time” (6-years) across the United States and, according to NCES, approximately 60% of first-time, full-time students graduated from 4-year and 2-year institutions in 2013.

In a recent study by the Foundation for Excellence in Education, two-thirds of college professors report that what is taught in high school does not prepare students for college and, according to ACT, 2015, approximately one in four high school students graduates ready for college in all four core subjects (English, reading, math and science), resulting in a third of students who enter college requiring remedial courses to meet basic levels of proficiency.

Public and political scrutiny of the disparity between funding and student outcomes has increased demand for greater transparency and accountability for spending on education. With educational institutions under pressure to increase their student retention and graduation rates, new and more effective methods of teaching and learning are in demand. Almost 80% of faculty in higher education in the United States believe the most important initiative at their institution is improving student learning outcomes, according to a BISG 2015 survey.

Public policy initiatives aimed at improving student outcomes and accountability within higher education in the United States extend to college and career readiness standards in the K-12 market. An important aspect of postsecondary student success is adequate preparation via primary and secondary education. Currently, 1.7 million students each year begin college in remediation and approximately one-third complete bachelor’s degrees in six years, according to Complete College America. In the United States, improved college readiness has been a focal point for lawmakers, which has led to an increased focus on the linkage between K-12 funding and higher student achievement of educational standards.

As a learning science company, we have designed our learning solutions to facilitate educational institutions in improving student outcomes. According to case studies we have conducted to date, we have seen improvements in course pass rates and attendance, where our learning solutions have been used as compared to the period prior to implementation. We believe our learning solutions contribute to these improvements.

Educators and Students are Increasingly Embracing Digital Learning Solutions

Trends across all of our markets are driving demand for outcome-driven, adaptive and personalized learning tools which incorporate data and analytics to help both instructors and students improve learning effectiveness. The percentage of students in higher education using digital course materials in Spring 2015 was approximately 70%, according to the BISG 2015 survey. Growth in digital solutions is driven by their proven and demonstrable impact on improving student outcomes and through the advancement of enabling technology such as eReaders, tablets, other hand held devices and laptop computers.

The education market’s transition to digital offers many important benefits to instructors, students and providers of learning solutions. For instructors and students, the benefits of the digital transition include:

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Facilitating more effective creation of interactive and adaptive learning solutions designed to reinforce and test concepts taught in primary course materials;

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Improving the ability to capture data around student comprehension and performance and making it available to the students and instructors in real-time. This information can then be integrated into instruction and studying, promoting a more interactive and effective overall learning process; and

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Reducing the cost of effective learning solutions to the student.

For learning solutions providers, the benefits of the digital transition include:

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Allowing for a more direct relationship with the end-user in the higher education market as students purchase licenses for digital learning solutions directly from the learning solutions provider;

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Improving the learning experience through continuous feedback from the billions of interactions students have with our adaptive tools;

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Allowing faster, more efficient and less expensive creation and updating of content;

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Disintermediation of the print used and rental market within higher education; and

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An improved business model with greater visibility, predictability, margins and free cash flow generation.

Our Competitive Strengths

We believe the following to be our most important competitive strengths:

Widely recognized brand with global reach and expansive scale.

We believe our brand recognition is driven by our long-standing history of over 125 years in the industry and our ownership of globally well-known titles such as Harrison’s Principles of Internal Medicine and Samuelson’s Economics, which have been cornerstones of education around the world for decades. We distribute our products in over 135 countries across Asia-Pacific, Europe, India, Latin America and the Middle East, and approximately 27% of our more than 4,750 employees are based in over 35 offices in 28 countries outside of the United States. We believe that our brand, global reach and scale provide us with a defensible market position and present significant barriers to entry. We expect to leverage our market position and internal infrastructure and operational resources to further grow revenues and gain market share by increasing distribution of learning solutions through our network.

In the United States, our products are sold in over 5,000 higher education institutions and 13,000 K-12 school districts across all 50 states. Our nearly 1,450 person sales force, which includes approximately 450 sales people in each of the United States higher education and K-12 markets, maintains close relationships with the individual instructors that represent the primary decision makers in the higher education market and the states, school districts, and individual schools that primarily make purchase decisions in the K-12 market. In the K-12 market, our market leading basal programs such as My Math and Reading Wonders have enabled us to capture approximately 46% market share in large state new adoptions in 2015. In addition, our growing suite of digital products allows us to develop direct relationships with an even larger group of customers, including over 3 million higher education students and instructors who were users of our Connect platform in 2015.

Proprietary and unique content, developed over many years, leveraged in digital adaptive learning.

Our portfolio of proprietary content developed over 125 years and built around market leading titles has been the foundation of our transformation into a large and growing digital learning solutions provider. We increased the market share of our top 10 Higher Education product categories by 160 bps from 2012 to 2014, as reported by AAP. These top 10 product categories represented over 50% of industry net sales as reported by AAP in 2014. This market leadership has uniquely positioned us to extend our portfolio of traditional print products by offering digital alternatives and new digital solutions that incorporate our existing content and curriculum. The future potential of digital learning solutions is illustrated by a 2015 BISG survey which states that 77% of the instructors who use an integrated digital learning system, such as our Connect platform, require the purchase of that system for their courses and base approximately 26% of the students’ grades on homework assigned through such platforms.

In addition to leveraging digital formats to extend the reach of existing print content, we create all new content in a digital format and optimize it for use in an adaptive environment. This has reduced our development costs and enhanced our ability to use new content for the future development of additional products. We believe that our repositories of over nine petabytes of digital content, which is over nine million gigabytes, provide us with an opportunity to more quickly and effectively bring future products to market. Our centralized DPG team ensures that all of our digital solutions are immediately available to customers running a wide range of different technology architectures.

Diversified portfolio of education businesses and unified approach to digital.

We have a unique presence across the learning continuum, including higher education, K-12 and professional, with additional operations in international markets. Our presence across the full continuum allows us to mitigate the cyclicality of the individual segments. The higher education segment of our business, which represented approximately 44% of our revenue in 2015, has historically proven to be countercyclical, balancing out cycles experienced by the K-12 business. During and immediately following recent economic downturns, postsecondary enrollment rates have tended to rise while postsecondary attrition rates have tended to decline. We believe this is driven by the lower opportunity cost for enrolling or staying in college during times of relative economic weakness and higher unemployment. In the current economic environment, characterized by a slow recovery, the K-12 market is benefiting from increased state and local government spending while higher education enrollment has begun to slow.

In addition to making our product development more innovative and faster to market, our DPG organization has allowed us to spread significant R&D spend across our entire revenue base and leverage investments in products developed for one segment across our entire product suite. This centralized approach provides superior capital efficiency to a siloed development model. The creation of DPG, along with the acquisitions of ALEKS, LearnSmart and Engrade, enables us to own and control all of the key technologies necessary to implement our digital strategy.

First mover in digital adaptive learning solutions and strong capabilities in digital technology.

We believe the significant investment we have made in our digital capabilities has made us a longstanding leader in digital adaptive learning. Today, our annualized spend in our DPG, including operating and capital expenditures, has grown from less than $90 million in 2012 to approximately $150 million in 2014 and approximately $180 million in 2015. In addition to our organic investments, we have committed in excess of $200 million for the acquisitions of ALEKS, LearnSmart and Engrade, which have significantly strengthened our platform and adaptive digital offerings. Our LearnSmart solution has been one of the most widely used adaptive platforms in higher education since its launch in 2009, and ALEKS, our digital adaptive learning solution originally developed for K-12 math, originated in 1992 with a National Science Foundation grant. Our long history of offering adaptive learning solutions has allowed us to develop a growing and robust database of student interactions relating to achievement of learning objectives, which we use to continuously improve the effectiveness of our platforms. For example, LearnSmart has generated almost 5 billion interactions with students since inception in 2009, recently growing at an average of more than 100 million interactions per month. Since 2010, ALEKS has seen nearly 3.6 billion interactions. In addition to using this information to enhance the effectiveness of our adaptive tools, we share data on interactions with instructors to help them more effectively integrate our solutions into their lessons, focusing on content that students are having difficulty learning, reinforcing our relationships and making our solutions more difficult to displace.

Our interactions data are also leveraged on an ongoing basis to create new adaptive technology solutions. For Higher Education, our SmartBooks adaptive offering, introduced in 2013, is among the first adaptive reading experiences for higher education that utilizes data analytics combined with a deep repository of proprietary content to improve learning outcome. In the higher education market alone, we have increased our number of adaptive products from 40 in 2012 to over 1,400 as of December 31, 2015.

Highly attractive business model positioning us for growth.

significant investment in our digital capabilities, several key strategic acquisitions, return of capital to our shareholders and continued deleveraging. Since the Founding Acquisition in 2013, our strong cash flow has funded three acquisitions, including ALEKS, LearnSmart and Engrade, that included cash components totaling $138 million. We also completed a minority interest buy-out of Ryerson Canada (our Canadian business) for $27 million and made a minority investment in English Language Learning provider Busuu for €6 million. In addition, we have made significant investments in the staffing of DPG, which supports ongoing innovation, development and maintenance of our technology platforms, reducing our pre-publication and capital expenditure requirements and our dependence on third parties.

In addition to our ongoing shift towards a more digitally-enabled model, another important driver of increasing free cash flow generation has been our demonstrated success in implementing various cost saving measures. We expect these opportunities to continue to improve our operating margins and fund additional investment in our digital capabilities. Since our March 2013 sale to Apollo through December 31, 2015, we have identified and actioned approximately $160 million of annualized cost savings, with nearly $140 million realized to date. We plan to achieve the full run-rate benefit of these savings by the end of 2017.

Talented management team and employee base.

Since being acquired by Apollo in March 2013, we have enhanced our leadership team with the addition of proven leaders, including a new CEO, Presidents of each business segment, a new CIO and a Head of Communications. Our leadership team consists of professionals averaging over 20 years of experience in a range of industries that include education, technology and media with various leadership positions at Bain, Gartner, Harvard Business School, Pearson, Reed Elsevier, Standard & Poor’s, Sylvan Learning, Symbian, UBM, and Wolters Kluwer as well as start-ups such as Intelligent Solutions. We have more than 4,750 employees world-wide with 475 full-time employees in DPG, including more than 210 engineers, over 75 user experience designers, 80 technical product managers, over 20 data scientists and software solutions architects and over 80 customer-facing and other supporting staff.

Our Growth Strategies

The key elements of our growth strategies are described below.

Further our leadership in digital solutions and digital technology.

We intend to capitalize on the increasing market demand for digital learning solutions by expanding our portfolio of technology-enabled adaptive tools and learning solutions. By leveraging a common software architecture and platform, we will be able to quickly design, develop and test innovative products. Our next generation products, several of which have been recently deployed or are currently in development, will also benefit from the experience we have gained from our existing product suite. These products will have enhanced flexibility, provide greater ability for our users to create custom solutions, and better analyze learning data. We believe these next generation products will further our leadership in our key markets and allow us to grow our revenues at a faster rate than the overall market.

We also expect that increased adoption of our digital solutions in the higher education market will expand our revenue opportunity by limiting the availability of used and rental alternatives. As instructors mandate and integrate digital solutions into their classrooms, learning will become more personalized. We believe there is a significant growth opportunity for the use of personalized learning programs, which can further the disintermediation of the used and rental market.

capabilities. We expect this effort will reduce maintenance costs and unlock creative synergies across our engineering teams. We will also streamline our tools and platforms for efficient and effective delivery with open application program interfaces. This rationalization and simplification of our delivery platforms will reduce costs, freeing up capital for investment in new products.

Increase our penetration in our largest, most profitable disciplines and sub-markets.

In Higher Education, we intend to make additional investments in large customer segments with the greatest strategic value, such as freshman and sophomore general education and developmental courses. As a core competency, we will continue to identify high value segments through rigorous customer segmentation analysis and discipline-specific market insight. These key areas contain the least specialized curriculum, have the highest enrollment, are likely to be taught at a high percentage of institutions and will benefit the most from digital solutions that track students’ progress. By focusing our investments on these areas, we believe we can increase market share and drive further revenue growth. Going forward, we will prioritize opportunities based on rigorous customer segmentation analysis and specific market insights.

To increase penetration and drive better student outcomes in K-12, we will target synergies across the entire learning environment, including technology platforms and services, and leverage our existing sales, marketing and product development capabilities to further penetrate the market. We will leverage our digital adaptive assets, ALEKS and LearnSmart, to accelerate our penetration of digital products while also emphasizing the research-basis of revitalized programs such as Everyday Mathematics and Open Court Reading. In addition, we will enhance our formative, in-classroom, testing offering with our adaptive capabilities to further penetrate the market. We will continue to compete in all major state new adoptions, especially the upcoming California English language arts adoption in 2016, as well as Texas, Florida and other adoption states in 2017 and later years.

Introduce new enterprise solutions aimed at education effectiveness and student retention.

We believe our learning science focus, highly talented DPG team and the large amount of data we collect via our adaptive learning solutions uniquely position us to offer enterprise services that help our institutional customers improve educational outcomes and accountability. We intend to sell a number of new products and services, including our Connect Insight product, that offer enterprise-wide course development and design services, analytical tools focused on optimizing student performance and retention, and college and career readiness programs and services.

Leverage our digital solutions in International and Professional markets.

We intend to leverage our large global sales presence, our DPG team, deep local knowledge and numerous strategic partnerships to adapt our leading portfolio of English language content and digital solutions to meet local market needs, such as culture, language and curricula. We believe that this will allow us to rapidly scale our presence in international markets, with particular focus on emerging markets in Latin America, the Middle East, Africa and Asia Pacific.

We also believe we can achieve significant growth by utilizing our adaptive learning competencies to enter and disrupt attractive education segments. These include the high stakes test preparation markets in selected geographies, vocational and skills-based training markets, and the corporate training market where personalized adaptive learning has significant value to the enterprise.

License our software and platforms to other education industry participants and the corporate training market.

We intend to license our leading portfolio of software, platforms and capabilities to other market participants in both the education and corporate markets. Education industry participants, such as universities and international content providers, can save significant development costs by using our technology to deliver their own content, in their own local languages and with features designed for their own unique markets. We have estimated this addressable market at approximately $1 billion, which is based on our estimate of the potential for publishers who do not have their own digital solution or are sub-scale in education to outsource their technology development efforts to us.

We will also market to corporate partners who can benefit from our proven and effective adaptive technology, especially in high-stakes areas where it is important to demonstrate mastery. This will allow corporate partners to provide personalized corporate training and professional development programs that capitalize on our data reporting and analysis tools. In 2015, we launched our first successful pilot of this program, which we have already expanded, and our pipeline of potential education and corporate clients is building. According to IDC, the U.S. corporate e-learning market was estimated at $16.8 billion in 2015 and grew at a 8.7% compound annual growth rate since 2006. While it is difficult to estimate our direct addressable market, the overall level of spending on U.S. corporate e-learning does present a significant growth opportunity.

Continue to evolve our digital-centric business model to generate significant free cash flow.

We will continue to drive towards a digital-centric business model which will allow us to continue to generate significant free cash flow over time as we derive an increasing proportion of our sales from digital learning solutions. We expect our digital-centric model to continue to result in higher margins and lower capital intensity as we drive efficiencies in our business from reduced operating expenditures, reduced print inventory and more efficient pre-publication investment relative to revenue. We expect to use our free cash flow to fund our growth, delever our balance sheet and, potentially, return capital to shareholders over time.

Selectively pursue acquisitions.

We will consider acquisitions that expand our product offerings, accelerate our digital product development and add important content. We believe our brand and scale allow us to derive significant benefit from emerging education technology companies, which would be challenged to attain a significant market position as standalone companies.

Our Key Metrics

We measure our business using several key financial metrics, including Adjusted Revenues and Adjusted EBITDA and the ratios related thereto.

Adjusted Revenue is a non-GAAP financial measure that we define as the total amount of revenue that would have been recognized in a period if we recognized all revenue immediately at the time of sale. We use Adjusted Revenue as a performance measure given that we typically collect full payment for our digital and print solutions near the time of sale, but recognize revenue from digital solutions and multi-year deliverables ratably over the term of our customer contracts. Adjusted Revenue is a key metric we use to manage our business as it reflects the sales activity in a given period and provides comparability during this time of transition, particularly in the K-12 market, in which customers typically pay for five to eight-year contracts upfront. Adjusted Revenue is GAAP revenue plus the net change in deferred revenue.

Adjusted EBITDA is a non-GAAP financial measure defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre-publication investment

cash costs) and adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under our debt agreements less cash spent for pre-publication investment in addition to the change in deferred revenue.

For further information on non-GAAP financial measures and a description of how we calculate each of our key metrics and operating factors that impact these metrics, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” and “Use of Non-GAAP Financial Information.”

Our key metrics are presented under the headings “Summary Historical Combined Consolidated Financial Data” and “Selected Historical Combined Consolidated Financial Data.”

The Founding Acquisition

Pursuant to a Purchase and Sale Agreement, dated as of November 26, 2012 and as amended on March 4, 2013, among The McGraw-Hill Companies, Inc. (“MHC”) and certain other subsidiaries of MHC named therein, as sellers (collectively, the “Sellers”), MHE Acquisition, LLC and McGraw-Hill Education, LLC (the “Purchase and Sale Agreement”), MHE Acquisition, LLC acquired from the Sellers the Acquired Business. The Acquired Business included all of MHC’s educational materials and learning solutions business, which was comprised of: (i) the Higher Education, Professional and International Group, which included post-secondary education and professional products both in the United States and internationally and (ii) the School Education Group business, which included school and assessment products targeting students in the pre-kindergarten through secondary school market. As of completion of the acquisition, Apollo and certain co-investors directly or indirectly owned all of the equity interests of the Issuer, which owned all of the equity interests of MHE Acquisition, LLC. MHE Acquisition, LLC and the Company were formed by Apollo on November 15, 2012 and February 22, 2013, respectively, for the purpose of the Founding Acquisition. Prior to the Founding Acquisition, the sole stockholder of the Company was AP Georgia Holdings, LP and the sole member of MHE Acquisition, LLC was the Company. The Founding Acquisition was completed for an aggregate purchase price of approximately $2.2 billion, which was paid in cash.

Throughout this prospectus, we collectively refer to the acquisition, the related restructuring, the investment in MHE Acquisition, LLC’s equity, the issuance of 9.75% first priority senior secured notes due 2021 (the “MHGE Senior Secured Notes”) by McGraw-Hill Global Education Holdings, LLC (“MHGE Holdings”), the entry into an $810 million term loan credit facility (the “MHGE Term Loan”) and a $240 million revolving credit facility (the “MHGE Revolving Facility” and together with the MHGE Term Loan, the “MHGE Facilities”) by MHGE Holdings and the entry into an $150 million asset based revolving credit facility (the “MHSE Revolving Facility”) by McGraw-Hill School Education Holdings, LLC, each such debt issuance occurring concurrently with the acquisition, as the “Founding Acquisition.”

Corporate Structure

The diagram below sets forth a simplified version of our organizational structure and our principal indebtedness as of the date of the prospectus. This chart is provided for illustrative purposes only and does not represent all legal entities affiliated with, or all obligations of, the Issuer.

LOGO

(1)	8.500% / 9.250% Senior PIK Toggle Notes due 2019 (the “MHGE PIK Toggle Notes”).

(2)	MHGE Intermediate Holdings has pledged the equity of MHGE Holdings to secure the MHGE Facilities.

(3)	9.75% First Priority Senior Secured Notes due 2021.

(4)

As of December 31, 2015, there were no outstanding obligations under the MHGE Revolving Facility. As of December 31, 2015, there were $673.9 million face value of loans outstanding under the MHGE Term Loan, which reflects an $81.0 million voluntary prepayment on December 31, 2013, a $35.0 million voluntary

prepayment in connection with the repricing transaction that closed on March 24, 2014 and a $0.3 million voluntary prepayment in connection with the repricing transaction that closed on May 4, 2015. As of December 31, 2015, the Company determined that a $72.3 million mandatory prepayment of indebtedness is required and is payable five business days after the annual MHGE financial statements are delivered.

(5)	All wholly owned domestic subsidiaries of MHGE Holdings, other than any domestic subsidiary that is a subsidiary of a foreign subsidiary, guarantee and pledge certain assets under the MHGE Facilities and the MHGE Secured Notes.

(6)	McGraw-Hill School Education Intermediate Holdings, LLC has pledged the equity of McGraw-Hill School Education Holdings, LLC to secure the MHSE Revolving Facility and a $250.0 million term loan credit facility (the “MHSE Term Loan”).

(7)	As of December 31, 2015, there were no outstanding obligations under the MHSE Revolving Facility.

(8)	As of December 31, 2015, there were $245.0 million face value of loans outstanding under the MHSE Term Loan.

(9)	All wholly owned domestic subsidiaries of McGraw-Hill School Education Holdings, LLC, other than any domestic subsidiary that is a subsidiary of a foreign subsidiary, guarantee and pledge certain assets under the MHSE Revolving Facility and MHSE Term Loan.

Our Sponsor

Apollo, founded in 1990, is a leading global alternative investment manager with offices in New York, Los Angeles, Houston, Bethesda, Chicago, Toronto, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong and Shanghai. Apollo had assets under management of approximately $170 billion as of December 31, 2015 in its affiliated private equity, credit and real estate funds invested across a core group of nine industries where Apollo has considerable knowledge and resources. Apollo’s team of approximately 331 investment professionals possesses a broad range of transactional, financial, managerial and investment skills, which has enabled the firm to deliver strong long-term investment performance throughout expansionary and recessionary economic cycles. Apollo has a successful track record of managing investments in education companies such as Laureate International Universities, Connections Education, Sylvan Learning and Berlitz. Moreover, Apollo has considerable experience leading large, complex carve-out transactions, including its affiliated funds’ current and prior portfolio companies Berry Plastics (original acquisition from Tyco International), Constellium (acquired from Rio Tinto), EP Energy (acquired from El Paso Corporation), Evertec (acquired from Banco Popular), General Nutrition Centers (acquired from Royal Numico), Hostess (selected assets acquired from Hostess Brands, Inc.), Noranda (acquired from Xstrata) and United Agri Products (acquired from ConAgra Foods).

We will continue to be controlled by Apollo following this offering. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—We continue to be controlled by Apollo, and Apollo’s interest may conflict with our interests and the interests of other stockholders” for a summary of the potential conflicts of interests that may arise as a result of our control by Apollo. In addition, Apollo and its affiliates are permitted to engage in the same or similar business activities to those we undertake. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—Our second amended and restated certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities” for further details.

Corporate Information

Our principal executive offices are located at 2 Penn Plaza, New York, NY 10121 and our telephone number is (646) 766-2000. We also maintain a website at www.mheducation.com. Our website and the information contained therein or connected thereto is not incorporated into this prospectus or the registration statement of which it forms a part.

THE OFFERING

Issuer

McGraw-Hill Education, Inc.

Common stock offered by us

shares (or shares, if the underwriters exercise in full their option to purchase additional shares).

Option to purchase additional shares

We have granted the underwriters an option to purchase up to an additional shares from us. The underwriters may exercise this option at any time within 30 days from the date of this prospectus.

Total shares of common stock offered

shares (or shares, if the underwriters exercise in full their option to purchase additional shares).

Common stock to be outstanding after the offering

shares (or shares, if the underwriters exercise in full their option to purchase additional shares).

Use of Proceeds

We expect to receive approximately $ of net proceeds (based upon the assumed initial public offering price of $ per share, the midpoint of the range set forth on the cover page of this prospectus) from the sale of the common stock offered by us, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the public offering would increase (decrease) our net proceeds by approximately $ million.

We intend to use approximately $ million of the net proceeds from this offering to pay related fees and expenses. The remaining net proceeds will be used to repay debt and for general corporate purposes.

Dividend Policy

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. The decision whether to pay dividends in the future will be at the sole discretion of our board of directors (the “Board”) after taking into account various factors, including legal requirements, our subsidiaries’ ability to make payments to us, our financial condition, operating results, cash flow from operating activities, available cash, business opportunities, restrictions in our debt agreements and other contracts, current and anticipated cash needs and other factors the Board deems relevant. See “Dividend Policy.”

Listing and trading symbol

We have been approved to list our common stock on the New York Stock Exchange, under the symbol “MHED.”

Risk factors

You should carefully read and consider the information set forth under the heading “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our common stock.

Directed share program

At our request, the underwriters have reserved for sale at the initial public offering price up to percent of the common stock offered by this prospectus for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. See “Underwriting (Conflicts of Interest).”

Conflicts of interest

Apollo Global Securities, LLC, an underwriter of this offering, is an affiliate of Apollo, our controlling stockholder. Since Apollo beneficially owns more than 10% of our outstanding common stock, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of the Financial Industry Regulatory Authority (“FINRA”). Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121 of the Conduct Rules of FINRA (“Rule 5121”), pursuant to which the appointment of a “qualified independent underwriter” is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest and meet the requirements of paragraph (f)(12)(E) of Rule 5121. Apollo Global Securities, LLC will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. See “Underwriting (Conflicts of Interest).”

The information above excludes shares of common stock reserved for issuance under our management equity plan, adopted by the Board on May 15, 2013, and our new 2016 Omnibus Incentive Plan (“Omnibus Incentive Plan”) that we intend to adopt prior to the completion of this offering. As of , 2015, there were a total of shares of common stock underlying outstanding stock options issued under our management equity plan with a weighted average exercise price of $ . See “Compensation Discussion and Analysis—Compensation Programs.”

SUMMARY HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA

The following table presents the summary historical combined consolidated financial and operating results of the Company.

The combined consolidated statement of operations for the years ended December 31, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and the consolidated balance sheet data as of December 31, 2015 and 2014 have been derived from the audited combined consolidated financial statements of the Company (Successor) included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2013 has been derived from the audited consolidated financial statements of the Company (Successor), which are not included elsewhere in this prospectus.

The summary combined consolidated financial and operating results presented below should be read in conjunction with our audited combined consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical combined financial information may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented, including changes that occurred in our operations and capitalization as a result of the Founding Acquisition.


	Successor									Predecessor
	Year Ended December 31,						March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
(Dollars in thousands, except per share data)	2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
Statement of Operations
Revenue	$	1,834,581		$	1,855,779		$	1,589,574		$	229,441
Cost of sales		485,015			533,913			777,384			64,006

Gross Profit		1,349,566			1,321,866			812,190			165,435

Operating expenses:
Operating and administration expenses		1,131,123			1,194,656			841,652			208,816
Depreciation		30,086			22,086			23,538			5,817
Amortization of intangibles		94,156			104,157			69,181			6,326
Impairment charge		—			23,800			—			—
Transaction costs		—			3,932			56,820			—

Total operating expenses		1,255,365			1,348,631			991,191			220,959

Operating (loss) income		94,201			(26,765	)		(179,001	)		(55,524	)
Interest expense (income), net		192,643			181,890			137,283			488
Other (income) expense		(4,779	)		(8,420	)		—			—

(Loss) income from operations before taxes on income		(93,663	)		(200,235	)		(316,284	)		(56,012	)
Income tax (benefit) provision		5,861			112,571			(130,158	)		(20,410	)

Net (loss) income from continuing operations		(99,524	)		(312,806	)		(186,126	)		(35,602	)
Net (loss) income from discontinued operations, net of taxes		(75,675	)		(18,157	)		18,617			4,058

Net (loss) income		(175,199	)		(330,963	)		(167,509	)		(31,544	)

Less: Net (income) loss attributable to non-controlling interests		—			299			(2,251	)		631

Net (loss) income attributable to McGraw-Hill Education, Inc.	$	(175,199	)	$	(330,664	)	$	(169,760	)	$	(30,913	)

Net earnings (loss) per share from continuing operations—basic and diluted	$	(9.46	)	$	(30.09	)	$	(18.74	)	$	(3.50	)
Weighted average shares outstanding—basic and diluted		10,517			10,387			10,051			10,000


Other Financial Data:
Adjusted Revenue(1)	$	2,055,475		$	2,034,838		$	1,758,299		$	212,137
Adjusted EBITDA(1)		486,396			472,366			498,126			(62,970	)
Free Cash Flow From Operations(1)		430,612			508,733			637,895			(16,632	)
Capital expenditures		41,181			40,500			7,379			2,461
Total net debt(2)		1,638,581			1,682,180			1,308,740			—
Working capital(3)		171,713			200,298			363,651			232,956

Statement of Cash Flow Data:
Cash flows provided by (used in):
Operating activities	$	309,694		$	353,669		$	560,797		$	(15,741	)
Investing activities		(151,763	)		(176,464	)		(2,345,978	)		(61,879	)
Financing activities		(14,122	)		(191,281	)		2,192,054			6,109


	Successor
(Dollars in thousands)	As of December 31,
	2015			2014			2013
Balance Sheet data:
Cash and cash equivalents	$	553,194		$	413,963		$	430,691
Total assets		2,743,069			2,747,296			3,031,719
Total debt(2)		2,191,775			2,096,143			1,739,431
Stockholders’ equity (deficit)		(664,408	)		(377,609	)		409,597

(1)	Adjusted Revenue, a measure used by management to assess operating performance, is defined as the total amount of revenue that would have been recognized in a period if all revenue were recognized immediately at the time of sale.

Adjusted Revenue is calculated as follows:


	Successor						Predecessor
	Year Ended December 31,				March 23, 2013 to December 31, 2013		January 1, 2013 to March 22, 2013
(Dollars in thousands)	2015		2014		March 23, 2013 to December 31, 2013		January 1, 2013 to March 22, 2013
Revenue	$	1,834,581	$	1,855,779	$	1,589,574	$	229,441
Change in deferred revenue(a)		220,894		179,059		168,725		(17,304	)

Adjusted Revenue	$	2,055,475	$	2,034,838	$	1,758,299	$	212,137

(a)

We receive cash up-front for most product sales but recognize revenue (primarily related to digital sales) over time recording a liability for deferred revenue at the time of sale. This adjustment represents the net effect of converting deferred revenues (inclusive of deferred royalties) to a cash basis assuming the collection of all receivable balances.

Adjusted EBITDA is defined as EBITDA adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under our debt agreements.

Free Cash Flow From Operations is defined as Adjusted EBITDA as further adjusted to reflect changes in working capital from operations and capital expenditures.

Adjusted Revenue, Free Cash Flow From Operations and each of the above described EBITDA-based measures is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue or income from continuing operations as a measure of operating performance or to cash flows from operations as a measure of liquidity. Additionally, each such EBITDA-based measure is not intended to be a measure of free cash flows available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, income tax payments and debt service requirements. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under U.S. GAAP. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use identical calculations, these EBITDA-based measures may not be comparable to other similarly titled measures of other companies. See “Use of Non-GAAP Financial Information.”

Management believes that Adjusted Revenue is helpful in highlighting the sales performance from period to period because it reflects sales as they are made.

Management believes EBITDA is helpful in highlighting trends because EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. In addition, EBITDA provides more comparability between the historical operating results and operating results that reflect purchase accounting and the new capital structure.

Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.

For additional information related to these measures, please see “Non-GAAP Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures—Adjusted Revenue and Adjusted EBITDA.”

Management believes that Free Cash Flow From Operations is useful in highlighting the cash available for use that is generated by our operations.

EBITDA, Adjusted EBITDA and Free Cash Flow From Operations are calculated as follows:


	Successor									Predecessor
	Year Ended December 31,						March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
(Dollars in thousands)	2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
Net (loss) income from continuing operations	$	(99,524	)	$	(312,806	)	$	(186,126	)	$	(35,602	)
Interest expense (income), net		192,643			181,890			137,283			488
Income tax (benefit) provision		5,861			112,571			(130,158	)		(20,410	)
Depreciation, amortization and pre-publication amortization		212,851			205,831			163,883			25,434

EBITDA		311,831			187,486			(15,118	)		(30,090	)

Change in deferred revenue(a)		220,894			179,059			168,725			(17,304	)
Restructuring and cost savings implementation fees(b)		23,886			39,888			33,984			4,116
Sponsor fees(c)		3,500			3,500			875			—
Impairment charge(d)		—			23,800			—			—
Purchase accounting(e)		—			41,585			312,615			—
Transaction costs(f)		—			3,932			56,820			—
Acquisition costs(g)		—			4,376			4,796			—
Physical separation costs(h)		—			46,716			8,100			—
Other(i)		25,102			29,109			23,944			5,627
Pre-publication investment cash costs(j)		(98,817	)		(87,085	)		(96,615	)		(25,319	)

Adjusted EBITDA	$	486,396		$	472,366		$	498,126		$	(62,970	)

Change in working capital from operations(k)		(14,603	)		76,867			147,148			48,799
Capital expenditures		(41,181	)		(40,500	)		(7,379	)		(2,461	)

Free Cash Flow From Operations	$	430,612		$	508,733		$	637,895		$	(16,632	)

(a)

(b)

Represents severance and other expenses associated with headcount reductions and other cost savings initiated as part of our formal restructuring initiatives to create a flatter and more agile organization.

(c)

Beginning in 2014, $3.5 million of annual management fees was recorded and payable to Apollo. The amount recorded in the Successor period from March 23, 2013 to December 31, 2013 was $0.9 million.

(d)

An impairment charge was recorded in 2014 to reduce the recorded value of an owned office building to its estimated fair value based upon an independent appraisal.

(e)

Represents the effects of the application of purchase accounting associated with the Founding Acquisition, driven by the step-up of acquired inventory. The deferred revenue adjustment recorded as a result of purchase accounting has been considered in the deferred revenue adjustment.

(f)

The amount represents the transaction costs associated with the Founding Acquisition.

(g)

The amount represents costs incurred for acquisitions subsequent to the Founding Acquisition including ALEKS, LearnSmart and Engrade.

(h)

The amount represents costs incurred to physically separate our operations from MHC. These physical separation costs were incurred subsequent to the Founding Acquisition and concluded in 2014.

(i)

For the year ended December 31, 2015 (Successor), the amount represents (i) non-cash incentive compensation expense; (ii) elimination of the gain of $4.8 million on the sale of an investment in an equity security and (iii) other adjustments required or permitted in calculating covenant compliance under our debt agreements.

For the year ended December 31, 2014 (Successor), the amount represents (i) cash distributions to noncontrolling interest holders of $0.2 million; (ii) non-cash incentive compensation expense; (iii) elimination of non-cash gain of $7.3 million in LearnSmart; and (iv) other adjustments required or permitted in calculating covenant compliance under our debt agreements.

For the periods from March 23, 2013 to December 31, 2013 (Successor) and from January 1, 2013 to March 22, 2013 (Predecessor) the amount represents (i) cash distributions to noncontrolling interest holders (excluding special dividends) of $0.5 million and $1.8 million, respectively; (ii) non-cash incentive compensation expense recorded directly beginning in the first quarter of 2013; and (iii) other adjustments required or permitted in calculating covenant compliance under our debt agreements.

(j)

Represents the cash cost for pre-publication investment during the period excluding discontinued operations.

(k)

Working capital from operations is defined as accounts receivable, net, inventories, net and prepaid and other current assets less accounts payable, accrued royalties, accrued compensation and other current liabilities.

(2)	Total debt is presented as long-term debt plus current portion of long-term debt. Total net debt is total debt less cash and cash equivalents.

(3)	Working capital is calculated as current assets less current liabilities.

RISK FACTORS

You should carefully consider the risk factors set forth below, as well as the other information contained in this prospectus, before participating in our initial public offering. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In addition, the risks described below are not the only risks that we face. Additional risks and uncertainties not currently known to us or those that we currently view to be immaterial could also materially and adversely affect our business, financial condition or results of operations. In any such case, you may lose all or a part of your investment in our common stock.

Risks Related to Our Business

We face competition from both large, established industry participants and new market entrants, the risks of which are enhanced due to rapid changes in our industry and market.

Our competitors in the market for education products include a few large, established industry participants. Some established competitors have greater resources and less debt than us and, therefore, may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. In addition, the market shift toward digital education solutions has induced both established technology companies and new start-up companies to enter certain segments of our market. These new competitors have the possible advantage of not needing to transition from a print business to a digital business. The risks of competition are intensified due to the rapid changes in the products our competitors are offering, the products our customers are seeking and our sales and distribution channels, which create increased opportunities for significant shifts in market share. Competition may require us to reduce the price of our products or make additional capital investments or result in reductions in our market share and sales.

Our investments in new products and distribution channels may not be profitable.

In order to maintain a competitive position, we must continue to invest in new products and new ways to deliver them. This is particularly true in the current environment where investment in new technology is ongoing and there are rapid changes in the products our competitors are offering, the products our customers are seeking and our sales and distribution channels. In some cases, our investments will take the form of internal development; in others, they may take the form of an acquisition. Our investments in new products or distribution channels, whether by internal development or acquisition, may be less profitable than what we have experienced historically, may consume substantial financial resources and/or may divert management’s attention from existing operations, all of which could materially and adversely affect our business, results of operations and financial condition.

Our failure to win new state adoptions could adversely affect our revenue.

A significant portion of our revenue is derived from sales of K-12 instructional materials pursuant to pre-determined adoption schedules. Due to the revolving and staggered nature of state adoption schedules, sales of K-12 instructional materials have traditionally been cyclical, with some years offering more sales opportunities than others. For example, over the next few years, new adoptions are scheduled in one or more of the primary subjects of reading, language arts and literature, social studies and mathematics in, among others, the states of California, Texas and Florida, which are the three largest adoption states. In each adoption decision for each state, we face significant competition. Our failure to do well in new state adoptions could materially and adversely affect our revenue for the year of adoption and subsequent years.

Reductions in anticipated levels of federal, state and local education funding available for the purchase of instructional materials could adversely affect demand for our K-12 products.

Most public school districts, which are the primary customers for K-12 products and services, depend largely on state and local funding programs to purchase materials. In addition, many school districts also receive substantial funding through Federal education programs. State, local or federal funding available to school

districts may be reduced as a result of reduced tax revenues, efforts to reduce government spending or increased allocation of tax revenues to other uses. In addition, changes in the laws or regulations that give school districts flexibility in their use of funds previously dedicated exclusively to the purchase of instructional materials may reduce the share of district funds allocated to the purchase of instructional materials. Reductions in the amount of funding provided to school districts or reductions in the portion of those funds allocated to instructional materials could reduce demand for our K-12 products.

Increased difficulty in predicting the timing of customer purchases may adversely affect us.

Traditionally, when the majority of products sold to customers in the higher education market consisted of print textbooks, the timing of purchases was predictable because of the long lead time to order and receive printed books before the start of the semester. As the higher education market has shifted to digital products, there has been a tendency for purchases to occur closer to the beginning of the semester since less lead time is required for the purchase of a digital product. There is no assurance that the trend to more digital purchases will continue, but given the current mix of digital versus print purchasing it has become more difficult to predict when the majority of customer purchases will occur. Similar timing uncertainty exists in the K-12 business as it transitions to digital. In addition, in the K-12 market there has been increased uncertainty regarding the timing of state adoption decisions, with last minute delays or cancellations attributable to school funding considerations occurring with increased frequency. In addition, whereas in the past most school districts purchased educational materials in state adoptions up-front, many are now choosing to spend on educational materials over a multi-year period, and in some cases school districts are choosing to use available funds to purchase hardware, software and other instructional aids that are not produced by us. Taken together, it has become increasingly difficult for us to forecast the timing of customer purchases, causing us to have to wait until later in the buying season in order to assess our financial performance. The change in ordering patterns may impact the comparison of results between a quarter and the same quarter of the previous year, between a quarter and the consecutive quarter or between a fiscal year and the prior fiscal year.

State changes to Common Core State Standards or delays in their implementation may adversely affect our K-12 business.

There is considerable political controversy in many states surrounding the adoption and implementation of Common Core State Standards. Legislation has been introduced in a number of states to drop Common Core State Standards, and some states are considering revisions to and/or rebranding of the standards. These developments could disrupt local adoptions of instructional materials and require modifications to our programs offered for sale in those states that adopt such changes, which may delay or impair sales of our products or cause us to incur additional product development costs.

A change from up-front payment by school districts for multi-year licenses could adversely affect our cash flow and results of operation.

In keeping with the past practice of payment for printed materials, school districts typically pay up-front when buying multi-year licenses for digital products. If school districts changed to spreading their payments to us over the term of the licenses, our cash flow and results of operation could be adversely affected.

Increased availability of free or relatively inexpensive products may reduce demand for or negatively impact the pricing of our products.

Free or relatively inexpensive educational products are becoming increasingly available, particularly in digital formats and through the internet. For example, some governmental and regulatory agencies have increased the amount of information they make publicly available for free. In addition, in recent years there have been initiatives by not-for-profit organizations such as the Gates Foundation and the Hewlett Foundation to develop educational content that can be “open sourced” and made available to educational institutions for free or nominal cost. There is also a possibility that federal or state governments will enact legislation or regulations that mandate

or favor the use by educational institutions of open sourced content. The increased availability of free or relatively inexpensive educational products may reduce demand for our products or require us to reduce pricing, thereby impacting our sales revenue.

Increased customer expectations for lower prices or free bundled products could reduce sales revenues.

As the market has shifted to digital products, customer expectations for lower priced products has increased due to customer awareness of reductions in marginal production costs and the availability of free or low-cost digital content and products. As a result, there has been pressure to sell digital versions of products at prices below their print versions and an increase in the amount of products and materials given away as part of bundled packs. Increased customer demand for lower prices or free bundled products could reduce our sales revenue.

Operational disruptions, including failure of our hosting facilities and electronic delivery systems, could adversely affect our ability to serve our customers and cause financial loss and reputational damage.

We depend on complex operational and logistical arrangements across our business to provide our products to our customers. In particular, the provision of our online products depends on the capacity, reliability and security of our hosting and electronic delivery systems. We maintain a backup facility for some, but not all, of our online products, and failures of our hosting and delivery systems (whether as a result of operational failures, tampering or hacking, human error, natural disasters, computer viruses or other factors) could cause our online products to operate slowly, interrupt their availability or result in loss of data. The occurrence of such problems or other operational disruptions could result in liability, loss of revenue or harm to our reputation.

Failure to comply with privacy laws and/or a data security breach may cause financial loss and reputational damage.

Across our businesses we hold large volumes of personal data, including that of employees, customers and students. We have policies, processes, internal controls and cybersecurity mechanisms in place intended to ensure the stability of our information technology, provide security from unauthorized access to our systems and maintain business continuity; however, no mechanisms are entirely free from the risk of failure, and we have no guarantee that our security mechanisms will be adequate to prevent all possible security threats. Failure to adequately protect such personal data could lead to penalties, significant remediation costs, reputational damage, potential cancellation of existing contracts and an impaired ability to compete for future business.

We are subject to a wide array of different privacy laws, regulations and standards in the United States and in foreign jurisdictions where we conduct business, including but not limited to (i) the Children’s Online Privacy Protection Act and state student data privacy laws in connection with access to, collection of, and use of personally identifiable information of students, (ii) the Health Insurance Portability and Accountability Act in connection with our self-insured health plan, (iii) the Payment Card Industry Data Security Standards in connection with collection of credit card information from customers, and (iv) various EU data protection laws resulting from the EU Privacy Directive. Our failure to comply with applicable privacy laws, regulations and standards could lead to significant reputational damage and other penalties and costs, including loss of revenue.

Our brand and customer trust are critical assets for our Company. In the event of negative publicity regarding the Company’s adherence to applicable privacy laws, regulations, and standards—whether valid or not valid—the resulting reputational damage could reduce demand for our products and adversely affect our relationship with teachers, educators and institutions. This reaction may have an immediate and/or long term impact on both new and renewed sales, and may lead to short and/or long term revenue loss.

Defects in our digital products could cause financial loss and reputational damage.

In the fast-changing digital marketplace, demand for innovative technology has generally resulted in short lead times for producing products that meet customer specifications. Growing demand for innovation and

additional functionality in digital products increases the risk that our products may contain flaws or corrupted data, and these defects may only become apparent after product launch, particularly for new products and new features to existing products that are developed and brought to market under tight time constraints. Problems with the performance of our digital products could result in liability, loss of revenue or harm to our reputation.

An increase in unauthorized copying and distribution of our products could adversely affect our sales and competitive position.

Our products contain intellectual property delivered through a variety of media, including digital and print. We rely on a combination of copyrights, trademarks, patents, trade secrets and nondisclosure agreements to protect our intellectual property and proprietary rights. As we and our industry transition from providing print content to providing digital content and as the copying and distribution of content over the internet proliferates, the risk of piracy, illegal downloading, file-sharing or other infringements of our intellectual property is likely to increase. Although the copying and redistribution of our products are restricted by copyright and other intellectual property laws, license agreements with customers, and other means, unauthorized copying and redistribution of our products does occur and reduces our product sales. In addition, while we use digital rights management features to protect our digital solutions, no digital rights management system is foolproof, and all such systems are subject to unauthorized tampering or modification. Our efforts to protect our intellectual property and proprietary rights may not be sufficient and we cannot make assurances that our proprietary rights will not be challenged, invalidated or circumvented. If there is an increase in the scale of unauthorized copying and redistribution of our products, or if we are unable to adequately protect and enforce our intellectual property and proprietary rights, it would adversely impact our product sales and reduce our revenue, thereby adversely affecting our results of operations and financial condition, as well as our competitive position.

Factors that reduce enrollment at colleges and universities could adversely affect demand for our higher education products.

Enrollment in U.S. colleges and universities can be adversely affected by many factors, including changes in government and private student loan and grant programs, uncertainty about current and future economic conditions, general decreases in family income and net worth and a perception of uncertain job prospects for recent graduates. In addition, enrollment levels at colleges and universities outside the United States are influenced by the global and local economic climate, local political conditions and other factors that make predicting foreign enrollment levels difficult. While enrollment at degree granting institutions in the United States has overall been steadily growing over the last several decades, enrollment declined between 2012 and 2014. Further reductions in expected levels of enrollment at colleges and universities both within and outside the United States could adversely affect demand for our higher education products.

Growth of the used and rental book markets could adversely affect our sales of printed higher education and professional books.

Active markets exist for the sale by third parties of used copies of our printed higher education and professional books and the rental by third parties of copies of those books. The internet has made the used and rental book markets more efficient and has significantly increased customer access to used and rental books. Further expansion of the used and rental book markets could further adversely affect our sales of new printed higher education and professional books and reduce our revenue, adversely affecting our results of operations and financial condition.

We are dependent on third-party distributors, representatives and retailers for a substantial portion of our sales.

In addition to our own sales force, we offer our products through a variety of third-party distributors, representatives and retailers. We do not ultimately control the performance of our third-party distributors, representatives and retailers to perform as required or to our expectations. Also, certain of our distributors, representatives or retailers may market other products that compete with our products. The loss of one or more of

our distributors, representatives or retailers or their failure to effectively promote our products or otherwise perform in their functions in the expected manner could adversely affect our ability to bring our products to market and impact our revenues.

A significant portion of our sales is concentrated on a small number of customers. Our profitability and financial results may be impaired if our customers’ demand for our products is reduced or if their financial condition were to deteriorate.

Some of our distribution and retail channels have recently experienced significant consolidation and concentration. This concentration could potentially place us at a disadvantage with respect to negotiations regarding pricing and other terms. In addition, this concentration increases the risk that the loss of, or problems with, a single distribution or retail partner could have significant effect on our sales or profitability. As of December 31, 2015 and 2014, two customers comprised approximately 29% and 25% of the gross accounts receivable balance, respectively. For the year ended December 31, 2015, the Company had one customer, Follett Corporation, that accounted for 10% of our gross revenues. The Company has no single customer that accounted for 10% or more of our gross revenue for the year ended December 31, 2014 (Successor), the periods March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor). The loss of or any reduction in sales or collections from a significant customer could harm our business and financial results.

We may not be able to retain or attract the key authors and talented personnel that we need to remain competitive and grow.

Our success depends, in part, on our ability to continue to attract and retain key authors and talented management, creative, editorial, technology, sales and other personnel. We operate in a number of highly visible industry segments where there is intense competition for successful authors and other experienced, highly effective individuals. Our successful operations in these segments may increase the market visibility of our authors and personnel and result in their recruitment by other businesses. There can be no assurance that we can continue to attract and retain key authors and talented personnel and, if we fail to do so, it could adversely affect our business.

We may not be able to reduce our costs related to print-related products as fast as revenues from those products decline.

As the portion of our business that consists of print-related products declines, our need for certain facilities and arrangements, such as printing and warehousing, also declines. Some of the costs related to these facilities and arrangements are relatively fixed over the short term and, as a result, may not decline as quickly as the related revenues. If our print-related costs do not decline proportionately with our print-related revenues, our results of operations and financial condition would be adversely affected.

The shift to sales of multi-year licenses may affect the comparability of our GAAP revenue to prior periods and cause increases or decreases in our sales to be reflected in our results of operation on a delayed basis.

As our business transitions from printed products to digital products, an increasing percentage of our revenues are derived from the sale of multi-year licenses. Our customers typically pay for both printed products and multi-year licenses up-front; however, we recognize revenue from multi-year licenses over their respective terms, as required by GAAP, even if we are paid in full at the beginning of the license. As a result, an increase in the portion of our sales coming from multi-year licenses may cause our GAAP revenue, when compared to prior periods, to not provide a truly comparable perspective of our performance. Another effect of recognizing revenue from multi-year licenses over their respective terms is that any increases or decreases in sales during a particular period do not translate into proportional increases or decreases in revenue during that period. Consequently, deteriorating sales activity may be less immediately observable in our results of operations.

Unexpectedly large returns could adversely affect our financial results.

We generally permit our distributors to return products they purchase from us. When we record revenue, we record an allowance for sales returns, which is based on the historical rate of return and current market conditions. Should the estimate of the allowance for sales returns vary by one percentage point from the estimate we use in recording our allowance, the impact on operating income would be approximately $1.5 million.

The high degree of seasonality of our business can create cash flow difficulties.

Our business is seasonal. Purchases of Higher Education products have traditionally been made in the third and fourth quarters for the semesters starting classes in September and January. Purchases of K-12 products are typically made in the second and third quarters of the calendar year for the beginning of the school year. In 2015, we realized approximately 23%, 40% and 23% of net sales during the second, third and fourth quarters, respectively, making third-quarter results particularly material to our full-year performance. This sales seasonality affects operating cash flow from quarter to quarter. There are months when we operate at a net cash deficit from our activities. We cannot make assurances that our third quarter net sales will continue to be sufficient to meet our obligations or that they will be higher than net sales for our other quarters. In the event that we do not derive sufficient net sales in the third quarter, we may not be able to meet our debt service requirements and other obligations.

Our substantial indebtedness restricts our ability to react to changes in the economy or our industry and exposes us to interest rate risk and risk of default.

We are a leveraged company that has substantial indebtedness. As of December 31, 2015, we had $2,218.9 million face value of outstanding indebtedness (in addition to $240.0 million of commitments under the MHGE Revolving Facility and $150.0 million of commitments under the MHSE Revolving Facility, none of which was drawn), and for the year ended December 31, 2015, we had total debt service of $179.9 million (including approximately $78.0 million of debt service relating to fixed rate obligations). Our substantial indebtedness could have important consequences. For example, it could:

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limit our ability to borrow money for our working capital, capital expenditures, debt service requirements, strategic initiatives or other purposes;

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make it more difficult for us to satisfy our obligations with respect to our indebtedness;

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require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, thereby reducing funds available to us for other purposes;

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require us to repatriate funds to the United States at substantial cost;

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limit our flexibility in planning for, or reacting to, changes in our operations or business;

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make us more vulnerable to downturns in our business or the economy;

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restrict us from making strategic acquisitions, engaging in development activities, introducing new technologies or exploiting business opportunities;

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cause us to make non-strategic divestitures; or

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expose us to the risk of increased interest rates, as certain of our borrowings, including borrowings under the MHGE Facilities, MHSE Revolving Facility and MHSE Term Loan, are at variable rates of interest.

In addition, the agreements governing our indebtedness contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness.

Despite our substantial indebtedness, we may still be able to incur significantly more debt, which could intensify the risks described above.

We and our subsidiaries may be able to incur additional indebtedness in the future. For example, as of December 31, 2015, we had approximately $240.0 million available for additional borrowing under the MHGE Revolving Facility portion of the MHGE Facilities, all of which would be secured, and approximately $150.0 million available for additional borrowing under the MHSE Revolving Facility (without giving effect to letters of credit or limitations to availability as a result of the MHSE Revolving Facility borrowing base calculation). In addition, although the terms of the agreements governing our indebtedness contain restrictions on our and our subsidiaries’ ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Further, these restrictions will not prevent us from incurring obligations that do not constitute indebtedness. The more leveraged we become, the more we, and in turn our security holders, will be exposed to certain risks described above under “Our substantial indebtedness restricts our ability to react to changes in the economy or our industry and exposes us to interest rate risk and risk of default.”

We may record future goodwill or indefinite-lived intangibles impairment charges related to our reporting units, which could materially adversely impact our results of operations.

We test our goodwill and indefinite-lived intangibles asset balances for impairment during the fourth quarter of each year or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level and, in evaluating the potential for impairment of goodwill, we make assumptions regarding estimated net sales projections, growth rates, cash flows and discount rates. Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates are uncertain by nature and can vary from actual results. Declines in the future performance and cash flows of the reporting unit or small changes in other key assumptions may result future goodwill impairment charges, which could materially adversely impact our results of operations.

Failure to develop or maintain an effective system of internal controls could lead to sanctions, reduce investor confidence in our financial reporting and lower the price of our common stock.

As a public company, we will be required to meet these standards in the course of preparing our consolidated financial statements. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could make it impossible for us to issue reliable financial reports, prevent fraud or operate successfully as a public company. Failure to comply with Section 404 of the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC, the Financial Industry Regulatory Authority or other regulatory authorities. Sanctions by regulatory authorities or disclosure of inadequacies in our internal controls could cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common stock.

Our management determined that there was a material weakness in our historical revenue recognition policies and practices in our K-12 business.

During 2014 we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. This material weakness related to our historical revenue recognition accounting in our K-12 business for multi-element revenue agreements and associated recognition of costs during the following subsidiary financial reporting periods: (i) year ended December 31, 2012 (Predecessor), (ii) from January 1, 2013 to March 22, 2013 (Predecessor), and (iii) from March 23, 2013 to December 31, 2013 (Successor). As a result of this material weakness, we restated our previously issued subsidiary balance sheet as of December 31, 2013 and our subsidiary statement of operations and comprehensive

income (loss), cash flows and statement of shareholders’ equity for each of the above periods. We appropriately accounted for multi-element revenue agreements and associated recognition of costs during 2014 and in the financial statements included in this prospectus.

Our management has begun the process of remediating this material weakness. If we are unsuccessful in remediating this weakness or suffer additional deficiencies or material weaknesses in our internal controls in the future, we may be unable to report financial information in a timely and accurate manner and it could result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis, which could cause investors to lose confidence in our financial reporting, cause a default under the agreements governing our indebtedness and/or have a negative effect on the trading price of our common stock.

Our ability to protect our intellectual property rights could impact our competitive position.

Our products contain intellectual property delivered through a variety of media, including digital and print. We rely on a combination of copyrights, trademarks, patents, trade secrets and nondisclosure agreements to protect our intellectual property and proprietary rights. However, our efforts to protect our intellectual property and proprietary rights may not be sufficient and we cannot make assurances that our proprietary rights will not be challenged, invalidated or circumvented. We may also be required to initiate expensive and time-consuming litigation to maintain, defend or enforce our intellectual property. Moreover, despite the existence of copyright and trademark protection under applicable laws, third parties may nonetheless violate our intellectual property rights, and our ability to remedy such violations, particularly in foreign countries, may be limited. In addition, the copying and distribution of content over the internet creates additional challenges for us in protecting our proprietary rights. If we are unable to adequately protect and enforce our intellectual property and proprietary rights, our competitive position may be harmed and our business and financial results could be materially and adversely affected.

Legal actions against us, including intellectual property infringement claims, could be costly to defend and could result in significant damages.

In the ordinary course of business, we are occasionally involved in legal actions and claims against us arising from our business operations and therefore expect that we will likely be subject to additional actions and claims against us in the future. Litigation alleging infringement of copyrights and other intellectual property rights, particularly in relation to proprietary photographs and images, has become extensive in the educational publishing industry. At present, there are various suits pending or threatened which claim that we exceeded the print run limitation or other restrictions in licenses granted to us to reproduce photographs in our instructional materials. A number of similar claims against us have already been settled. A number of our competitors are defendants in similar lawsuits. We have liability insurance in such amounts and with such coverage and deductibles as management believes is reasonable. However, there can be no assurance that our liability insurance will cover our damages and, if our liability insurance does cover our damages, that the limits of coverage will be sufficient to fully cover all potential liabilities and costs of litigation. While management does not expect any of the claims currently pending or threatened against us to have a material adverse effect on our results of operations, financial position or cash flows, due to the inherent uncertainty of the litigation process, the resolution of any particular legal proceeding or change in applicable legal standards could have a meaningful adverse effect on our financial position and results of operations.

We face risks of doing business abroad.

As we continue to invest in and expand our overseas business, we face increased exposure to the risks of doing business abroad, including, but not limited to:

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lack of local knowledge or acceptance of our products and services;

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entrenched competitors;

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the need to adapt our products to meet local requirements;

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longer customer payment cycles in certain countries;

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limitations on the ability to repatriate funds to the United States;

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difficulties in protecting intellectual property, enforcing agreements and collecting receivables under certain foreign legal systems;

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compliance under the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-corruption laws;

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the need to comply with local laws and regulations generally; and

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in some countries, a higher risk of political instability, economic volatility, terrorism, corruption, social and ethnic unrest.

Fluctuations between foreign currencies and the U.S. dollar could adversely affect our financial results.

We derived approximately 17% of our total revenue in the year ended December 31, 2015 from our international sales operations. The financial position and results of operations of our international operations are primarily measured using the foreign currency in the jurisdiction of operation of such business as the functional currency. As a result, we are exposed to currency fluctuations both in receiving cash from our international operations and in translating our financial results into U.S. dollars. For example, foreign exchange rates had an unfavorable impact on our revenue of $27.5 million for the year ended December 31, 2015. We have operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. Our principal currency exposures relate to the Australian Dollar, British Pound, Canadian Dollar, Euro, Mexican Peso and Singapore Dollar. Assets and liabilities of our international operations are translated at the exchange rate in effect at each balance sheet date. Our income statement accounts are translated at the average rate of exchange during the period. A strengthening of the U.S. dollar against the relevant foreign currency reduces the amount of income we recognize from our international operations. In addition, certain of our international operations generate revenues in the applicable local currency or in currencies other than the U.S. dollar, but purchase inventory and incur costs primarily in U.S. dollars. While, from time to time, we may enter into hedging arrangements with respect to foreign currency exposures, variations in exchange rates may adversely impact our results of operations and profitability. The risks we face in foreign currency transactions and translation may continue to increase as we further develop and expand our international operations.

We are dependent on third-parties for the performance of many critical operational functions.

We rely on third-parties for many critical operational functions, including general financial shared services, accounts payable, accounts receivable, royalty processing, printing, warehousing, distribution, technology support, online product hosting and certain customer support functions. Since those functions are provided by third parties, our ability to supervise and support the performance of those functions is limited. The loss of one or more of these third-party partners, a material disruption in their business or their failure to otherwise perform their functions in the expected manner could cause disruptions in our business that would adversely affect our results of operations and financial condition.

A significant increase in operating costs and expenses could have a material adverse effect on our profitability.

Our major operating expenses include employee compensation, paper, technology and third-party provider fees and royalties. Any material increase in these or other operating costs and expenses that we are not able to pass on in the cost of our products and services could adversely affect our results of operations and financial condition.

We may not be able to continue to achieve cost savings in our operations.

We have achieved significant cost savings since we became an independent company in 2013. While we have additional cost saving initiatives planned and underway, it is likely that we will not be able to continue to achieve levels of cost savings that are similar to those we have achieved in the past. In addition, any cost savings that we realize from such efforts may differ materially from our estimates. We cannot assure you that these initiatives will be completed as anticipated or that the benefits we expect will be achieved on a timely basis or if they will be achieved at all. If we are unable to continue to reduce costs as expected, or at all, our competitive position and results of operations could be materially adversely affected.

Risks Related to this Offering and Ownership of Our Common Stock

We are a “controlled company” within the meaning of New York Stock Exchange rules and, as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements.

Following this offering, Apollo will continue to control a majority of the voting power of our outstanding voting stock, and as a result we will be a controlled company within the meaning of the New York Stock Exchange’s corporate governance standards. Under New York Stock Exchange rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:

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a majority of the board of directors consist of independent directors;

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the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

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the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

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there be an annual performance evaluation of the nominating and governance and compensation committees.

These requirements will not apply to us as long as we remain a controlled company. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

We continue to be controlled by Apollo, and Apollo’s interests may conflict with our interests and the interests of other stockholders.

Following this offering, Apollo will own % of our common equity. In addition, representatives of Apollo comprise a majority of our directors. As a result, Apollo can control our ability to enter into significant corporate transactions such as mergers, tender offers and the sale of all or substantially all of our assets. The interests of Apollo and its affiliates could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination which may otherwise be favorable for us. Additionally, Apollo is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete, directly or indirectly with us. Apollo may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Apollo continues to indirectly, own a significant amount of our equity, even if such amount is less than 50%, they will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.

Our second amended and restated certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.

Our second amended and restated certificate of incorporation will provide for the allocation of certain corporate opportunities between us and Apollo. Under these provisions, neither Apollo, its portfolio companies, funds or other affiliates, nor any of their officers, directors, agents, stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities or lines of business in which we operate. For instance, a director of our company who also serves as a director, officer or employee of Apollo or any of its portfolio companies, funds or other affiliates may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by Apollo to itself or its portfolio companies, funds or other affiliates instead of to us. The terms of our second amended and restated certificate of incorporation are more fully described in “Description of Capital Stock.”

Provisions in our organization documents and Delaware law may discourage our acquisition by a third party.

Our second amended and restated certificate of incorporation will authorize our board of directors to issue preferred stock without stockholder approval. If the Board elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our second amended and restated certificate of incorporation and second amended and restated by laws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders.

Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”) may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder.” We will elect in our second amended and restated certificate of incorporation not to be subject to Section 203 of the DGCL. Nevertheless, our second amended and restated certificate of incorporation will contain provisions that have the same effect as Section 203 of the DGCL, except that it will provide that affiliates of Apollo and their transferees will not be deemed to be “interested stockholders,” regardless of the percentage of our voting stock owned by them, and will therefore not be subject to such restrictions. These charter provisions may limit the ability of third parties to acquire control of our company. See “Description of Capital Stock—Certain Anti-Takeover, Limited Liability and Indemnification Provisions.”

Investors in this offering will experience immediate and substantial dilution of $ per share.

Based on an assumed initial public offering price of $ per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $ per share in the as adjusted net tangible book value per share of common stock from the initial public offering price, and our as adjusted net tangible book value as of December 31, 2015 after giving effect to this offering would be $ per share. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. Please see “Dilution.”

The sale of restricted shares of our common stock in the public market could reduce our stock price.

After the completion of this offering, we will have outstanding shares of common stock. This number includes shares that we are selling in this offering, which may be resold immediately in the public market. The number of outstanding shares of common stock also includes shares, including shares controlled by Apollo, that are “restricted securities,” as defined under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), and eligible for sale in the public market subject to the requirements of Rule 144, all of which subject to the lock-up agreements with the underwriters described in “Underwriting (Conflicts

of Interest),” but may be sold into the market following the expiration of such lock-up agreements beginning days after the date of this prospectus or if the underwriters waive those agreements. Sales of significant amounts of restricted stock in the public market could adversely affect prevailing market prices of our common stock.

We may not pay dividends on our common stock.

As a holding company, our ability to pay dividends in the future depends on our subsidiaries’ making upstream distributions to us. There is no assurance that our subsidiaries will generate sufficient net income and cash flows to allow them to do so. Our subsidiaries’ ability to make distributions to us is also restricted by covenants in their debt instruments. As of December 31, 2015, the maximum amount MHGE would be permitted to distribute to us in compliance with its indebtedness was approximately $ million, and the maximum amount MHSE would be permitted to distribute to us in compliance with its indebtedness was approximately $ million, for an aggregate of $ million, distributable to us by MHGE and MHSE. Moreover, our subsidiaries are separate legal entities, and although they may be wholly owned or controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends or otherwise. Even if our subsidiaries are able and willing to distribute funds to us, we have no obligation to have them to do so and we have no obligation to declare a dividend if we have received funds that enable us to do so. The fact that we have paid dividends in the past is no assurance we will pay the same level of dividends, or any dividends at all, in the future.

The requirements of being a public company may increase our costs, divert management’s attention, and affect our ability to attract and retain qualified board members.

We will incur significant additional expenses as a result of having publicly traded common stock, including, but not limited to, increased costs related to auditor fees, legal fees, directors’ fees, directors and officers insurance, investor relations and various other costs. Moreover, the additional demands associated with being a public company may disrupt regular operations of our business by diverting the attention of some of our senior management team away from revenue producing activities. Being a public company could make it more difficult for us to attract and retain qualified persons to serve on the Board or as executive officers.

There can be no assurance that a viable public market for our common stock will develop.

Prior to this offering, our common stock was not traded on any market. An active, liquid and orderly trading market for our common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. We cannot predict the extent to which investor interest in our common stock will lead to the development of an active trading market on the New York Stock Exchange or otherwise or how liquid that market might become. If an active public market for our common stock does not develop, or is not sustained, it may be difficult for you to sell your shares at a price that is attractive to you or at all.

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering.

The initial public offering price was determined by negotiations between us and representatives of the underwriters, based on numerous factors which we discuss in “Underwriting (Conflicts of Interest),” and may not be indicative of the market price of our common stock after this offering. If you purchase our common stock, you may not be able to resell those shares at or above the initial public offering price.

Our stock price may be volatile.

The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The following factors could affect our stock price:

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our operating and financial performance,

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quarterly variations in the rate of growth (if any) of our financial indicators, such as net income per share, net income and revenues,

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the public reaction to our press releases, our other public announcements and our filings with the SEC,

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strategic actions by our competitors,

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changes in operating performance and the stock market valuations of other companies,

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announcements related to litigation,

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our failure to meet revenue or earnings estimates made by research analysts or other investors,

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changes in the credit ratings of our debt,

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changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts,

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speculation in the press or investment community,

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sales of our common stock by us or our stockholders, or the perception that such sales may occur,

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changes in accounting principles, policies, guidance, interpretations or standards,

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additions or departures of key management personnel,

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actions by our stockholders,

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general market conditions,

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domestic and international economic, legal and regulatory factors unrelated to our performance, and

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the realization of any risks described under this “Risk Factors” section, or other risks that may materialize in the future.

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.

If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our common stock or if our operating results do not meet their expectations, our stock price could decline.

The issuance by us of additional shares of common stock or convertible securities may dilute your ownership of us and could adversely affect our stock price.

In connection with this offering, we intend to file a registration statement with the SEC on Form S-8 providing for the registration of shares of our common stock issued or reserved for issuance under our long-term incentive plan. Subject to the satisfaction of vesting conditions and the expiration of lock-up agreements, shares registered under the registration statement on Form S-8 will be available for resale immediately in the public market without restriction. From time to time in the future, we may also issue additional shares of our common stock or securities convertible into common stock pursuant to a variety of transactions, including acquisitions. The issuance by us of additional shares of our common stock or securities convertible into our common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our common stock.

We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.

Our second amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as the Board may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.

Our designation of the Delaware Court of Chancery as the exclusive forum for certain types of stockholder legal proceedings could limit our stockholders’ ability to obtain a more favorable forum.

Our second amended and restated certificate of incorporation will provide that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our second amended and restated certificate of incorporation or our second amended and restated by laws or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our second amended and restated certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. See “Description of Capital Stock—Forum Selection.”

Alternatively, if our exclusive forum provision is not enforceable, we may be subject to additional costs that we do not currently anticipate.

Alternatively, if a court were to find these provisions of our second amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs that we do not currently anticipate associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, including without limitation statements relating to our businesses and our prospects, new products, sales, expenses, tax rates, cash flows, plate investment and operating and capital requirements. These forward-looking statements are intended to provide management’s current expectations or plans for our future operating and financial performance and are based on assumptions management believes are reasonable at the time they are made.

Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “plan,” “estimate,” “project,” “target,” “anticipate,” “intend,” “may,” “will,” “continue,” “should” and other words of similar meaning in connection with a discussion of future operating or financial performance. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual outcomes and results could differ materially from what is expected or forecasted. These risks and uncertainties include, among others:

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competition in our existing and future lines of business and the financial resources of competitors;

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the rapidly changing nature of and technological advancements in the education market;

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the level of success of new product development, global expansion, and strength of domestic and international markets;

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changes in government programs, laws or payment systems;

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the availability of free or relatively inexpensive educational information and materials;

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operational disruptions and failures in our information technology or electronic delivery systems;

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failure to comply with privacy laws and defects in, or security breaches relating to, our data security system or digital products;

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piracy, unauthorized copying, file-sharing, or other infringements on or claims against our intellectual property, including our digital content;

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enrollment and demographic trends;

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competition from used and rental markets for books and educational materials;

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the ability of our suppliers, distributors or service providers to meet their commitments to us, or the timing of purchases by our current and potential customers, and other general economic and business conditions;

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the loss of, or default by, one or more key customers;

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failure to retain or continue to attract senior management, key authors or skilled personnel;

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manufacturing, distribution, plate investment, amortization, depreciation, capital, technology, and other expenses related to our operations;

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the level of future cash flows;

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risks related to our substantial indebtedness;

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risks inherent in operating in foreign countries, including the impact of economic, political, legal, regulatory, compliance, cultural, foreign currency fluctuations and other conditions abroad.

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fluctuations between foreign currencies and the U.S. dollar;

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the uncertain economic climate in the U.S. and abroad or deterioration in the economy and its impact on the markets in general;

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adverse developments in general business, economic and political conditions or any outbreak or escalation of hostilities on a national, regional or international basis;

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the health of debt and equity markets, including credit quality and spreads, the level of liquidity and future debt issuances;

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the state of the credit markets and regulatory environment and their impact on us and the economy in general;

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fluctuations in our operating results, unanticipated delays or accelerations in our sales cycles and the difficulty of accurately estimating revenues;

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income tax rates; and

•

future legislative and regulatory developments, including any change in the integration or enforcement of existing laws or regulations.

You should consider the areas of risk described above, as well as those set forth in the section entitled “Risk Factors” in connection with considering any forward-looking statements that may be made by us and our businesses generally. We cannot assure you that projected results or events reflected in the forward-looking statements will be achieved or occur. The forward-looking statements included in this prospectus are made as of the date of this prospectus. We undertake no obligation to publicly release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events, except as otherwise required by law.

USE OF PROCEEDS

DIVIDEND POLICY

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. The decision whether to pay dividends in the future will be at the sole discretion of the Board after taking into account various factors, including legal requirements, our subsidiaries’ ability to make payments to us, our financial condition, operating results, cash flow from operating activities, available cash, business opportunities, restrictions in our debt agreements and other contracts, current and anticipated cash needs and other factors the Board deems relevant.

We are a holding company and have no direct operations. We will only be able to pay dividends from our available cash on hand and funds received from our subsidiaries. Their ability to make any payments to us will depend upon many factors, including our operating results, cash flows and the terms of the MHGE Facilities, the MHSE Revolving Facility, the MHSE Term Loan and the indentures governing the MHGE Senior Secured Notes and the MHGE PIK Toggle Notes. In addition, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries and us to pay dividends and make distributions under the terms of our future indebtedness. Although we have sustained net losses in prior periods and cannot assure you that we will be able to pay dividends on a quarterly basis or at all, we believe that a number of recent positive developments in our business have improved our ability to pay dividends in compliance with applicable state corporate law once this offering has been completed. Also, because the DGCL permits corporations to pay dividends either out of surplus (generally, the excess of a corporation’s net assets (total assets minus total liabilities) over its stated capital, in each case as defined and calculated in the manner prescribed by the DGCL) or net profits, we may be able to pay dividends even if we report net losses in future periods.

The maximum amount that can be distributed to us by our subsidiaries for the purpose of paying dividends in compliance with the terms of our subsidiaries’ indebtedness was approximately $ million as of December 31, 2015 (assuming the number of shares offered by us are sold at the midpoint of the range set forth on the front cover of this prospectus).

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2015:

•

on an actual basis; and

•

as adjusted to give effect to this offering and the use of proceeds therefrom as set forth under “Use of Proceeds.”


	As of December 31, 2015
	Actual			As Adjusted
	(in thousands, except per share and par value)
Cash and cash equivalents	$	553,194		$

Long-term debt, including current maturities
MHGE Revolving Facility(1)	$	—		$
MHGE Term Loan(1)		660,189
MHGE Senior Secured Notes(2)		791,898
MHGE PIK Toggle Notes(3)		496,338
MHSE Revolving Facility(4)		—
MHSE Term Loan(4)		243,350

Total indebtedness, including current portion	$	2,191,775		$
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value; 1,000,000 shares authorized, 100,000 shares issued and 62,500 outstanding		—
Common stock—$0.01 par value; 100,000,000 shares authorized, 10,441,746 shares issued and 10,437,658 outstanding, actual; shares authorized, shares issued and outstanding, as adjusted		104
Additional paid-in capital		63,430
Treasury stock, 4,088 shares as of December 31, 2015		(597	)
Accumulated other comprehensive income (loss)		(51,722	)
Accumulated deficit		(675,623	)

Total stockholders’ equity (deficit)		(664,408	)

Total capitalization	$	1,527,367		$

(1)

As of December 31, 2015, the $240.0 million MHGE Revolving Facility had no borrowings outstanding. As of December 31, 2015, there were $660.2 million of loans outstanding under the MHGE Term Loan ($673.9 million face value less unamortized discount), which reflects a $81.0 million voluntary prepayment on December 31, 2013, a $35.0 million voluntary prepayment in connection with the repricing transaction that closed on March 24, 2014 and a $0.3 million voluntary prepayment in connection with the repricing transaction that closed on May 4, 2015. As of December 31, 2015, the Company determined that a $72.3 million mandatory prepayment of indebtedness is required and is payable five business days after the annual MHGE financial statements are delivered. MHGE Intermediate Holdings guarantees the MHGE Facilities, and all of the material wholly owned domestic subsidiaries of MHGE Holdings have pledged their assets to secure the MHGE Facilities.

(2)	MHGE Senior Secured Notes are presented at $791.9 million ($800.0 million face value less unamortized discount).

(3)	MHGE PIK Toggle Notes are presented at $496.3 million ($500.0 million face value less unamortized discount).

(4)

As of December 31, 2015, the $150.0 million MHSE Revolving Facility had no borrowings outstanding and no letters of credit outstanding and availability is subject to limitations of its borrowing base calculations. As of December 31, 2015, there were $243.4 million of loans outstanding under the MHSE Term Loan Facility ($245.0 million face value less unamortized discount).

DILUTION

Purchasers of the common stock in this offering will experience immediate and substantial dilution to the extent of the difference between the initial public offering price per share of our common stock and the as adjusted net tangible book value per share of the common stock after this offering for accounting purposes. Dilution results from the fact that the per share offering price of our common stock is in excess of the net tangible book value per share attributable to new investors.

Historical net tangible book value as of December 31, 2015 before this offering was $ per share and represents the amount of our total tangible assets (total assets less total intangible assets) less total liabilities, divided by the number of shares of common stock issued and outstanding. Assuming an initial public offering price of $ per share (which is the midpoint of the range set forth on the cover page of this prospectus), after giving effect to the sale of the shares in this offering and further assuming the receipt and application of the estimated net proceeds (after deducting estimated underwriting discounts and commissions and estimated offering expenses), our as adjusted net tangible book value as of December 31, 2015 would have been approximately $ million, or $ per share. This represents an immediate increase in the net tangible book value of $ per share to our existing stockholders and an immediate dilution (i.e., the difference between the offering price and the as adjusted net tangible book value after this offering) to new investors purchasing shares in this offering of $ per share. The following table illustrates the per share dilution to new investors purchasing shares in this offering:


Assumed initial public offering price per share		$
Net tangible book value per share as of December 31, 2015 before this offering	$
Increase per share attributable to new investors in this offering

As adjusted net tangible book value per share after giving effect to this offering

Dilution in net tangible book value per share to new investors in this offering		$

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) our as adjusted net tangible book value per share after the offering by $ and increase (decrease) the dilution to new investors in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters were to fully exercise their option to purchase additional shares of our common stock, the as adjusted tangible book value per share as of December 31, 2015 would be $ per share, and the dilution in net tangible book value per share to new investors in this offering would be $ per share.

The following table summarizes, on an adjusted basis as of December 31, 2015, the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at the assumed initial public offering price of $ per share, calculated before deduction of estimated underwriting discounts and commissions:


	Shares Purchased				Total Consideration				Average Price per Share
	Number	Percent			Amount	Percent			Average Price per Share
Existing stockholders				%	$			%	$
Investors in the offering				%				%

Total			100	%	$		100	%	$

If the underwriters were to fully exercise their option to purchase additional shares of our common stock, the percentage of common stock held by existing investors would be %, and the percentage of shares of common stock held by new investors would be %.

The information above excludes shares of common stock reserved for issuance under our management equity plan, adopted by the Board on May 15, 2013, and our new 2016 Omnibus Incentive Plan that we intend to adopt prior to the completion of this offering. As of December 31, 2015 there were a total of shares of common stock underlying outstanding stock options issued under the management equity plan.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

SELECTED HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA

The following table presents our selected historical combined consolidated financial data and operating results. The combined consolidated statement of operations for the years ended December 31, 2015, 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 have been derived from the audited combined consolidated financial statements of the Company (Successor) included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2013 has been derived from the audited combined consolidated financial statements of the Company (Successor), which are not included elsewhere in this prospectus. The combined statement of operations for the years ended December 31, 2012 and 2011 and the combined balance sheet data as of December 31, 2012 and 2011 have been derived from our audited combined financial statements of our Predecessor which are not included in this prospectus.

The selected historical combined consolidated financial data and operating results presented below should be read in conjunction with our audited and unaudited combined consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical combined consolidated financial information may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented, including changes that occurred in our operations and capitalization as a result of the Founding Acquisition.


	Successor									Predecessor
(Dollars in thousands except per share amounts)	Year Ended December 31,						March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			Year Ended December 31,
(Dollars in thousands except per share amounts)	2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			2012			2011
Statements of Operations
Revenue	$	1,834,581		$	1,855,779		$	1,589,574		$	229,441		$	1,917,599		$	2,072,735
Cost of sales		485,015			533,913			777,384			64,006			541,306			598,044

Gross Profit		1,349,566			1,321,866			812,190			165,435			1,376,293			1,474,691
Operating expenses:
Operating and administration expenses		1,131,123			1,194,656			841,652			208,816			1,224,126			1,275,058
Depreciation		30,086			22,086			23,538			5,817			28,083			25,149
Amortization of intangibles		94,156			104,157			69,181			6,326			25,130			24,933
Impairment charge		—			23,800			—			—			412,886			—
Transaction costs		—			3,932			56,820			—			—			—

Total operating expenses		1,255,365			1,348,631			991,191			220,959			1,690,225			1,325,140

Operating (loss) income		94,201			(26,765	)		(179,001	)		(55,524	)		(313,932	)		149,551
Interest expense (income), net		192,643			181,890			137,283			488			(1,688	)		(4,205	)
Other (income) expense		(4,779	)		(8,420	)		—			—			(16,868	)		—

(Loss) Income from operations before taxes on income		(93,663	)		(200,235	)		(316,284	)		(56,012	)		(295,376	)		153,756
Income tax (benefit) provision		5,861			112,571			(130,158	)		(20,410	)		(19,704	)		52,029

Net (loss) income from continuing operations		(99,524	)		(312,806	)		(186,126	)		(35,602	)		(275,672	)		101,726
Net (loss) income from discontinued operations, net of taxes		(75,675	)		(18,157	)		18,617			4,058			23,897			24,543

Net (loss) income		(175,199	)		(330,963	)		(167,509	)		(31,544	)		(251,775	)		126,269

Less: net (income) loss attributable to non-controlling interests		—			299			(2,251	)		631			(4,559	)		(4,320	)

Net (loss) income attributable to McGraw-Hill Education, Inc.	$	(175,199	)	$	(330,664	)	$	(169,760	)	$	(30,913	)	$	(256,334	)	$	121,949

Net earnings (loss) income per share from continuing operations—basic and diluted	$	(9.46	)	$	(30.09	)	$	(18.74	)	$	(3.50	)	$	(28.02	)	$	9.74
Weighted average shares outstanding—basic and diluted		10,517			10,387			10,051			10,000			10,000			10,000


Other Financial Data:
Adjusted Revenue (1)	$	2,055,475		$	2,034,838		$	1,758,299		$	212,137		$	1,978,112		$	2,164,218
Adjusted EBITDA (1)		486,396			472,366			498,126			(62,970	)		413,138			471,932
Capital expenditures		41,181			40,500			7,379			2,461			20,983			17,905
Total net debt (2)		1,638,581			1,682,180			1,308,740			—			—			—
Working capital (3)		171,713			200,298			363,651			232,956			339,321			339,673


	Successor									Predecessor
	Year Ended December 31,						March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			Year Ended December 31,
(Dollars in thousands)	2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			2012			2011
Statement of Cash Flow Data:
Cash flows provided by (used in):
Operating activities	$	309,694		$	353,669		$	560,797		$	(15,741	)	$	406,427		$	434,818
Investing activities		(151,763	)		(176,464	)		(2,345,978	)		(61,879	)		(197,983	)		(182,000	)
Financing activities		(14,122	)		(191,281	)		2,192,054			6,109			(223,320	)		(242,521	)


	Successor								Predecessor
(Dollars in thousands)	As of December 31,								As of December 31,
(Dollars in thousands)	2015			2014			2013		2012		2011
Balance Sheet data:
Cash and cash equivalents	$	553,194		$	413,963		$	430,691	$	98,188	$	110,267
Total assets		2,743,069			2,747,296			3,031,719		1,916,275		2,454,111
Total debt(2)		2,191,775			2,096,143			1,739,431		—		—
Stockholders’ equity (deficit)		(664,408	)		(377,609	)		409,597		1,120,930		1,563,547

(1)	Adjusted Revenue, a measure used by management to assess operating performance, is defined as the total amount of revenue that would have been recognized in a period if all revenue were recognized immediately at the time of sale.

Adjusted Revenue is calculated as follows:


	Successor						Predecessor
	Year Ended December 31,				March 23, 2013 to December 31, 2013		January 1, 2013 to March 22, 2013			Year Ended December 31,
(Dollars in thousands)	2015		2014		March 23, 2013 to December 31, 2013		January 1, 2013 to March 22, 2013			2012		2011
Revenue	$	1,834,581	$	1,855,779	$	1,589,574	$	229,441		$	1,917,599	$	2,072,735
Change in deferred revenue(a)		220,894		179,059		168,725		(17,304	)		60,513		91,483

Adjusted Revenue	$	2,055,475	$	2,034,838	$	1,758,299	$	212,137		$	1,978,112	$	2,164,218

(a)

Adjusted EBITDA is defined as EBITDA adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under our debt agreements.

Adjusted Revenue and each of the above described EBITDA-based measures is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue or income from continuing operations as a measure of operating performance or to cash flows from operations as a measure of liquidity. Additionally, each such EBITDA-based measure is not intended to be a measure of free cash flows available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, income tax payments and debt service requirements. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under U.S. GAAP. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use identical calculations, these EBITDA-based measures may not be comparable to other similarly titled measures of other companies. See “Use of Non-GAAP Financial Information.”

Management believes that Adjusted Revenue is helpful in highlighting the sales performance from period to period because it reflects sales as they are made.

For additional information related to these measures, please see “Prospectus Summary—Our Key Metrics” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures—Adjusted Revenue and Adjusted EBITDA.”

EBITDA and Adjusted EBITDA are calculated as follows:


	Successor									Predecessor
	Year Ended December 31,						March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			Year Ended December 31,
(Dollars in thousands)	2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			2012			2011
Net (loss) income from continuing operations	$	(99,524	)	$	(312,806	)	$	(186,126	)	$	(35,602	)	$	(275,672	)	$	101,726
Interest expense (income), net		192,643			181,890			137,283			488			(1,688	)		(4,205	)
Income tax (benefit) provision		5,861			112,571			(130,158	)		(20,410	)		(19,704	)		52,029
Depreciation, amortization and pre-publication amortization		212,851			205,831			163,883			25,434			228,565			245,576

EBITDA		311,831			187,486			(15,118	)		(30,090	)		(68,499	)		395,126

Change in deferred revenue(a)		220,894			179,059			168,725			(17,304	)		60,513			91,483
Restructuring and cost savings implementation fees(b)		23,886			39,888			33,984			4,116			62,477			29,741
Sponsor fees(c)		3,500			3,500			875			—			—			—
Elimination of corporate overhead(d)					—			—			—			88,551			59,506
Impairment charge(e)		—			23,800			—			—			412,886			—
Purchase accounting(f)		—			41,585			312,615			—			—			—
Transaction costs(g)		—			3,932			56,820			—			—			—
Acquisition costs(h)		—			4,376			4,796			—			—			—
Physical separation costs(i)		—			46,716			8,100			—			—			—
Other(j)		25,102			29,109			23,944			5,627			(1,559	)		(5,930	)
Pre-publication investment cash costs(k)		(98,817	)		(87,085	)		(96,615	)		(25,319	)		(168,623	)		(145,727	)
Stand-alone cost savings(l)		—			—			—			—			27,392			47,733

Adjusted EBITDA	$	486,396		$	472,366		$	498,126		$	(62,970	)	$	413,138		$	471,932

(a)

(b)

(c)

Beginning in 2014, $3.5 million of annual management fees was recorded and payable to Apollo. The amount recorded in the Successor period from March 23, 2013 to December 31, 2013 was $0.9 million.

(d)

General corporate allocations for executive management costs incurred by MHC were allocated to the business prior to Q1 2013.

(e)

An impairment charge was recorded in 2014 to reduce the recorded value of an owned office building to its estimated fair value based upon an independent appraisal. In addition, a goodwill impairment charge was recorded in 2012 relating to the K-12 reporting unit.

(f)

(g)

The amount represents the transaction costs associated with the Founding Acquisition.

(h)

The amount represents costs incurred for acquisitions subsequent to the Founding Acquisition including ALEKS, LearnSmart and Engrade.

(i)

The amount represents costs incurred to physically separate our operations from MHC. These physical separation costs were incurred subsequent to the Founding Acquisition and concluded in 2014.

(j)

For the year ended December 31, 2015, the amount represents (i) non-cash incentive compensation expense; (ii) elimination of the gain of $4.8 million on the sale of an investment in an equity security and (iii) other adjustments required or permitted in calculating covenant compliance under our debt agreements.

For the year ended December 31, 2014, the amount represents (i) cash distributions to noncontrolling interest holders of $0.2 million; (ii) non-cash incentive compensation expense; (iii) elimination of non-cash gain of $7.3 million in LearnSmart; and (iv) other adjustments required or permitted in calculating covenant compliance under our debt agreements.

For the periods from March 23, 2013 to December 31, 2013 (Successor) and from January 1, 2013 to March 22, 2013 (Predecessor) and the year ended December 31, 2012 (Predecessor), the amount represents (i) cash distributions to noncontrolling interest holders (excluding special dividends) of $0.5 million and $1.8 million and $5.5 million, respectively; (ii) the elimination of a $16.9 million benefit realized in 2012 as a result of a change in the Company’s vacation policy; (iii) non-cash incentive compensation expense recorded directly beginning in the first quarter of 2013; and (iv) other adjustments required or permitted in calculating covenant compliance under our debt agreements.

(k)

Represents the cash cost for pre-publication investment during the period excluding discontinued operations.

(l)

Represents stand-alone cost savings to reflect our expectation that costs incurred on a stand-alone basis will be lower than costs historically allocated to McGraw-Hill Education, LLC by MHC. These allocations were primarily related to services and expenses including (i) global technology operations and infrastructure; (ii) global real estate occupancy; (iii) employee benefits; and (iv) shared services such as tax, legal, treasury, and finance.

(2)	Total debt is presented as long-term debt plus current portion of long-term debt. Total net debt is total debt less cash and cash equivalents.

(3)	Working capital is calculated as current assets less current liabilities.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides a narrative of our results of operations and financial condition for the years ended December 31, 2015 and 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), which covers periods prior to the consummation of the Founding Acquisition. Accordingly, the discussion and analysis of historical periods prior to the consummation of the Founding Acquisition do not reflect the impact of the Founding Acquisition. Except as otherwise specified, the results of operations and other financial information included in this section present the Company on a stand-alone basis, after giving effect to the restructuring and related financing completed in connection with the Founding Acquisition.

You should read the following discussion of our results of operations and financial condition in conjunction with the accompanying audited and unaudited financial statements and notes thereto and “Selected Historical Combined Financial Data” of the Company, appearing elsewhere in this prospectus. This discussion contains forward looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this prospectus. Actual results may differ materially from those contained in any forward looking statements.

Overview

Company History

On March 22, 2013, MHE Acquisition, LLC (“AcquisitionCo”) completed the Founding Acquisition, pursuant to which a wholly-owned subsidiary of the Company acquired all of the outstanding equity interests of certain subsidiaries of McGraw Hill Financial, Inc. (“MHC”) pursuant to a Purchase and Sale Agreement, dated November 26, 2012 and as amended March 4, 2013 (the “Acquired Business”). The Acquired Business included all of MHC’s educational materials and learning solutions business, which is comprised of (i) the Higher Education, Professional, and International Group (the “HPI business”), which includes post-secondary education and professional products both in the United States and internationally and (ii) the School Education Group business (the “SEG business”), which includes school and formative assessment products targeting students in the pre-kindergarten through secondary school market. We refer to the purchase of the Acquired Business and the related financing transactions as the “Founding Acquisition.” Following the Founding Acquisition, MHC has been known as McGraw Hill Financial, Inc.

In connection with the Founding Acquisition, a restructuring was completed, the result of which was that the HPI business and the SEG business became held by separate wholly owned subsidiaries of MHE US Holdings, LLC. The HPI business became held by McGraw-Hill Global Education Intermediate Holdings, LLC (“MHGE Holdings”) and its wholly owned subsidiary McGraw-Hill Global Education Holdings, LLC (“MHGE”), while the SEG business became held by McGraw-Hill School Education Intermediate Holdings, LLC (“MHSE”) and its wholly owned subsidiaries. In addition, concurrent with the closing of the Founding Acquisition, subsidiaries of each of MHGE and MHSE entered into certain credit facilities. Neither MHGE nor its subsidiary companies guarantee or provide collateral to the financing of MHSE, and MHSE does not guarantee or provide collateral to the financing of MHGE or its subsidiary companies.

The term “Predecessor” refers to McGraw-Hill Education, LLC prior to giving effect to the consummation of the Founding Acquisition. The term “Successor” refers to McGraw-Hill Education, Inc. after giving effect to the consummation of the Founding Acquisition.

Business Segments

We have four operating business segments: Higher Education, K-12, International and Professional. Higher Education is our largest segment, representing 44%, 45%, 42% and 47%, of total revenue for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor), and January 1, 2013 to March 22, 2013 (Predecessor), respectively. Our K-12 segment generated 32%, 31%, 34% and 19% of total revenue for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), respectively. Our International segment generated 17%, 18%, 19% and 23% of total revenue for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), respectively. Our Professional segment represents 7%, 6%, 6% and 10% of total revenue for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), respectively. The remaining total revenue relates to adjustments made for in-transit product sales.

Higher Education

In the higher education market in the United States, we provide students, instructors and institutions with adaptive digital learning tools, digital platforms, custom publishing solutions and traditional printed textbook products with capabilities in adaptive learning, homework tools, lecture capture and Learning Management System (“LMS”) integration for post-secondary markets. Although we cover all major academic disciplines, our content portfolio is organized into three key disciplines: (i) Business, Economics & Career; (ii) Science, Engineering & Math; and (iii) Humanities, Social Science & Languages. Our top selling products include Economics: Principles, Problems, and Policies (McConnell/Brue/Flynn), ALEKS, Managerial Accounting (Garrison) and The Art of Public Speaking (Lucas). The primary users of our solutions are students enrolled in two- and four-year non-profit colleges and universities, and to a much lesser extent, for-profit institutions. Based on NCES and NSCRC data and our estimates, we believe that recent declines in 2-year and 4-year enrollments have been predominately driven by declines in for-profit institutions. While overall enrollments declined by approximately 0.8 million between 2011 and 2014, we believe that for-profit enrollment declined from approximately 2.0 million to 1.6 million during this period while other enrollments declined from approximately 19.0 million to 18.6 million during the same period. In 2015, for-profit colleges accounted for approximately 10% of Higher Education revenue and approximately 4% of McGraw-Hill Education revenue.

We sell our Higher Education solutions to well-known online retailers, distribution partners and college bookstores, who subsequently sell to students. Our own direct-to-student sales channel is increasing via our proprietary e-commerce platform, which currently represents one of our three largest distribution channels in this segment. Although we sell our products to the students as end users, it is the instructor that makes the ultimate decision regarding new materials for the course. We have longstanding and exclusive relationships with many authors and nearly all of our products are covered by copyright in major markets, providing us the exclusive right to produce and distribute such content in those markets during the applicable copyright terms.

K-12

In the K-12 market in the United States, we primarily sell curriculum and learning solutions, which include core basal programs, intervention and supplemental products, formative assessment tools, teaching resources and professional development programs. We sell our learning solutions directly to school districts across the United States. The process through which products are selected and procured for classroom use varies throughout the United States. Eighteen states, known as adoption states, approve and procure new basal programs, usually every five to eight years on a state-wide basis for each major area of study, before individual schools or school districts are permitted to schedule the purchase of materials. In all remaining states, known as open territories, each individual school or school district can procure materials at any time, though they usually do so on a five to eight year cycle. The student population in adoption states represents nearly 50% of the U.S. elementary and secondary

school-age population. Many adoption states provide “categorical funding” for instructional materials, which means that state funds cannot be used for any other purpose. While we offer all of our curriculum and learning solutions in digital format, given the varying degrees of availability and maturity of our customers’ technological infrastructure, a majority of our sales are derived from blended print and digital solutions. Our top selling programs are Reading Wonders, McGraw-Hill My Math, Everyday Mathematics, Glencoe Math, and the Networks Social Studies Series.

International

Our International segment, defined as sales outside the United States, serves students in the higher education, K-12 and professional markets in over 135 countries. Our products and solutions for the International segment are produced in nearly 60 languages and primarily originate from our offerings for the United States market, which are later adapted to meet the needs of individual geographies. Sales of our digital offerings are growing significantly in the international market, and we are continuously increasing our inventory of digital programs. The growth in the use of the English language is also a driver of demand for digital learning solutions and printed educational instructional materials.

Professional

In the professional market in the United States, we provide medical, technical, engineering and business content for the professional, education and test preparation communities. Our digital subscription products are sold to over 2,700 customers including corporations, academic institutions, libraries and hospitals. Our digital subscription products had a 94% annual retention rate in 2015.

Other

Other represents certain transactions or adjustments that are unusual or non-operational. In addition, adjustments made for in-transit product sales, timing related corporate cost allocations and other costs not attributed to a single operating segment are recorded within Other.

Factors Affecting Our Performance

Impact of Our Digital Transformation

The acceptance and adoption of digital learning solutions is driving a substantial transformation in the education market. We believe we are well positioned to take advantage of this transformation given our ability to offer embedded assessments, adaptive learning, real-time interaction and feedback and student specific personalization based on our core curated educational content in a platform- and device-agnostic manner.

The demand for our digital solutions has increased substantially over the last five years though the rate of transformation differs by business segment. In the higher education market, our customers’ technology infrastructures are sufficiently advanced to support full adoption of digital learning solutions. During the year ended December 31, 2015 (Successor), approximately 45% of our Higher Education Adjusted Revenue was derived from digital learning solutions. In the K-12 market, varying degrees of broadband internet connectivity, adequacy of technical support staff, and teacher training across our customer base have limited the rate of broad-based adoption of digital solutions. Recent public policy and funding initiatives have increased emphasis on removing these limitations. Professional markets have the greatest digital readiness, and a majority of our Professional revenues are derived from digital product sales. Internationally, the receptivity to digital solutions is also strong, particularly in developing economies. According to Juniper Networks, people in developing countries are nearly twice as likely to use connected devices for educational purposes on a regular basis as those in developed markets.

Our revenue models across each of our business segments are transforming along with our customers’ increasing adoption of digital learning solutions. In general, our digital solutions are sold on a subscription basis

with high renewal rates, which provides a more stable and predictable long term revenue model. We believe that the digital transformation will provide new opportunities for revenue growth. For example, our digital learning solutions provide an opportunity for us to increase the size of our addressable market as our digital products are not available in a format that can be utilized for sale in the used and rental market. In addition, the reserve that we maintain for product returns has declined over time due to the shift from traditional print products to digital learning solutions, which experience a much lower return rate.

We closely monitor our digital sales given the significant investment being made across our business and the increasing adoption of digital in the marketplace. Our digital offerings are sold on a standalone basis and as part of bundled or hybrid offerings. In instances where we sell digital with a print component, it is our policy to bifurcate the sale between the digital and print components and attribute value to each of the components in accordance with U.S. GAAP. When we discuss or present digital revenues, such information is based upon the attribution of value in accordance with U.S. GAAP and does not include print revenues.

The transition from traditional print to digital solutions also improves our cost structure as we tag and leverage content across the entire business instead of duplicating development efforts in each segment. We also expect to reduce raw material, warehouse and delivery costs as a result of the shift to digital solutions, as well as reducing sampling costs that are incurred to provide traditional print products to purchasing decision makers at no cost to them.

The development cycle for traditional print products involves periodic revisions, which give rise to significant pre-publication costs that are capitalized and recognized through amortization expense over time. Our pre-publication costs have been declining as we sell more digital solutions. With our digital solutions, we employ a continuous revision cycle that permits smaller and more frequent investment over the lifecycle of a product to maintain the product’s relevancy by quickly incorporating feedback and enhancement opportunities. The cost of the smaller and more frequent investment is expensed and not capitalized, a shift from the historical accounting for pre-publication costs.

Our digital learning solutions are supported by our in-house Digital Platform Group (“DPG”), which was formed in 2013 to drive innovation and to develop, maintain and leverage our digital learning solutions and technology tools and platforms across our entire business. To maintain and grow our leading digital position, we have increased our annual digital learning solutions spending, including operating and capital expenditures, from less than $90 million in 2012 to approximately $150 million in 2014 and approximately $180 million in 2015. While our investment has increased significantly since 2012, we believe that our annual expenditures will stabilize in the near future as our major initiatives and the build-out of certain foundational capabilities near completion.

Revenue

Higher Education

We derive revenue primarily from the sale of digital learning solutions and content, traditional and custom print content and instructional materials. Our digital and print revenues are a function of sales volume and, to a lesser extent, changes in unit pricing. Our revenues are comprised of product and services sales less an allowance for product returns and revenue that is required to be deferred in accordance with U.S. GAAP.

Sales volumes are primarily influenced and the use of used or rental alternatives to our learning solutions by student enrollment figures. Our business is driven by our ability to maintain and win instructor adoptions and purchasing decisions made by students. Higher education enrollment, which was approximately 20 million in the Fall of 2014, has grown at a 2% CAGR since 1970, according to NCES, although it has declined since 2012. Growth in enrollment impacts the number of students requiring our digital and print solutions in any given year. Because instructors are the ultimate decision makers for content and instructional materials to be used in their courses, we compete for instructor adoptions of our products. After an instructor has adopted our products for use in

his or her course, students have the option to purchase new content and instructional materials, purchase used versions of printed materials, rent printed materials from a number of outlets, or forego the acquisition of course content and materials altogether. Our sales depend heavily on the volume of new content and instructional materials sold and we do not benefit from sales in the used and rental markets. As digital solutions are adopted by more instructors, and increasingly become part of the instructors’ graded curriculum, more students are purchasing our digital solutions. This trend has increased sales of our digital solutions and is resulting in more predictable and recurring revenues as sales volumes begin to more closely align with trends in student enrollment.

Our product pricing is typically set at the beginning of each new academic year, and unit pricing has increased annually at a low-single digits percentage, on average, over the last several years. Digital products are typically priced at a discount to print products. However, we tend to generate more revenue per edition from a print product with a digital adaptive component than from a comparable stand-alone print product covering the same subject area. This is because the integration of our digital solutions into course instruction by the instructor, drives higher sell through into the classroom. There are no used or rental alternatives for the digital offerings.

For our print products, we recognize revenue at the time of shipment to our distribution partners, who typically order products several weeks before the beginning of an academic semester to ensure sufficient physical product inventory. Digital products are generally sold as subscriptions, which are paid for at the time of sale or shortly thereafter, and we recognize revenues derived from these products over the life of the subscription. In most cases, students purchase digital products at the beginning of the academic semester, or shortly thereafter, which has tended to shift the timing of revenues to later in the academic year as we sell more digital products and fewer print products. In addition, the difference in our revenue recognition policies between print and digital products has caused comparisons of current and historical revenues to less accurately reflect the actual sales performance of our business during this time of transition. As a result, we use the non-GAAP measure Adjusted Revenue to provide a consistent comparison of sales performance from period to period. See “—Non-GAAP Measures” for a description of Adjusted Revenue.

Revenues are also impacted by our reserve for product returns. Our distribution partners are permitted to return products at any time, though they primarily do so following the heavy student purchasing period at the beginning of each academic semester. To more accurately reflect the economic impact of returns on our operating performance, we reserve a percentage of our gross sales in anticipation of these returns when calculating our net revenues. This reserve has declined in recent years as we shift from sales of traditional print products to digital learning solutions, which experience a much lower return rate.

K-12

We derive revenue primarily from the sale of digital learning solutions, traditional print offerings and other instructional materials. Our revenues are driven primarily by sales volume and, to a lesser extent, changes in unit pricing. Our revenues are comprised of product and services sales less an allowance for product returns and revenue that is required to be deferred in accordance with U.S. GAAP. The required revenue deferral for digital solutions in K-12 is significantly greater than in Higher Education due to the longer, multi-year contractual terms of our customer arrangements in K-12 (typically five to eight years).

Sales volumes are driven primarily by the availability of funding for instructional materials. Most public school districts are largely dependent on state and local funding for the purchase of instructional materials, which correlate with state and local receipts from income, sales and property taxes. Nationally, total state funding for public schools has been trending upward as state income and sales tax revenues recover from the lows of the 2008-2009 economic recession. The improving economy has driven a recovery in housing, which has led to higher property tax revenues for local governments and increased budgets for public schools.

The purchasing cycles of adoption states also have a significant impact on our sales volumes. We monitor the purchasing cycles for specific disciplines in adoption states in order to manage our product development and

to plan sales campaigns. Our sales may be materially impacted by the purchasing schedules of major adoption states such as Florida, California and Texas. For example, Florida implemented a language arts new adoption in 2014 and is scheduled to adopt new social studies materials in 2016 that will be purchased beginning in 2017. Texas school districts purchased new mathematics and science materials in 2014, and adopted new social studies and high school math materials in 2014 for purchase in 2015. California adopted new math materials in 2013, with purchases spread over 2014 and 2015, and adopted new English language arts materials in 2015 for purchase beginning in 2016. Florida, Texas and other adoption states provide dedicated state funding for instructional materials and classroom technology, with funding typically appropriated by the legislature in the first half of the year in which materials are to be purchased. Texas, which has a two-year budget cycle, has appropriated funds for purchases in 2015 and 2016. In the 2015 legislative session, California funded instructional materials in part with a dedicated portion of state lottery proceeds and in part out of general formula funds, with the minimum overall level of school funding determined according to the Proposition 98 funding guarantee.

Sales volume in the United States K-12 market is also affected by changes in state curriculum standards and by student enrollment. Changes in state curriculum standards require that instructional materials be revised or replaced to align to the new standards, which historically has driven demand for basal programs. School enrollment is highly predictable, as they correlate with the overall growth in birth rates in the United States, and are expected to continue trending upward over the long term. According to NCES, K-12 enrollment in the United States as of 2011 was nearly 55 million and enrollment is projected to grow at a compound annual growth rate of 0.4% from 2013 through 2023.

Our product pricing is generally determined at the time our products are adopted by a state or district. Price has historically been of lesser importance than curriculum quality and service levels in state and district purchasing decisions. The vast majority of our program offerings is hybrid, incorporating both print and digital elements.

Revenue from traditional print products is typically recognized at the time of shipment, which closely aligns with when a school district takes possession of the required number of products at the outset of a multi-year adoption. Traditional print products are typically re-used by students over the term of the adoption, and school districts will occasionally purchase replacement products due to wear or increasing enrollment over the life of the adoption. Sales of these replacement products are known as residual sales, from which we derive a significant portion of our revenue. Our online and digital solutions are sold as a subscription, which states and districts pay for at the beginning of a multi-year adoption. We typically defer revenue related to online and digital solutions for the entirety of the contract upfront and recognize it ratably over the term of the contract. Because they are consumable products, revenue for workbooks is deferred when we enter into a multi-year contract and is recognized when delivery takes place, often at the beginning of each academic year over the contract term. As our customers purchase more of our digital and hybrid learning solutions, the percentage of our revenue that is deferred continues to increase. The total amount of the sale and the cash received upfront for a fully-digital or hybrid program is comparable to a fully print program; however, the time period over which the revenue is recognized increases with the shift to digital. The difference in our revenue recognition policies between print and digital solutions has caused comparisons of current and historical revenues to less accurately reflect the actual sales performance of our business during this time of transition. As a result, we use the non-GAAP measure Adjusted Revenue to provide a consistent comparison of sales performance from period to period. See “—Non-GAAP Measures” for a description of how we define Adjusted Revenue.

Unlike our Higher Education segment, product returns in our K-12 segment have an immaterial impact on net revenues because we sell directly to school districts, which rarely return products.

International

We derive revenue primarily from the sale of digital learning solutions and content, traditional print content and instructional materials to the higher education, K-12 and professional markets in over 135 countries

worldwide. Our revenues are a function of the market conditions in the countries in which we operate and our ability to expand our sales to customers in these countries and to new countries. A majority of our international revenue is generated by selling our unmodified English language products, which were originally created for the United States market, internationally. Our revenues are comprised of product and services sales less an allowance for product returns and revenue that is required to be deferred in accordance with U.S. GAAP.

Our International business covers five major regions. Each of these regions and the underlying country performance can be impacted by the economy, government policy and competitive situations. These regions and the general revenue drivers for each are as follows:

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EMEA: the majority of our business is driven by Higher Education, followed by K-12 (including English Language Learning) and Professional. The majority of our Higher Education revenues come from the sale of original United States product translations and adaptations of those products. Our K-12 business in Spain is primarily driven by the development and sale of local original publications and is subject to the cyclical nature of government driven curriculum renewals. Our K-12 business in the Middle East is primarily driven by orders for United States product as well as translations and adaptations.

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Asia Pacific: our business is driven primarily by Higher Education, followed by K-12 (including English Language Learning) and Professional. The majority of the business is derived from Southeast Asia, where we operate in over 15 countries, some of which are subject to volatile political and economic conditions. Our Australian business is primarily driven by the sale of original United States Higher Education product as well as translations and adaptations.

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India: Higher Education is a major driver of our business, followed by Professional and K-12. Our product portfolio in India primarily consists of local publishing programs, followed by adaptations of United States product.

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Latin America: this region is primarily driven by K-12 (including English Language Learning), followed by Higher Education and Professional. From a regional perspective, our largest market is Mexico, followed by Colombia, Chile and Venezuela. Latin America’s business is exposed to volatile political and economic conditions. The majority of our Higher Education revenues are derived from the sale of original United States products that have been translated and / or adapted. Our K-12 business is primarily driven by the development and sale of local/original publications and is subject to the cyclical nature of government driven curriculum renewals.

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Canada: Higher Education is the largest driver of our Canadian business, followed by K-12 and Professional. Higher Education sales consist primarily of original United States Higher Education product as well as translations and adaptations. Our Canadian K-12 business is primarily driven by the development and sale of local/original publications and is subject to the cyclical nature of government driven curriculum renewals.

Product pricing varies by region and country with pricing comparable to equivalent products sold in the United States in some instances. Within developing economies, price points tend to be lower than in the United States, dictated by the economic conditions prevalent in that country.

Foreign exchange rates also impact our international revenues as the functional currency is often the foreign currency of the countries in which we operate. As a result, we are exposed to currency fluctuations in translating our financial results into U.S. dollars. In 2015, approximately 63% of our international sales were denominated in currencies other than the U.S. dollar. Recent strengthening of the dollar has resulted in unfavorable foreign exchange impacts. We monitor the impact of foreign currency movements and the correlation between local currencies and the U.S. dollar. We also periodically review our hedging strategy and may enter into other arrangements as appropriate.

Revenue recognition for international products is similar to products sold in the United States. Revenue for traditional print products is typically recognized upon shipment, while digital revenues are recognized over the

contractual term of the product. The difference in our revenue recognition policies between print and digital solutions has caused comparisons of current and historical revenues to less accurately reflect the actual sales performance of our business during this time of transition. As a result, we use the non-GAAP measure Adjusted Revenue to provide a consistent comparison of sales performance from period to period. See “—Non-GAAP Measures” for a description of how we define Adjusted Revenue.

Professional

We derive revenue primarily from the sale of digital subscription services and content, both digital and print. Our digital and print revenues are a function of sales volume and, to a lesser extent, changes in unit pricing. Our revenues are comprised of product and services sales less an allowance for product returns and revenue that is required to be deferred in accordance with U.S. GAAP.

Sales volume is driven by demand for subscription based, professional content and by growth in knowledge-based industries, especially in the medical, technical and engineering fields. As the United States economy continues to recover, we expect the market for professional education resources to grow, particularly among professions that are experiencing more rapid job growth. The Professional and Business Services and Healthcare and Social Assistance industry sectors are expected to add nearly 6 million jobs between 2014 and 2024, more than all other United States industries combined, according to the Bureau of Labor Statistics (“BLS”). We derive a substantial portion of our Professional revenue from these two industries.

Sales of our digital subscription services provide a stable and highly recurring revenue stream, with a retention rate across major platforms of 94% in 2015. Our digital subscription services are sold as annual contracts, and prices for new subscriptions typically increase by low single-digits each year. Our other digital and traditional print products are also priced competitively and increase in the low single digits each year.

Revenue for traditional print products is typically recognized upon shipment, while digital revenues are recognized over the contractual term. The continued shift from print to digital will increase the percentage of our sales that are deferred and recognized over the contractual term. The difference in our revenue recognition policies between print and digital solutions has caused comparisons of current and historical revenues to less accurately reflect the actual sales performance of our business during this time of transition. As a result, we use the non-GAAP measure Adjusted Revenue to provide a consistent comparison of sales performance from period to period. See “—Non-GAAP Measures” for a description of Adjusted Revenue.

Cost of Sales

Cost of sales include variable costs such as paper, printing and binding, certain transportation and freight costs related to our print products, as well as content related royalty expenses and gratis costs (products provided at no charge as part of the sales transaction) for both print and digital products. Gratis costs are predominately incurred in our K-12 business and tend to be higher for adoption state sales as compared to open territory sales. As such, these costs will vary based upon the level of adoption state sales during a given period. Royalty expense for author developed content is primarily related to our Higher Education and Professional segments.

Due to the inherent subjectivity in the classification of costs between cost of sales and operating and administrative expense across the Company’s industry, the Company does not focus on gross profit or gross margin as a key metric for the Company’s business. Additionally, the classification of costs between cost of sales and operating and administrative expense does not impact the Company’s key metrics, including Adjusted Revenue, EBITDA and Adjusted EBITDA.

Operating and Administration Expenses

Our operating and administration expenses include the expenses of our employees and outside vendors engaged in our marketing, selling, editorial and administrative activities as well as pre-publication cost amortization. A significant component of our total operating and administration expense relates to our ongoing

investment in DPG. These costs are both fixed and variable in nature and our investment is expected to increase given our increasingly digital revenues; however, we expect the rate of increase to moderate over time as our major initiatives and the build-out of certain foundational capabilities near completion.

Costs associated with design and content creation for both digital and print products are capitalized as a component of pre-publication expenditures. Capitalized pre-publication expenditures are subsequently amortized as a component of operating and administration expenses.

Outside of costs directly associated with DPG, we incur additional digital related costs, including content tagging and digital solutions hosting, which have increased as the digital transformation continues. The Company relies primarily on internal resources to develop the Company’s digital platform, host the Company’s digital solutions and tag the Company’s digital content, and these costs have no clear attribution to specific products or services and do not directly correlate to sales of products or delivery of services. As a result, the Company has classified these costs within operating and administrative expenses.

We incur expense for products provided to decision makers in the educational materials purchasing process as part of our sampling program, primarily in our K-12 business. Annual samples expense can vary significantly depending upon the adoption calendar and the mix of programs being considered for adoption. As our revenues continue to shift from traditional print offerings to digital solutions, we expect the expense incurred for sampling to decline.

In the United States, our products are sold in over 5,000 higher education institutions and 13,000 K-12 school districts across all 50 states. Our sales force of nearly 1,450 persons, which includes approximately 450 sales people in each of the United States higher education and K-12 markets, maintains close relationships with the individual instructors who are the primary decision makers in the higher education market, as well as the states, school districts, and individual schools. We incur significant selling and market expense to maintain and support our extensive sales force. Subsequent to the Founding Acquisition, we invested in sales and marketing to drive future revenue opportunities and enhance our product branding. As revenues grow in the future, we expect to see modest increases in selling and marketing expense that will vary with the K-12 adoption cycle.

Since the Founding Acquisition, we have incurred significant non-recurring restructuring and separation costs to establish the standalone operations of our business and facilitate cost saving opportunities. The physical separation costs incurred to establish our standalone operations ceased in 2014 upon the completion of the separation from our former parent. Excluding the impact of restructuring and separation costs, we expect our operating and administration expense to increase nominally as we continue to invest in the business and drive our digital transformation.

Transaction and Acquisition Costs

In connection with the Founding Acquisition, we incurred significant transaction costs including external legal and consulting expenses that are separately identified in the statement of operations. Subsequent to the Founding Acquisition, we incurred additional acquisition costs in connection with our acquisitions of ALEKS, LearnSmart and Engrade, which are included in operating and administration expenses. To the extent we acquire and divest of businesses in the future, we may incur transaction costs that will vary based upon the size and complexity of the transaction.

Interest Expense

Our interest expense includes interest related primarily to the MHGE Senior Secured Notes, the MHGE Term Loan, the MHGE PIK Toggle Notes and the MHSE Term Loan.

Interest expense varies based on the amount of indebtedness outstanding and the rates at which we were able to secure the indebtedness. The interest rate on certain tranches of indebtedness is based on London InterBank

Offered Rate (LIBOR) or the prime lending rate (Prime), plus an applicable margin. As a result, changes in the LIBOR or Prime rate can impact interest expense. As applicable, interest expense may also include costs associated with our revolving credit facility and the amortization of deferred financing fees and loan discounts. Interest expense for the year ending December 31, 2015 (Successor) was $192.6 million.

Intangible Amortization

Our intangible asset amortization expense primarily includes the amortization of acquired intangible assets consisting of customer relationships, content rights, trade names, non-compete rights and technology. The largest component of our intangibles asset balance is related to content acquired as part of the Founding Acquisition and is being amortized over a period of 8 to 14 years. The remaining balances will be amortized over varying periods of time from 4 to 14 years from the date of acquisition. Intangible asset amortization expense for the year ending December 31, 2015 (Successor) was $94.2 million.

Pre-publication Expenditures and Amortization

Pre-publication expenditures are capitalized costs incurred and principally consist of design and content creation. Costs incurred prior to the publication date of a title or release date of a product represent activities associated with product development. These may be performed internally or outsourced to subject matter specialists and include, but are not limited to, editorial review and fact verification, graphic art design and layout and the process of conversion from print to digital media or within various formats of digital media. These costs are capitalized when the costs can be directly attributable to a project or title and the title is expected to generate probable future economic benefits. Capitalized costs are amortized upon publication of the title over its estimated useful life of up to six years, with a higher proportion of the amortization typically taken in the earlier years.

Over the last several years, we have optimized our pre-publication expenditures to emphasize investment in content that can be leveraged across our full range of products, which maximizes our long-term returns on this investment. This has been accomplished, in part, by the creation of DPG, which supports ongoing innovation, development and maintenance of our technology platforms. We have also experienced a decline in pre-publication expenditures as our business shifts from a periodic revision cycle for print products, which gives rise to significant pre-publication expenditures, to a continuous revision cycle for digital learning solutions.

Pre-publication expenditure demands differ by business segment for a variety of reasons, including the speed with which the digital transformation has occurred. In Higher Education, pre-publication expenditures are highest for the first edition of a new title, and lower for subsequent revisions. Our pre-publication investment to create content used in our adaptive tools, such as the assessment questions in the LearnSmart, product is increasing. This foundational investment is expected to reduce the variability of pre-publication expenditures in the future as we are able to leverage the content across the business.

Higher Education

Pre-publication expenditures in the Higher Education segment relate to the development of product across all disciplines, since the content is created by authors on a royalty basis. We develop “first editions,” which are new titles or programs that can be revised over time based on market acceptance. As we continue our digital transformation, our pre-publication expenditure is increasingly related to content used in our adaptive tools, such as the assessment questions in the LearnSmart product. Development of the technology underlying our digital products is either supported by DPG with costs recorded in operating expenses, or capitalized if a new capability is developed (i.e., new product). Pre-publication expenditures are typically incurred in the year before the copyright is acquired on a printed textbook. The cash spend for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $30.2 million, $30.2 million, $34.3 million and $9.7 million, respectively.

K-12

Pre-publication expenditures in the K-12 segment relate to content development and are the highest in the company, representing approximately 53% of total spend in 2015. Unlike the Higher Education segment, most content is developed by our K-12 product development teams. Pre-publication expenditures are incurred for external content development (work for hire), permissions, artwork and the physical design and layout of the printed books. Created content is used in our digital offerings as well. New basal programs such as reading, math, social studies or science are published around the adoption cycles for large adoption states such as California, Texas and Florida. Pre-publication expenditures are typically spent up to three years prior to an adoption sales year. The cash spend for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $52.7 million, $38.0 million, $44.0 million and $11.7 million, respectively.

International

Pre-publication expenditures in the international segment relate to locally developed products or adaptations and translations of existing Higher Education, K-12 and Professional products in both digital and print format. Similar to our Higher Education and Professional segments, pre-publication is typically spent in the year before the copyright is established. The cash spend for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $6.5 million, $10.0 million, $9.1 million and $2.5 million, respectively.

Professional

Pre-publication expenditures in the Professional segment relate to new titles and revisions, similar to the Higher Education segment, and include activities related to the creation of the actual product, since the content is created by authors on a royalty basis. Pre-publication expenditures are typically incurred in the year before the copyright is established. For our Access platforms, any additional content needed to supplement the print product will be funded through pre-publication expenditures. The cash spend for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $9.4 million, $10.1 million, $9.1 million and $1.9 million, respectively.

Capital Expenditures

Capital expenditures relate to expenditures for fixed assets, leasehold improvements and software development. The expense related to these purchases is recorded as depreciation in our statement of operations over the useful life of the asset. Our capital expenditures as a percentage of revenue have historically averaged less than 2.0% per annum. Our capital expenditures vary based upon the level of digital investment being made, which was significant in 2014 and 2015, as well as the timing of asset purchases. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) our capital expenditures were $41.2 million, $40.5 million, $7.4 million and $2.5 million, respectively.

Combined Consolidated Operating Results

The following tables set forth certain historical combined consolidated financial information for the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor). The following tables and discussion should be read in conjunction with the information contained in our historical combined consolidated financial statements and the notes thereto included elsewhere in this prospectus. However, our historical predecessor results of operations set forth below and elsewhere in this prospectus may not necessarily reflect what would have occurred if we had been a separate, stand-alone entity during the periods presented or what will occur in the future. For a discussion of the non-GAAP measures used to assess the performance of the Company’s segments, see “—Non-GAAP Measures.”

Consolidated Operating Results for the Years Ended December 31, 2015 and 2014 (Successor)


	Year Ended December 31,
	2015			2014			$ Change			% Change
(Dollars in thousands)
Revenue	$	1,834,581		$	1,855,779		$	(21,198	)		(1.1	)%
Cost of sales		485,015			533,913			(48,898	)		(9.2	)%

Gross profit		1,349,566			1,321,866			27,700			2.1	%
Operating expenses
Operating and administration expenses		1,131,123			1,194,656			(63,533	)		(5.3	)%
Depreciation		30,086			22,086			8,000			36.2	%
Amortization of intangibles		94,156			104,157			(10,001	)		(9.6	)%
Impairment charge		—			23,800			(23,800	)		(100.0	)%
Transaction costs		—			3,932			(3,932	)		(100.0	)%

Total operating expenses		1,255,365			1,348,631			(93,266	)		(6.9	)%

Operating (loss) income		94,201			(26,765	)		120,966			(452.0	)%
Interest expense (income), net		192,643			181,890			10,753			5.9	%
Other (income) expense		(4,779	)		(8,420	)		3,641			(43.2	)%

(Loss) income from operations before taxes on income		(93,663	)		(200,235	)		106,572			(53.2	)%
Income tax (benefit) provision		5,861			112,571			(106,710	)		(94.8	)%

Net (loss) income from continuing operations		(99,524	)		(312,806	)		213,282			(68.2	)%
Net (loss) income from discontinued operations, net of taxes		(75,675	)		(18,157	)		(57,518	)		316.8	%

Net (loss) income	$	(175,199	)	$	(330,963	)	$	155,764			(47.1	)%

Less: Net (income) loss attributable to non-controlling interests		—			299			(299	)		(100.0	)%

Net (loss) income attributable to McGraw-Hill Education, Inc.	$	(175,199	)	$	(330,664	)	$	155,465			(47.0	)%

Revenue


	Year Ended December 31,
	2015		2014			$ Change			% Change
(Dollars in thousands)
Reported Revenue by segment:
Higher Education	$	808,945	$	840,549		$	(31,604	)		(3.8	)%
K-12		593,499		565,301			28,198			5.0	%
International		305,021		333,764			(28,743	)		(8.6	)%
Professional		119,589		116,774			2,815			2.4	%
Other		7,527		(609	)		8,136			(1336.0	)%

Total Reported Revenue	$	1,834,581	$	1,855,779		$	(21,198	)		(1.1	)%

Revenue for the years ended December 31, 2015 and 2014 (Successor) was $1,834.6 million and $1,855.8 million, respectively, a decrease of $21.2 million or 1.1%. Excluding the impact of purchase accounting (which negatively impacted revenue as a result of the adjustment recorded to reduce the carrying value of deferred revenue on the opening balance sheet), revenue for the years ended December 31, 2015 and 2014 (Successor) was $1,860.0 million and $1,886.4 million, respectively, a decrease of $26.4 million or 1.4%. This decrease was driven by the segment factors described below.

Higher Education

Higher Education revenue for the years ended December 31, 2015 and 2014 (Successor) was $808.9 million and $840.5 million, respectively, a decrease of $31.6 million or 3.8%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2015 and 2014 (Successor) was $809.5 million and $834.8 million, respectively, a decrease of $25.3 million or 3.0%. The decrease was primarily due to:

•

decreased print revenues, resulting in part from our focused transition from print to digital which has led to extended revision cycles for certain titles and a declining print front-list, which in turn has led to more used and rental alternatives for new print materials. In addition, the digital transition has led to unfavorable timing impacts resulting from distribution partners having less market visibility leading to later ordering of print and more unpredictable purchasing and returns patterns in the near term. In the long-term, we would expect higher sell-through to the classroom of digital alternatives and print returns to decline as the business mix transitions to digital offerings; and

•

unfavorable timing in sales as the digital transition is changing our selling patterns for digital and print offerings. As we drive our digital first strategy, students are increasingly purchasing digital solutions directly from our proprietary e-commerce channel at the start of the semester. As these sales transition from the traditional distribution channel to our proprietary e-commerce channel, this has the effect of shifting our sales from the end of 2015 to the beginning of 2016; partially offset by

•

digital revenue growth, primarily driven by growth in paid activations of our core digital learning solutions Connect/LearnSmart and ALEKS (paid activations of Connect/LearnSmart grew by 16%, and paid activations of ALEKS grew by 10%); and

•

a favorable product returns reserve rate adjustment consistent with the ongoing market shift to digital learning solutions which experience a lower return rate.

K-12

K-12 revenue for the years ended December 31, 2015 and 2014 (Successor) was $593.5 million and $565.3 million respectively, an increase of $28.2 million or 5.0%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2015 and 2014 (Successor) was $618.3 million and $597.3 million, respectively, an increase of $21.0 million or 3.5%. The increase was primarily due to:

•

strong performance in California new math adoptions as well as Texas new math and social studies adoptions; partially offset by

•

net deferred revenue growth of $42.1 million driven by increased sales of our digital learning solutions (which are required to be deferred and recognized to income over time (typically five to eight years) in accordance with U.S. GAAP); and

•

a decline in open territory revenue due to a smaller market in 2015 and lower elementary reading and math sales as compared to 2014.

International

International revenue for the years ended December 31, 2015 and 2014 (Successor) was $305.0 million and $333.8 million, respectively, a decrease of $28.8 million or 8.6%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2015 and 2014 (Successor) was $305.0 million and $334.4 million, respectively, a decrease of $29.4 million or 8.8%. The decrease was primarily due to:

•

a $27.5 million unfavorable foreign exchange rate impact (estimated by re-calculating current period results of foreign operations using the average exchange rate from the prior period); and

•

a decline in print revenue; partially offset by

•

digital revenue growth primarily in higher education sales.

Geographic performance was driven by higher education sales in Australia and the Middle East, offset by a decline in Latin America driven by lower K-12 and professional sales.

Professional

Professional revenue for the years ended December 31, 2015 and 2014 (Successor) was $119.6 million and $116.8 million, respectively, an increase of $2.8 million or 2.4%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2015 and 2014 (Successor) was $119.7 million and $120.5 million, respectively, a decrease of $0.8 million or 0.7%. The decrease was primarily due to:

•

decline in print and eBook revenue due, in part, to a formal portfolio review and rationalization in late 2014; partially offset by

•

new digital subscription revenue growth and strong renewals across Access platform offerings.

Cost of Sales


	Year Ended December 31
	2015			2014			$ Change			% Change
(Dollars in thousands)
Cost of sales, as reported	$	485,015		$	533,913		$	(48,898	)		(9.2	)%
Impact of purchase accounting		—			41,585			(41,585	)		(100.0	)%

Cost of sales, excluding the impact of purchase accounting	$	485,015		$	492,328		$	(7,313	)		(1.5	)%

Excluding purchase accounting—% of revenue		26.1	%		26.1	%

Cost of sales for the years ended December 31, 2015 and 2014 (Successor) was $485.0 million and $533.9 million, respectively. Excluding the impact of purchase accounting (which negatively impacted cost of sales as a result of the step-up in the carrying value of inventory on the opening balance sheet), cost of sales for the years ended December 31, 2015 and 2014 (Successor) was $485.0 million and $492.3 million, respectively, a decrease of $7.3 million or 1.5%. This net decrease was driven by:

•

lower manufacturing costs due to the migration from print to digital learning solutions; and

•

lower royalty expense due to product mix; partially offset by

•

slightly higher freight charges.

Operating and Administration Expenses

Operating and administration expenses for the years ended December 31, 2015 and 2014 (Successor) were $1,131.1 million and $1,194.7 million, respectively, a decrease of $63.6 million or 5.3%. Included within operating and administration expense is the amortization of pre-publication expenditures which increased by $9.5 million or 11.7% primarily due to planned K-12 adoptions. The remaining decrease was driven by:

•

a $46.7 million cost reduction due to the completion of physical separation from MHC, our former parent company, in 2014;

•

a $6.0 million decrease in selling and marketing expense driven by our decline in revenue;

•

a $1.7 million decrease in print samples expense due to a focus on digital sampling;

•

a $16.0 million decrease in restructuring and cost savings implementation charges;

•

the realization of cost savings associated with actions taken subsequent to the Founding Acquisition including headcount reduction, facilities rationalization, technology optimization and outsourcing as part of our comprehensive cost savings program;

•

a $3.9 million decrease in transaction costs; and

•

a $4.4 million decrease in acquisition costs; partially offset by

•

a $24.8 million increase in DPG expense as a result of our continued investment in digital.

Depreciation & Amortization of Intangibles

Depreciation and amortization expenses for the years ended December 31, 2015 and 2014 (Successor) were $124.2 million and 126.2 million, respectively, a decrease of $2.0 million or 1.6%. This decrease was the result of having finalized the valuation of intangible assets acquired at the time of the Founding Acquisition.

Interest expense, net

Interest expense, net, for the years ended December 31, 2015 and 2014 (Successor) was $192.6 million and $181.9 million, respectively, an increase of $10.7 million or 5.9%. The increase was the result of the following:

•

the original issuance of the $400.0 million in MHGE PIK Toggle Notes on July 17, 2014 and subsequent issuance of an additional $100.0 million of MHGE PIK Toggle Notes in April 2015; partially offset by

•

the refinancing of the MHGE Term Loan on March 24, 2014, which reduced the applicable LIBOR margin from 7.75% to 4.75%, and voluntary principal payment of $35.0 million; and

•

the refinancing of the MHGE Term Loan on May 4, 2015, which further reduced the applicable LIBOR margin of 4.75% to 3.75%, and voluntary principal payment of $0.3 million.

Other (income) expense

Other (income) expense for the years ended December 31, 2015 and 2014 (Successor) was $(4.8) million and $(8.4) million, respectively related to the following:

•

a gain of $4.8 million relating to the sale of an investment in an equity security in 2015; and

•

a $7.3 million gain recognized on the original 20% equity interest in LearnSmart held at the time the remaining 80% was acquired on February 6, 2014 and the sale of two parcels of land in November 2014 for a gain of $1.1 million.

Provision for Taxes on Income

Taxes on income from continuing operations for the years ended December 31, 2015 and 2014 (Successor) were provisions of $5.9 million and $112.6 million, respectively. As of December 31, 2014, a full valuation allowance was recorded against federal and state deferred tax assets due to negative evidence of cumulative book losses incurred in the Successor period. The valuation allowance established in the year ended December 31, 2014, reversed domestic tax benefits claimed in the year ended December 31, 2013 (Successor). In assessing the need for a valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.

Discontinued Operations

The Company sold substantially all of the assets and certain liabilities of the Company’s wholly owned CTB business to Data Recognition Corporation in June 2015. The net loss from discontinued operations was $75.7 million for the year ended December 31, 2015 (Successor) as compared to $18.2 million for the year ended December 31, 2014 (Successor). The variance of $57.5 million is primarily due to a $42.8 million loss on sale

recognized in 2015 in addition to material contracts that were not renewed and the timing of state adoptions of Common Core assessment tests which negatively impacted the market and the number of new business opportunities.

Combined Consolidated Operating Results for the Year Ended December 31, 2014 (Successor) and the Periods Ended March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor)


	Successor						Predecessor
	Year Ended December 31, 2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			$ Change			% Change
(Dollars in thousands)
Revenue	$	1,855,779		$	1,589,574		$	229,441		$	36,764			2.0	%
Cost of sales		533,913			777,384			64,006			(307,477	)		(36.5	)%

Gross profit		1,321,866			812,190			165,435			344,241			35.2	%
Operating expenses
Operating and administration expenses		1,194,656			841,652			208,816			144,188			13.7	%
Depreciation		22,086			23,538			5,817			(7,269	)		(24.8	)%
Amortization of intangibles		104,157			69,181			6,326			28,650			37.9	%
Impairment charge		23,800			—			—			23,800			100.0	%
Transaction costs		3,932			56,820			—			(52,888	)		(93.1	)%

Total operating expenses		1,348,631			991,191			220,959			136,481			11.3	%

Operating (loss) income		(26,765	)		(179,001	)		(55,524	)		207,760			(88.6	)%
Interest expense (income), net		181,890			137,283			488			44,119			32.0	%
Other (income) expense		(8,420	)		—			—			(8,420	)		100.0	%

(Loss) income from operations before taxes on income		(200,235	)		(316,284	)		(56,012	)		172,061			(46.2	)%
Income tax (benefit) provision		112,571			(130,158	)		(20,410	)		263,139			(174.8	)%

Net (loss) income from continuing operations		(312,806	)		(186,126	)		(35,602	)		(91,078	)		41.1	%
Net (loss) income from discontinued operations, net of taxes		(18,157	)		18,617			4,058			(40,832	)		(180.1	)%

Net (loss) income	$	(330,963	)	$	(167,509	)	$	(31,544	)	$	(131,910	)		66.3	%

Less: Net (income) loss attributable to non-controlling interests		299			(2,251	)		631			1,919			(118.5	)%

Net (loss) income attributable to McGraw-Hill Education, Inc.	$	(330,664	)	$	(169,760	)	$	(30,913	)	$	(129,991	)		64.8	%

Revenue


	Successor					Predecessor
	Year Ended December 31, 2014			March 23, 2013 to December 31, 2013		January 1, 2013 to March 22, 2013		$ Change			% Change
(Dollars in thousands)
Reported Revenue by segment:
Higher Education	$	840,549		$	664,698	$	107,717	$	68,134			8.8	%
K-12		565,301			533,769		43,199		(11,667	)		(2.0	)%
International		333,764			296,353		53,009		(15,598	)		(4.5	)%
Professional		116,774			93,988		23,139		(353	)		(0.3	)%
Other		(609	)		766		2,377		(3,752	)		(119.4	)%

Total Reported Revenue	$	1,855,779		$	1,589,574	$	229,441	$	36,764			2.0	%

Revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $1,855.8 million and $1,589.6 million and $229.4 million, respectively, an increase of $36.8 million or 2.0%. Excluding the impact of purchase accounting (which negatively impacted revenue as a result of the adjustment recorded to reduce the carrying value of deferred revenue on the opening balance sheet), revenue for the year ended December 31, 2014 (Successor) and the periods ended March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $1,886.4 million and $1,651.4 million and $229.4 million, respectively, an increase of $5.6 million or 0.3%. This net increase was driven by the segment factors discussed below.

Higher Education

Higher Education revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $840.5 million and $664.7 million and $107.7 million, respectively, an increase of $68.1 million or 8.8%. Excluding the impact of purchase accounting, revenue for the year ended December 31, 2014 (Successor) and the periods ended March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $834.8 million and $690.0 million and $107.7 million, respectively, an increase of $37.1 million or 4.7%. The increase was primarily due to:

•

digital revenue growth of nearly $60.0 million driven primarily by our Connect/LearnSmart and ALEKS digital learning solutions (paid activations of Connect/LearnSmart grew by 19% and paid activations of ALEKS grew by 24%);

•

eBooks and a full year of incremental ALEKS revenues (acquired in August 2013); partially offset by

•

a decline in print revenue of $22.0 million or 4% due primarily to extended new book revision cycles, used and rental alternatives for new materials and the migration from traditional print to digital learning solutions.

K-12

K-12 revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $565.3 million and $533.8 million and $43.2 million, respectively, a decrease of $11.7 million or 2.0%. Excluding the impact of purchase accounting, revenue for the year ended December 31, 2014 (Successor) and the periods ended March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $597.3 million and $566.5 million and $43.2 million, respectively, a decrease of $12.4 million or 2.0%. The decrease was primarily due to:

•

net deferred revenue growth of $68.7 million driven by increased sales of our digital learning solutions (which are required to be deferred and recognized to income over time (typically five to eight years) in accordance with U.S. GAAP);

•

a decline in Everyday Math revenues in anticipation of the new product release; partially offset by

•

strong new adoption state sales (both print and digital) in secondary math and science in Texas and secondary math in California;

•

strong open territory sales, most notably Hawaii and Pennsylvania; and

•

the full year results of ALEKS, which was acquired in August 2013.

International

International revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $333.8 million and $296.4 million and $53.0 million, respectively, a decrease of $15.6 million or 4.5%. Excluding the

impact of purchase accounting, revenue for the year ended December 31, 2014 (Successor) and the periods ended March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $334.4 million and $297.5 million and $53.0 million, respectively, a decrease of $16.1 million or 4.6%. The decrease was primarily due to the following:

•

unfavorable foreign exchange rate impact of $6.4 million (estimated by re-calculating current year results of foreign operations using the average exchange rate from the prior year); and

•

a decline in print revenues; partially offset by

•

an increase in digital revenues to approximately 10% of total revenues.

Geographic performance was affected by growth in the Asia Pacific region, driven by higher education market share gains in Australia; a decline in performance in the EMEA region, driven partially by the cyclical nature of K-12 renewals and pressure on government funding; and lower performance in Latin America across all segments.

Professional

Professional revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $116.8 million and $94.0 million and $23.1 million, respectively, a decrease of $0.4 million or 0.3%. Excluding the impact of purchase accounting, revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $120.5 million and $96.7 million and $23.1 million, respectively, an increase of $0.7 million or 0.6%. The increase was primarily due to the following:

•

a digital revenue increase of 8%, net of eBook revenue declines, to approximately 40% of total revenues with digital subscription renewal rates continuing to exceed 90%; partially offset by

•

print revenue declines.

Cost of Sales


	Successor						Predecessor
	Year Ended December 31, 2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			$ Change			% Change
(Dollars in thousands)
Cost of sales, as reported	$	533,913		$	777,384		$	64,006		$	(307,477	)		(36.5	)%
Impact of purchase accounting		41,585			312,615			—			(271,030	)		(86.7	)%

Cost of sales, excluding the impact of purchase accounting	$	492,328		$	464,769		$	64,006		$	(36,447	)		(6.9	)%

Excluding purchase accounting—% of revenue		26.1	%		28.1	%		27.9	%

Cost of sales for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $533.9 million and $777.4 million and $64.0 million, respectively. Excluding the impact of purchase accounting (which negatively impacted cost of sales as a result of the step-up in the carrying value of inventory on the opening balance sheet), cost of sales for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to

December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $492.3 million and $464.8 million and $64.0 million, respectively, a decrease of $36.5 million or 6.9%. The net decrease was driven by:

•

royalty savings as a result of the ALEKS acquisition in August 2013 and LearnSmart acquisition in February 2014; and

•

decreased manufacturing and gratis product costs during the period due, in part, to the continued migration from print to digital solutions.

Operating and Administration Expenses

Operating and administration expenses for the year ended December 31, 2014 (Successor) and periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) were $1,194.7 million and $841.7 million and $208.8 million, respectively, an increase of $144.2 million or 13.7%. Included within operating and administration expense is the amortization of pre-publication costs which decreased by $5.1 million or 5.9% as a result of more efficient capital deployment and the impact of transitioning from a print to digital operating model. The remaining variance was due to:

•

an increase in digital related expenditures associated with the formal establishment and build-out of DPG (approximately $60.0 million) subsequent to the Founding Acquisition;

•

a cost increase of $38.6 million related to the physical separation of MHE operations from MHC;

•

investment in selling and marketing of approximately $30.0 million in advance of sales opportunities in 2014 and future periods for both K-12 and Higher Education; and

•

increased technology costs as a standalone entity; partially offset by

•

the realization of cost savings associated with actions taken subsequent to the Founding Acquisition, including headcount reduction, facilities rationalization, technology optimization and outsourcing as part of our comprehensive cost savings program.

Depreciation & Amortization of Intangibles

Depreciation and amortization expenses for the year ended December 31, 2014 (Successor) and periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) were $126.2 million and $92.7 million and $12.1 million, respectively. This was primarily due to the definite-lived intangible assets associated with the following acquisitions:

•

Founding Acquisition: $998.0 million (completed March 2013; full year impact in 2014);

•

LearnSmart: $44.8 million (acquired February 2014; partial year impact in 2014);

•

ALEKS: $40.7 million (acquired August 2013; full year impact in 2014); and

•

Engrade: $5.8 million (acquired February 2014; partial year impact in 2014).

Impairment Charge

As of December 31, 2014, the Company estimated that the carrying amount of a directly owned office building may not be recoverable. In order to reduce the carrying amount of the office building to its estimated fair market value, the Company recorded an impairment charge of $23.8 million. The estimated fair market value was determined based on an appraisal from an independent valuation specialist.

Transaction Related Expenses

The transaction related expenses for the year ended December 31, 2014 (Successor) and period from March 23, 2013 to December 31, 2013 (Successor) were $3.9 million and $56.8 million, respectively. These

amounts represent the transaction costs associated with the Founding Acquisition, which include legal and consulting expenses. There were no transaction related expenses recorded in the Predecessor period.

Interest Expense, Net

Interest expense, net, for the year ended December 31, 2014 (Successor) and periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $181.9 million and $137.3 million and $0.5 million, respectively. The net change was the result of the following:

•

the debt incurred to finance the Founding Acquisition, including an initial $810 million 6-year MHGE Term Loan, all of which was drawn at closing, $240.0 million 5-year MHGE Revolving Facility, of which $35.0 million was drawn at closing, the issuance of $800.0 million MHGE Senior Secured Notes and a $150 million 5-year MHSE Revolving Facility, which was undrawn at closing;

•

the $250.0 million First-Lien Credit Agreement Term Loan entered into by MHSE on December 18, 2013; and

•

the $400.0 million issuance of the MHGE PIK Toggle Notes on July 17, 2014.

During the year ended December 31, 2014 (Successor), the interest expense, net was favorably impacted by the voluntary principal payments of the MHGE Term Loan of $35.0 million and $81.0 million on March 24, 2014 and December 31, 2013, respectively, as well as the refinancing of the MHGE Term Loan on March 24, 2014, which reduced the applicable LIBOR margin from 7.75% to 4.75%. This interest expense reduction was partially offset by the additional debt incurred by MHSE on December 18, 2013.

Other (Income) Expense

Other (income) expense for the year ended December 31, 2014 (Successor) and periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $(8.4) million and none and none, respectively, related to the following:

•

a $7.3 million gain recognized on the original 20% equity interest in LearnSmart held at the time the remaining 80% was acquired on February 6, 2014; and

•

the sale of two parcels of land in November 2014 for a gain of $1.1 million.

Provision for Taxes on Income

Taxes on income for the year ended December 31, 2014 (Successor) and periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), were a provision of $112.6 million and benefits of $130.2 million and $20.4 million, respectively. For the year ended December 31, 2014 (Successor) and the periods March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), the effective tax rate was (56.2)% and 41.2% and 36.4%, respectively. The Predecessor tax provisions and related deferred tax assets and liabilities were determined as if the Company were a separate taxpayer.

The taxes on income for the year ended December 31, 2014 (Successor) were negatively impacted by a full valuation allowance recorded by the Company against federal and state deferred tax assets due to negative evidence of cumulative book losses incurred in the Successor period. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence can be objectively verified. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.

Discontinued Operations

The Company sold substantially all of the assets and certain liabilities of the Company’s wholly-owned CTB business to Data Recognition Corporation in June 2015. For the year ended December 31, 2014 (Successor) and periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), there was a net loss of $18.2 million and net income of $18.6 million and net income of $4.1 million attributable to discontinued operations. The net loss in 2014 was the result of a $32.5 million impairment of goodwill, material contracts that were not renewed as well as slow and uneven state adoptions of Common Core assessment tests which negatively impacted the market and the number of new business opportunities.

Non-GAAP Measures

Adjusted Revenue, EBITDA and Adjusted EBITDA

The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of “non-GAAP financial measures,” such as Adjusted Revenue, EBITDA and Adjusted EBITDA and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with U.S. GAAP.

Adjusted Revenue is a non-GAAP financial measure that we define as the total amount of revenue that would have been recognized in a period if we recognized all revenue immediately at the time of sale. We use Adjusted Revenue as a performance measure given that we typically collect full payment for our digital and print solutions at the time of sale or shortly thereafter, but recognize revenue from digital solutions and multi-year deliverables ratably over the term of our customer contracts. Adjusted Revenue is a key metric we use to manage our business as it reflects the sales activity in a given period, particularly in the K-12 market, in which customers typically pay for five to eight year contracts upfront. Adjusted Revenue is U.S. GAAP revenue plus the net change in deferred revenue.

EBITDA, a measure used by management to assess operating performance, is defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre-publication investment cash costs). Adjusted EBITDA is defined as EBITDA adjusted to exclude unusual items and other adjustments required or permitted under our debt agreements. Adjusted EBITDA is the fundamental profitability metric we use to manage our business as it reflects the sales activity in a given period, as well as the impact of our continuing investment in pre-publication activities, which are important to the ongoing success of our business.

Each of the above described measures is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue, income from continuing operations, income from operations or any other measure derived in accordance with U.S. GAAP as a measure of operating performance or to cash flows from operations as a measure of liquidity. Additionally, each such measure is not intended to be a measure of free cash flows available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under U.S. GAAP. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use identical calculations, our measures may not be comparable to other similarly titled measures of other companies. See “Use of Non-GAAP Financial Information” and “Prospectus Summary—Our Key Metrics.”

Management believes Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax rules in the jurisdictions in which companies operate, and capital investments. In addition, Adjusted Revenue and Adjusted EBITDA provides more comparability between the historical operating results and operating results

that reflect purchase accounting and the new capital structure post the Founding Acquisition as well as the digital transformation that we are undertaking which requires different accounting treatment for digital and print solutions in accordance with U.S. GAAP.

Management believes that the inclusion of supplementary adjustments to Adjusted EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.


	Successor									Predecessor
	Year Ended December 31,						March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
(Dollars in thousands)	2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
Reported Revenue by segment:
Higher Education	$	808,945		$	840,549		$	664,698		$	107,717
K-12		593,499			565,301			533,769			43,199
International		305,021			333,764			296,353			53,009
Professional		119,589			116,774			93,988			23,139
Other		7,527			(609	)		766			2,377

Total Reported Revenue		1,834,581			1,855,779			1,589,574			229,441
Change in deferred revenue(a)		220,894			179,059			168,725			(17,304	)

Adjusted Revenue	$	2,055,475		$	2,034,838		$	1,758,299		$	212,137


Adjusted Revenue by segment:
Higher Education	$	824,951		$	838,310		$	718,076		$	93,289
K-12		797,510			734,417			638,197			38,942
International		307,932			335,809			300,487			54,289
Professional		123,037			127,299			99,429			25,738
Other		2,045			(997	)		2,110			(121	)

Total Adjusted Revenue	$	2,055,475		$	2,034,838		$	1,758,299		$	212,137


	Successor									Predecessor
	Year Ended December 31,						March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
(Dollars in thousands)	2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
Net income (loss) from continuing operations	$	(99,524	)	$	(312,806	)	$	(186,126	)	$	(35,602	)
Interest (income) expense, net		192,643			181,890			137,283			488
Income tax (benefit) provision		5,861			112,571			(130,158	)		(20,410	)
Depreciation, amortization and pre-publication investment amortization		212,851			205,831			163,883			25,434

EBITDA	$	311,831		$	187,486		$	(15,118	)	$	(30,090	)

Change in deferred revenue(a)		220,894			179,059			168,725			(17,304	)
Restructuring and cost savings implementation charges(b)		23,886			39,888			33,984			4,116
Sponsor fees(c)		3,500			3,500			875			—
Impairment charge(d)		—			23,800			—			—
Purchase accounting(e)		—			41,585			312,615			—
Transaction costs(f)		—			3,932			56,820			—
Acquisition costs(g)		—			4,376			4,796			—
Physical separation costs(h)		—			46,716			8,100			—
Other(i)		25,102			29,109			23,944			5,627
Pre-publication investment cash costs(j)		(98,817	)		(87,085	)		(96,615	)		(25,319	)

Adjusted EBITDA	$	486,396		$	472,366		$	498,126		$	(62,970	)

(a)

(b)	Represents severance and other expenses associated with headcount reductions and other cost savings initiated as part of our formal restructuring initiatives to create a flatter and more agile organization.

(c)	Beginning in 2014, $3.5 million of annual management fees was recorded and payable to Apollo. The amount recorded in the Successor period from March 23, 2013 to December 31, 2013 was $0.9 million.

(d)	An impairment charge was recorded in 2014 to reduce the recorded value of an owned office building to its estimated fair value based upon an independent appraisal.

(e)	Represents the effects of the application of purchase accounting associated with the Founding Acquisition, driven by the step-up of acquired inventory. The deferred revenue adjustment recorded as a result of purchase accounting has been considered in the deferred revenue adjustment.

(f)	The amount represents the transaction costs associated with the Founding Acquisition.

(g)	The amount represents costs incurred for acquisitions subsequent to the Founding Acquisition including ALEKS, LearnSmart and Engrade.

(h)	The amount represents costs incurred to physically separate our operations from MHC. These physical separation costs were incurred subsequent to the Founding Acquisition and concluded in 2014.

(i)

For the periods from March 23, 2013 to December 31, 2013 (Successor) and from January 1, 2013 to March 22, 2013 (Predecessor), the amount represents (i) cash distributions to noncontrolling interest holders (excluding special dividends) of $0.5 million and $1.8 million, respectively; (ii) non-cash incentive compensation expense recorded directly beginning in the first quarter of 2013; and (iii) other adjustments required or permitted in calculating covenant compliance under our debt agreements.

(j)	Represents the cash cost for pre-publication investment during the period excluding discontinued operations.

Operating Results Based on Non-GAAP Measures for the Years Ended December 31, 2015 and 2014 (Successor)


	Year Ended December 31,
(Dollars in thousands)	2015		2014			$ Change			% Change
Reported Revenue by segment:
Higher Education	$	808,945	$	840,549		$	(31,604	)		(3.8	)%
K-12		593,499		565,301			28,198			5.0	%
International		305,021		333,764			(28,743	)		(8.6	)%
Professional		119,589		116,774			2,815			2.4	%
Other		7,527		(609	)		8,136			(1336.0	)%

Total Reported Revenue	$	1,834,581	$	1,855,779		$	(21,198	)		-1.1	%

Change in deferred revenue		220,894		179,059			41,835			23.4	%

Adjusted Revenue	$	2,055,475	$	2,034,838		$	20,637			1.0	%

Adjusted Revenue by segment:
Higher Education	$	824,951	$	838,310		$	(13,359	)		(1.6	)%
K-12		797,510		734,417			63,093			8.6	%
International		307,932		335,809			(27,877	)		(8.3	)%
Professional		123,037		127,299			(4,262	)		(3.3	)%
Other		2,045		(997	)		3,042			(305.1	)%

Total Adjusted Revenue	$	2,055,475	$	2,034,838		$	20,637			1.0	%


	Year Ended December 31,
	2015			2014			$ Change			% Change
(Dollars in thousands)
Adjusted EBITDA by segment:
Higher Education	$	296,090		$	293,100		$	2,990			1.0	%
K-12		130,508			115,627			14,881			12.9	%
International		33,229			37,603			(4,374	)		(11.6	)%
Professional		32,193			37,882			(5,689	)		(15.0	)%
Other		(5,624	)		(11,846	)		6,222			(52.5	)%

Total Adjusted EBITDA	$	486,396		$	472,366		$	14,030			3.0	%

Adjusted Revenue for the years ended December 31, 2015 and 2014 (Successor) was $2,055.5 million and $2,034.8 million, respectively, an increase of $20.7 million or 1.0%.

Adjusted EBITDA for the years ended December 31, 2015 and 2014 (Successor) was $486.4 million and $472.4 million, respectively, an increase of $14.0 million or 3.0%.

These variances were driven by the segment factors described below.

Higher Education

Adjusted Revenue. Adjusted Revenue for the years ended December 31, 2015 and 2014 (Successor) was $825.0 million and $838.3 million, respectively, a decrease of $13.3 million or 1.6%. The decrease was due to:

•

long-term, we would expect higher sell-through to the classroom of digital alternatives and print returns to decline as the business mix transitions to digital offerings; and

•

a favorable product returns reserve rate adjustment consistent with the ongoing market shift to digital learning solutions which experience a much lower return rate.

Adjusted EBITDA. Adjusted EBITDA for the years ended December 31, 2015 and 2014 (Successor) was $296.1 million and $293.1 million, respectively, an increase of $3.0 million or 1.0%. The increase was due to:

•

the profit impact of aforementioned Adjusted Revenue variance; and

•

continued investment in digital capabilities, primarily through DPG.

K-12

Adjusted Revenue. Adjusted Revenue for the years ended December 31, 2015 and 2014 (Successor) was $797.5 million and $734.4 million, respectively, an increase of $63.1 million or 8.6%. The increase was due to:

•

an increase in total adoption Adjusted Revenue of 23% or approximately $84.1 million due to:

–

K-5 new math adoptions in California;

–

6-12 new social studies and 9-12 math adoptions in Texas; partially offset by

–

Lower new adoptions in 6-8 math and 6-12 science in Texas as compared to 2014; partially offset by

•

a 2% or approximately $4.4 million decline in total open territory Adjusted Revenue.

Adjusted EBITDA. Adjusted EBITDA for the years ended December 31, 2015 and 2014 (Successor) was $130.5 million and $115.6 million, respectively, an increase of $14.9 million or 12.9%. The increase was due to:

•

the profit impact of aforementioned Adjusted Revenue variance; and

•

reduced print samples expense due to a focus on digital sampling; partially offset by

•

continued investment in digital capabilities, primarily through DPG; and

•

increased pre-publication investment cash costs in advance of future sales opportunities.

International

Adjusted Revenue. Adjusted Revenue for the years ended December 31, 2015 and 2014 (Successor) was $307.9 million and $335.8 million, respectively, a decrease of $27.9 million or 8.3%. The decrease was due to:

•

a $28.4 million unfavorable foreign exchange rate impact (estimated by re-calculating current period results of foreign operations using the average exchange rate from the prior period); and

•

a decline in print revenue; partially offset by

•

digital revenue growth primarily in the higher education market.

Geographic performance was driven by higher education sales in Australia and the Middle East, offset by a sales decline in Latin America, primarily due to lower K-12 and professional sales.

Adjusted EBITDA. Adjusted EBITDA for the years ended December 31, 2015 and 2014 (Successor) was $33.2 million and $37.6 million, respectively, a decrease of $4.4 million or 11.7%. The decrease was due to:

•

a $6.7 million unfavorable foreign exchange rate impact (estimated by re-calculating current period results of foreign operations using the average exchange rate from the prior period); and

•

the profit impact of aforementioned Adjusted Revenue variance and slightly lower gross margins due to sales mix; partially offset by

•

more efficient capital deployment and timing related to pre-publication investment cash costs.

Professional

Adjusted Revenue. Adjusted Revenue for the years ended December 31, 2015 and 2014 (Successor) was $123.0 million and $127.3 million, respectively, a decrease of $4.3 million or 3.4%. The decrease was due to:

•

decline in print and eBook revenue due, in part, to a formal portfolio review and rationalization in late 2014;

•

unfavorable timing associated with subscription renewals; partially offset by

•

new digital subscription revenue growth and strong renewals across Access platform offerings.

Adjusted EBITDA. Adjusted EBITDA for the years ended December 31, 2015 and 2014 (Successor) was $32.2 million and $37.9 million, respectively, a decrease of $5.7 million or 15.0%. The decrease was due to:

•

the profit impact of the aforementioned Adjusted Revenue variance; and

•

continued investment in digital capabilities, primarily through DPG; partially offset by

•

the net cost benefit related to a print and eBook portfolio and operating model rationalization project undertaken in 2014.

Other

Adjusted EBITDA. Adjusted EBITDA for the years ended December 31, 2015 and 2014 (Successor) was $(5.6) million and $(11.8) million, respectively, an increase of $6.2 million or (52.5)%. The increase was due to:

•

impact of adjustments made for in-transit product sales in accordance with U.S. GAAP;

•

timing related corporate adjustments; and

•

various costs not attributable to a single operating segment.

Combined Consolidated Operating Results Based on Non-GAAP Measures for the Year Ended December 31, 2014 (Successor) and the Periods Ended March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor)


	Successor					Predecessor
(Dollars in thousands)	Year Ended December 31, 2014			March 23, 2013 to December 31, 2013		January 1, 2013 to March 22, 2013			$ Change			% Change
Reported Revenue by segment:
Higher Education	$	840,549		$	664,698	$	107,717		$	68,134			8.8	%
K-12		565,301			533,769		43,199			(11,667	)		(2.0	)%
International		333,764			296,353		53,009			(15,598	)		(4.5	)%
Professional		116,774			93,988		23,139			(353	)		(0.3	)%
Other		(609	)		766		2,377			(3,752	)		(119.4	)%

Total Reported Revenue		1,855,779			1,589,574		229,441			36,764			2.0	%
Change in deferred revenue		179,059			168,725		(17,304	)		27,638			18.3	%

Adjusted Revenue	$	2,034,838		$	1,758,299	$	212,137		$	64,402			3.3	%

Adjusted Revenue by segment:
Higher Education	$	838,310		$	718,076	$	93,289		$	26,945			3.3	%
K-12		734,417			638,197		38,942			57,278			8.5	%
International		335,809			300,487		54,289			(18,967	)		(5.3	)%
Professional		127,299			99,429		25,738			2,132			1.7	%
Other		(997	)		2,110		(121	)		(2,986	)		(150.1	)%

Total Adjusted Revenue	$	2,034,838		$	1,758,299	$	212,137		$	64,402			3.3	%


	Successor					Predecessor
	Year Ended December 31, 2014			March 23, 2013 to December 31, 2013		January 1, 2013 to March 22, 2013			$ Change			% Change
(Dollars in thousands)
Adjusted EBITDA by segment:
Higher Education	$	293,100		$	280,950	$	(6,045	)	$	18,195			6.6	%
K-12		115,627			126,095		(51,255	)		40,787			54.5	%
International		37,603			50,958		(8,630	)		(4,725	)		(11.2	)%
Professional		37,882			29,249		2,932			5,701			17.7	%
Other		(11,846	)		10,874		28			(22,748	)		(208.7	)%

Total Adjusted EBITDA	$	472,366		$	498,126	$	(62,970	)	$	37,210			8.6	%

Adjusted Revenue for the year ended December 31, 2014 (Successor), the periods March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $2,034.8 million, $1,758.3 million and $212.1 million, respectively, an increase of $64.4 million or 3.3%.

Adjusted EBITDA for the year ended December 31, 2014 (Successor), the periods March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $472.4 million, $498.1 million and $(63.0) million, respectively, an increase of $37.2 million or 8.6%.

These variances were driven by the segment factors set forth below.

Higher Education

Adjusted Revenue. Adjusted Revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $838.3 million and $718.1 million and $93.3 million, respectively, an increase of $26.9 million or 3.3%. The increase was due to:

•

18% or $48.9 million digital Adjusted Revenue growth, driven predominately by our Connect/LearnSmart and ALEKS offerings driven by growth in paid activations for our digital learning solutions (paid activations of Connect/LearnSmart grew by 19% and paid activations of ALEKS grew by 24%); partially offset by

•

a net print Adjusted Revenue decline of $22.0 million or 4% due primarily to extended new book revision cycles, used and rental alternatives for new materials and the migration from traditional print to digital learning solutions.

Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $293.1 million and $281.0 million and $(6.1) million, respectively, an increase of $18.2 million or 6.6%. The increase was due to:

•

the profit impact of aforementioned Adjusted Revenue variance;

•

modest gross margin improvement driven by reduced royalty expense (as a percentage of Adjusted Revenue) attributable to the acquisitions of ALEKS and LearnSmart as well as cost savings as a result of a favorable platform contract renewal and lower custom product development expense;

•

more efficient and disciplined pre-publication investment cash costs driving savings of $13.8 million; and

•

increased investment of more than $30.0 million in DPG which is partially responsible for the decrease in pre-publication investment cash costs as the business shifts from a periodic revision cycle that gives rise to significant pre-publication investment cash costs to a continuous revision cycle made possible by the digital nature of our learning solutions.

K-12

Adjusted Revenue. Adjusted Revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $734.4 million and $638.2 million and $38.9 million, respectively, an increase of $57.3 million or 8.5%. The increase was due to:

•

a 14% or approximately $45.0 million increase in total new adoption Adjusted Revenue (both print and digital) due to secondary math and science in Texas and secondary math in California;

•

a 3% or approximately $10.0 million increase in total open territory Adjusted Revenue due to strong sales in Hawaii and Pennsylvania; and

•

the full year results of ALEKS which was acquired in August 2013; partially offset by

•

decline in Everyday Math Adjusted Revenue in anticipation of the new product release.

Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $115.6 million and $126.1 million and $(51.3) million, respectively, an increase of $40.8 million or 54.5%. The increase was due to:

•

the profit impact of the aforementioned Adjusted Revenue variance;

•

an approximately $20.0 million reduction in pre-publication investment cash costs due to the timing of revision cycles and more efficient capital deployment;

•

increased investment of more than $20.0 million in digital capabilities via DPG.

International

Adjusted Revenue. Adjusted Revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $335.8 million and $300.5 million and $54.3 million respectively, a decrease of $19.0 million or 5.3%. The decrease was due:

•

an unfavorable foreign exchange impact of approximately $6.4 million (estimated by re-calculating current year results of foreign operations using the average exchange rate from the prior year); and

•

a decline in print revenue; partially offset by

•

growth in digital revenues grew during the period to approach 10% of total revenue;

Geographic performance was driven by growth in the Asia Pacific region driven by higher education market share gains in Australia; a decline in the EMEA region partially driven by cyclical nature of K-12 renewals and pressure on government funding; and a decrease in Latin America region performance across all segments.

Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $37.6 million and $51.0 million and $(8.6) million, respectively, a decrease of $4.7 million or 11.2%. The decrease was due to:

•

the profit impact of aforementioned Adjusted Revenue variance;

•

an unfavorable foreign exchange impact of $1.6 million (estimated by re-calculating current year results of foreign operations using the average exchange rate from the prior year); partially offset by

•

operating and administrative expense savings as a result of actions taken to mitigate the impact of the Adjusted Revenue decline; and

•

a $2 million reduction in pre-publication investment cash costs due to more efficient and effective capital deployment.

Professional

Adjusted Revenue. Adjusted Revenue for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $127.3 million and $99.4 million and $25.7 million, respectively, an increase of $2.1 million or 1.7%. The increase was due to:

•

Digital revenue increase driven by strong growth in subscription services Adjusted Revenue bringing digital revenue to 46% of Adjusted Revenue with digital subscription services renewal rates in excess of 90%; partially offset by

•

Expected print revenue declines.

Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $37.9 million and $29.2 million and $2.9 million, respectively, an increase of $5.7 million or 17.7%. The increase was due to:

•

the profit impact of aforementioned Adjusted Revenue variance and product mix shift from print to digital, which earns a higher gross margin; and

•

cost savings associated with initiatives implemented in 2013 and 2014, including a print portfolio and operating model rationalization project in 2014, which resulted in a reduction of compensation related costs and pre-publication investment cash costs.

Other

Adjusted EBITDA. Adjusted EBITDA for the year ended December 31, 2014 and for the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) was $(11.8) million and $10.9 million and nil, respectively, a variance of $22.7 million. The change was driven by:

•

the impact of adjustments made for in-transit product sales in accordance with U.S. GAAP;

•

changes in amounts not applicable to a single business segment;

•

increased incentive compensation accruals as financial performance exceed expectations; and

•

timing related adjustments for various corporate costs.

Seasonality and Comparability

Our revenues, operating profit and operating cash flows are affected by the inherent seasonality of the academic calendar. In 2015, we realized approximately 40% and 23% of our revenues during the third and fourth quarters, respectively. This seasonality affects operating cash flow from quarter to quarter and there are certain months when we operate at a net cash deficit. Changes in our customers’ ordering patterns may affect the comparison of our current results to comparable periods in prior years where our customers may shift the timing of material orders for any number of reasons, including, but not limited to, changes in academic semester start dates or changes to their inventory management practices.

Quarterly Results of Operations


	2014												2015
(Dollars in thousands)	First Quarter 2014			Second Quarter 2014			Third Quarter 2014			Fourth Quarter 2014			First Quarter 2015			Second Quarter 2015		Third Quarter 2015		Fourth Quarter 2015
Reported Revenue by segment:
Higher Education	$	128,101		$	144,718		$	322,159		$	245,571		$	126,228		$	149,053	$	310,466	$	223,198
K-12		44,724			178,041			278,632			63,904			47,093			172,310		298,606		75,490
International		49,057			79,805			108,840			96,062			44,692			74,056		93,952		92,321
Professional		25,784			27,368			31,830			31,792			26,092			27,576		32,812		33,109
Other		1,628			(146	)		(700	)		(1,391	)		2,802			241		3,954		530

Total Reported Revenue		249,294			429,786			740,761			435,938			246,907			423,236		739,790		424,648
Change in deferred revenue		(16,457	)		28,660			171,662			(4,806	)		(25,535	)		66,013		212,458		(32,042	)

Adjusted Revenue	$	232,837		$	458,446		$	912,423		$	431,132		$	221,372		$	489,249	$	952,248	$	392,606

Adjusted Revenue by segment:
Higher Education	$	115,082		$	114,359		$	382,753		$	226,116		$	118,981		$	124,868	$	386,182	$	194,920
K-12		45,792			230,544			384,911			73,170			36,558			259,167		435,364		66,421
International		48,137			79,143			114,109			94,420			42,969			73,603		100,155		91,205
Professional		23,543			33,451			30,593			39,712			22,079			29,996		30,241		40,721
Other		283			949			57			(2,286	)		785			1,615		306		(661	)

Total Adjusted Revenue	$	232,837		$	458,446		$	912,423		$	431,132		$	221,372		$	489,249	$	952,248	$	392,606



	2014											2015
(Dollars in thousands)	First Quarter 2014			Second Quarter 2014			Third Quarter 2014		Fourth Quarter 2014			First Quarter 2015			Second Quarter 2015		Third Quarter 2015			Fourth Quarter 2015
Adjusted EBITDA by segment:
Higher Education	$	(2,442	)	$	(1,007	)	$	222,341	$	74,208		$	465		$	10,885	$	234,603		$	50,137
K-12		(71,905	)		75,296			188,218		(75,982	)		(87,857	)		78,618		224,570			(84,823	)
International		(11,690	)		7,938			32,309		9,046			(9,533	)		5,597		24,206			12,959
Professional		2,529			10,507			9,262		15,584			761			8,080		7,267			16,085
Other		(452	)		(786	)		3,239		(13,847	)		53			1,488		(1,664	)		(5,501	)

Total Adjusted EBITDA	$	(83,960	)	$	91,948		$	455,369	$	9,009		$	(96,111	)	$	104,668	$	488,982		$	(11,143	)

Reconciliation of Adjusted EBITDA to the consolidated financial statements of operations is as follows:


	2014												2015
(Dollars in thousands)	First Quarter 2014			Second Quarter 2014			Third Quarter 2014			Fourth Quarter 2014			First Quarter 2015			Second Quarter 2015			Third Quarter 2015			Fourth Quarter 2015
Adjusted EBITDA	$	(83,960	)	$	91,948		$	455,369		$	9,009		$	(96,111	)	$	104,668		$	488,982		$	(11,143	)

Interest (expense) income, net		(48,890	)		(40,736	)		(47,836	)		(44,428	)		(48,284	)		(48,481	)		(47,633	)		(48,245	)
Income tax (benefit) provision		76,601			31,981			(72,183	)		(148,970	)		2,685			(158	)		(4,087	)		(4,301	)
Depreciation, amortization and pre-publication investment amortization		(45,385	)		(51,205	)		(59,118	)		(50,123	)		(42,692	)		(46,601	)		(69,729	)		(53,829	)
Change in deferred revenue		16,457			(28,660	)		(171,662	)		4,806			25,535			(66,013	)		(212,458	)		32,042
Restructuring and cost savings implementation charges		(11,300	)		(7,725	)		(5,532	)		(15,331	)		(7,677	)		(6,053	)		(4,246	)		(5,910	)
Sponsor fees		(875	)		(875	)		(875	)		(875	)		(875	)		(875	)		(875	)		(875	)
Impairment charge		—			—			—			(23,800	)		—			—			—			—
Purchase accounting		(8,369	)		(33,216	)		—			—			—			—			—			—
Transaction costs		(2,565	)		(856	)		(162	)		(349	)		—			—			—			—
Acquisition costs		(3,610	)		(435	)		(295	)		(36	)		—			—			—			—
Physical separation costs		(10,017	)		(11,590	)		(15,237	)		(9,872	)		—			—			—			—
Other		(239	)		(8,523	)		(8,461	)		(11,886	)		(7,080	)		(627	)		(9,168	)		(8,227	)
Pre-publication investment cash costs		16,634			20,980			21,476			27,995			19,732			24,870			22,579			31,636

Net (loss) income from continuing operations		(105,518	)		(38,912	)		95,484			(263,860	)		(154,767	)		(39,270	)		163,365			(68,852	)
Net (loss) income from discontinued operations, net of tax		1,595			9,085			(6,860	)		(21,977	)		(7,570	)		(54,593	)		(7,206	)		(6,306	)

Net (loss) income	$	(103,923	)	$	(29,827	)	$	88,624		$	(285,837	)	$	(162,337	)	$	(93,863	)	$	156,159		$	(75,158	)

Less: Net (income) loss attributable to non-controlling interests		118			181			—			—			—			—			—			—

Net (loss) income attributable to McGraw-Hill Education, Inc.	$	(103,805	)	$	(29,646	)	$	88,624		$	(285,837	)	$	(162,337	)	$	(93,863	)	$	156,159		$	(75,158	)

Indebtedness and Liquidity


	As of December 31,
(Dollars in thousands)	2015		2014		2013
Cash and cash equivalents	$	553,194	$	413,963	$	430,691
Current portion of long-term debt		82,480		9,380		10,600
Long-term debt		2,109,295		2,086,763		1,728,831

Historically, we have generated operating cash flows (and with respect to the Predecessor, received financial support from MHC) sufficient to fund our seasonal working capital, capital requirements, expenditure and financing requirements. We use our cash generated from operating activities for a variety of needs, including among others: working capital requirements, pre-publication investment cash costs, capital expenditures and strategic acquisitions.

Our operating cash flows are affected by the inherent seasonality of the academic calendar. This seasonality also impacts cash flow patterns as investments are typically made in the first half of the year to support the significant selling period that occurs in the second half of the year. As a result, our cash flow is typically lower in the first half of the fiscal year and higher in the second half of the fiscal year.

Going forward, we may need cash to fund operating activities, working capital, pre-publication investment cash costs, capital expenditures and strategic investments. Our ability to fund our capital needs will depend on our ongoing ability to generate cash from operations and our access to the bank and capital markets. We believe that our future cash flow from operations, together with our access to funds on hand and capital markets, will provide adequate resources to fund our operating and financing needs for at least the next twelve months. We also expect our working capital requirements to be positively impacted by our migration from print products to digital learning solutions.

If our cash flows from operations are less than we require, we may need to incur debt or issue equity. From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe we can currently finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future will be affected by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets and (iii) the current state of the economy. There can be no assurance that we will continue to have access to the capital markets on terms acceptable to us.

The Founding Acquisition was financed by:

•

the issuance by MHGE Holdings and McGraw-Hill Global Education Finance, Inc. of $800.0 million aggregate principal amount of MHGE Senior Secured Notes;

•

borrowings under the MHGE Facilities, consisting of a $810.0 million, 6-year MHGE Term Loan, all of which was drawn at closing and a $240.0 million, 5-year MHGE Revolving Facility, $35.0 million of which was drawn at closing;

•

the $150.0 million, 5-year MHSE Revolving Facility, which was undrawn at closing; and

•

an equity contribution of $1,000.0 million funded by Apollo and co-investors.

As of December 31, 2015 and 2014, we had cash and cash equivalents of $553.2 million and $414.0 million, respectively. The cash held by foreign subsidiaries as of December 31, 2015 and 2014 was $52.7 million and $46.3 million. These cash balances held outside the United States will be used to fund international operations and to make investments outside of the United States. In the event funds from international operations were needed to fund operations in the United States, we would provide for taxes in the United States, if any, on the repatriated funds.

MHGE Senior Secured Notes

In connection with the Founding Acquisition, on March 22, 2013, MHGE Holdings and McGraw-Hill Global Education Finance, Inc. issued $800.0 million in principal amount of the MHGE Senior Secured Notes in a private placement. The MHGE Senior Secured Notes bear interest at a rate of 9.75% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2013. The MHGE Senior Secured Notes were issued at a discount of 1.36%. Debt issuance costs and the discount are amortized to interest expense over the term of the MHGE Senior Secured Notes using the effective interest method. The amount of amortization included in interest expense was $4.8 million, $2.8 million and $4.6 million for the years ended December 31, 2015 and 2014 (Successor) and for the period from March 23, 2013 to December 31, 2013 (Successor), respectively. There was no amortization expense recorded in the Predecessor period in 2013.

MHGE Holdings and McGraw-Hill Global Education Finance, Inc. may redeem the MHGE Senior Secured Notes at their option, in whole or in part, at any time on or after April 1, 2016, at certain redemption prices.

On March 24, 2014, MHGE Holdings and McGraw-Hill Global Education Finance, Inc. began paying an incremental 0.25% interest rate on the MHGE Senior Secured Notes because a registration statement for an exchange offer to exchange the initial MHGE Senior Secured Notes for registered MHGE Senior Secured Notes had not been declared effective prior to that date. The incremental interest continued to accrue until the exchange offer had been consummated. MHGE Holdings’ registration statement for the exchange offer was declared effective on May 14, 2014, and the exchange offer was completed on June 19, 2014 ending the incremental 0.25% accrual on that date.

The MHGE Senior Secured Notes are fully and unconditionally guaranteed by MHGE Holdings and each of MHGE Holdings’ domestic restricted subsidiaries that guarantee the MHGE Facilities. In addition, the MHGE Senior Secured Notes and the related guarantees are secured by first priority lien on the same collateral that secure the MHGE Facilities, subject to certain exclusions.

The MHGE Facilities and the MHGE Senior Secured Notes contain certain customary affirmative covenants and events of default. In addition, the negative covenants in the MHGE Facilities and the MHGE Senior Secured Notes limit MHGE Holdings and its restricted subsidiaries’ ability to, among other things: incur additional indebtedness or issue certain preferred shares, create liens on certain assets, pay dividends or prepay junior debt, make certain loan, acquisitions or investments, materially change its business, engage into transactions with affiliates, conduct asset sales, restrict dividends from subsidiaries or restrict liens, or merge, consolidate, sell or otherwise dispose of all or substantially all of MHGE Holdings’ assets.

The fair value of the MHGE Senior Secured Notes was approximately $848.0 million and $890.0 million as of December 31, 2015 and December 31, 2014, respectively. The Company estimates the fair value of its MHGE Senior Secured Notes based on trades in the market. Since the MHGE Senior Secured Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). As of December 31, 2015, the remaining contractual life of the MHGE Senior Secured Notes is approximately 5.25 years.

MHGE Facilities

In connection with the Founding Acquisition, on March 22, 2013, MHGE Holdings, our wholly owned subsidiary, together with MHGE Intermediate Holdings, entered into the MHGE Facilities, which is governed by a first lien credit agreement as amended and restated, with Credit Suisse AG, as administrative agent and the other agents and lenders party thereto, that provided senior secured financing of up to $1,050.0 million, consisting of:

•

the MHGE Term Loan in an aggregate principal amount of $810.0 million with a maturity of six years; and

•

the MHGE Revolving Facility in an aggregate principal amount of up to $240.0 million with a maturity of five years, including both a letter of credit sub-facility and a swingline loan sub-facility. The amount available under the MHGE Revolving Facility as of December 31, 2015 was $240.0 million.

On December 31, 2013, MHGE Intermediate Holdings made a voluntary principal payment of 10% of the $810.0 million MHGE Term Loan outstanding against remaining installments thereunder in reverse order of maturity. This $81.0 million voluntary principal payment is in addition to MHGE Intermediate Holdings’s scheduled quarterly repayment of $2.0 million that was paid on the same date.

On March 24, 2014, MHGE Intermediate Holdings made a voluntary principal payment of $35.0 million and refinanced the MHGE Term Loan in the aggregate principal of $688.0 million. The revised terms reduce the LIBOR floor from 1.25% to 1.0% and the applicable LIBOR margin from 7.75% to 4.75%. The maturity date did not change but quarterly principal payments were reduced from $2.0 million to $1.7 million, maintaining the amortization rate at ¹⁄₄ of 1% of the refinanced principal amount.

On May 4, 2015, MHGE Holdings entered into and successfully closed on the repricing amendment by and among MHGE Holdings, the guarantors party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and lender party thereto. In connection with the closing of the repricing, MHGE Holdings voluntarily prepaid approximately $0.3 million of the term loans, which resulted in $679.0 million of term loans remaining outstanding pro-forma for the transaction (such repriced loans referred to as the “Refinancing MHGE Term Loans”). As a result of the repricing amendment, the LIBOR margin applicable to the Refinancing MHGE Term Loans was reduced from 4.75% to 3.75%. The Refinancing MHGE Term Loans are prepayable at any time without premium or penalty, provided that there is a 1.00% fee payable to the lenders in connection with any refinancing or repricing of the Refinancing MHGE Term Loans that reduces the interest rate prior to the date that is 6 months after the closing of the repricing amendment (other than in connection with an IPO, a change of control or a transformative acquisition).

The interest rate on the borrowings under the MHGE Facilities is based on LIBOR or Prime, plus an applicable margin. The interest rate as of December 31, 2015 was 4.75% for the MHGE Term Loan and there were no borrowings outstanding under the MHGE Revolving Facility. The MHGE Term Loan and the MHGE Revolving Facility were issued at a discount of 3% and 2%, respectively. Debt issuance costs and the discount are amortized over the term of the respective facility using the effective interest method and are included in interest expense, net within the combined consolidated statements of operations. The amount of amortization included in interest expense was $11.8 million, $12.7 million and $10.8 million for the years ended December 31, 2015 and 2014 (Successor) and for the period from March 23, 2013 to December 31, 2013 (Successor), respectively. There was no amortization expense recorded in the Predecessor period in 2013.

The MHGE Term Loan requires quarterly amortization payments totaling 1% per annum of the original principal amount of the facility, with the balance payable on the final maturity date. The MHGE Term Loan also includes customary mandatory prepayments requirements based on certain events such as asset sales, debt issuances and defined levels of excess cash flows. As of December 31, 2015, the Company determined that a $72.3 million mandatory prepayment of indebtedness is required and is payable five business days after the annual MHGE financial statements are delivered. This amount is included within the current portion of long-term debt in the consolidated balance sheets as of December 31, 2015.

All obligations under the MHGE Facilities are guaranteed by MHGE Intermediate Holdings, MHGE Holdings, and each of MHGE Holdings’ existing and future direct and indirect material, wholly owned domestic subsidiaries and are secured by first priority lien on substantially all tangible and intangible assets of MHGE Holdings and each subsidiary guarantor, all of MHGE Holdings’ capital stock and the capital stock of each subsidiary guarantor and 65% of the capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions.

The MHGE Revolving Facility includes a springing financial maintenance covenant that requires MHGE Holdings’ net first lien leverage ratio not to exceed 7.00 to 1.00 (the ratio of consolidated net debt secured by first-priority liens on the collateral to Adjusted EBITDA, as defined in the credit agreement governing the MHGE Facilities). The covenant will be tested quarterly when the revolving credit facility is more than 20% drawn (including outstanding letters of credit), beginning with the fiscal quarter ended June 30, 2013, and will be a condition to drawings under the MHGE Revolving Facility (including for new letters of credit) that would result in more than 20% drawn thereunder. As of December 31, 2015, the borrowings under the MHGE Revolving Facility were less than 20%, and so the covenant was not in effect.

Adjusted EBITDA as presented earlier reflects EBITDA as defined in the credit agreement governing the MHGE Facilities. Solely for the purpose of calculating the springing financial covenant, pre-publication investments should be excluded from the calculation of Adjusted EBITDA.

The fair value of the MHGE Term Loan was approximately $658.7 million and $677.6 million as of December 31, 2015 and December 31, 2014, respectively. The Company estimates the fair value of the MHGE Term Loan utilizing the market quotations for debt that have quoted prices in active markets. Since the MHGE Term Loan does not trade of a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). As of December 31, 2015, the remaining contractual life of the MHGE Term Loan is approximately 3.25 years.

MHGE PIK Toggle Notes

On July 17, 2014, MHGE and MHGE Parent Finance, Inc. issued $400.0 million aggregate principal amount of the MHGE PIK Toggle Notes in a private placement. The MHGE PIK Toggle Notes were issued at a discount of 1%. The net proceeds were used to make a return of capital to the equity holders of MHGE and pay certain related transaction costs and expenses.

On April 6, 2015, additional aggregate principal amount of $100.0 million was issued under the same indenture, and part of the same series, as the outstanding $400.0 million of the MHGE PIK Toggle Notes previously issued by the Issuers. The proceeds from this private offering were used to make a return of capital to the equity holders of MHGE Parent and pay certain related transaction costs and expenses.

Debt issuance costs and the discount are amortized over the term of the facility using the effective interest method and are included in interest expense, net within the combined consolidated statements of operations. The amount of amortization included in interest expense, net was $2.7 million and $1.1 million for the years ended December 31, 2015 and 2014 (Successor), respectively. There was no amortization expense recorded in the periods March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor).

The MHGE PIK Toggle Notes bear interest at 8.500% for interest paid in cash and 9.250% for in-kind interest, “PIK Interest,” by increasing the principal amount of the MHGE PIK Toggle Notes by issuing new notes. Interest is payable semi-annually on February 1 and August 1 of each year. The first semi-annual interest payment was required to be paid in cash and was paid on February 2, 2015 in the amount of $18.3 million. In addition, the Company paid $21.3 million in cash on August 3, 2015 relating to the second semi-annual interest payment. The determination as to whether interest is paid in cash or PIK Interest is determined based on restrictions in the credit agreement governing the MHGE Facilities and in the indenture governing the MHGE Senior Secured Notes for payments to MHGE. PIK Interest may be paid either 0%, 50% or 100% of the amount of interest due, dependent on the amount of any restriction. The MHGE PIK Toggle Notes are structurally subordinate to all of the debt of MHGE Intermediate Holdings, LLC and its subsidiaries, are not guaranteed by any of MHGE Intermediate Holdings, LLC or its subsidiaries and are a contractual obligation of MHGE.

The MHGE PIK Toggle Notes are unsecured and are not subject to registration rights.

The MHGE PIK Toggle Notes contain certain customary affirmative covenants and events of default that are similar to those contained in the indenture governing the MHGE Senior Secured Notes. In addition, the negative covenants in the MHGE PIK Toggle Notes limit MHGE and its restricted subsidiaries’ ability to, among other things: incur additional indebtedness or issue certain preferred shares, create liens on certain assets, pay dividends or prepay junior debt, make certain loan, acquisitions or investments, materially change its business, engage into transactions with affiliates, conduct asset sales, restrict dividends from subsidiaries or restrict liens, or merge, consolidate, sell or otherwise dispose of all or substantially all of MHGE’s assets.

The fair value of the MHGE PIK Toggle Notes was approximately $495.0 million and $389.0 million as of December 31, 2015 and 2014, respectively. The Company estimates the fair value of its MHGE PIK Toggle Notes based on trades in the market. Since the MHGE PIK Toggle Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). As of December 31, 2015, the remaining contractual life of the MHGE Senior Secured Notes is approximately 3.50 years.

MHSE Revolving Facility

In connection with the Founding Acquisition, on March 22, 2013, McGraw-Hill School Education Holdings, LLC entered into the MHSE Revolving Facility, which was an Asset-Based Revolving Credit Agreement, with Bank of Montreal as Administrative Agent and the other agents and lenders, as parties thereto, that provides senior secured financing of up to $150.0 million based on seasonal levels of the collateral base, with a maturity of five years. The MHSE Revolving Facility matures on March 22, 2018.

The interest rate on the borrowings under the MHSE Revolving Facility is based on LIBOR, plus an applicable margin. There were no outstanding obligations under the MHSE Revolving Facility as of December 31, 2015. Debt issuance costs are amortized over the term of the facility and are included in interest expense, net within the combined consolidated statements of operations. The amount of amortization included in interest expense, net was $1.3 million, $1.3 million and $1.0 million for the years ended December 31, 2015 and 2014 (Successor) and the period March 23, 2013 to December 31, 2013 (Successor), respectively. There was no amortization expense recorded in the Predecessor period in 2013.

The MHSE Revolving Facility includes a springing covenant that requires McGraw-Hill School Education Holdings, LLC to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0. The ratio of EBITDA, as defined in the MHSE Revolving Facility, minus non-financed cash capital expenditures and cash income taxes, to scheduled principal payments, cash interest expense and certain restricted payments, is calculated on a pro forma basis. The covenant is tested quarterly only when the availability under the MHSE Revolving Facility is less than or equal to 12.5% of the line cap, and an Event of Default, as defined in the credit agreement governing the MHSE Revolving Facility, shall have occurred and be continuing. As of December 31, 2015, the availability under the MHSE Revolving Facility was more than 12.5%, so the covenant was not in effect.

Adjusted EBITDA, as presented earlier, reflects EBITDA as defined in the MHSE Revolving Facility.

All obligations under the MHSE Term Loan and MHSE Revolving Facility are guaranteed by the MHSE Holdings and each of MHSE’s existing and future direct and indirect material wholly owned domestic subsidiaries, and are secured by first priority lien on substantially all tangible and intangible assets of MHSE’s and each subsidiary guarantor, all of the MHSE’s capital stock, and the capital stock of each subsidiary guarantor and 65% of the capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions.

The MHSE Revolving Facility and MHSE Term Loan contain certain customary affirmative covenants and events of default. In addition, the negative covenants limit MHSE’s and its restricted subsidiaries’ ability to, among other things: incur additional indebtedness or issue certain preferred shares, create liens on certain assets, pay dividends or prepay junior debt, make certain loans, acquisitions or investments, materially change its

business, engage into transactions with affiliates, conduct asset sales, restrict dividends from subsidiaries or restrict liens, or merge, consolidate, sell or otherwise dispose of all or substantially all of MHSE’s assets.

MHSE Term Loan

On December 18, 2013, MHSE, McGraw-Hill School Education Holdings, LLC, the Lenders, as parties thereto, and Bank of Montreal, as Administrative Agent entered into a First-Lien Credit Agreement providing for, amongst other things, the extension of $250.0 million of Term B Loan (the “MHSE Term Loan”) to McGraw-Hill School Education Holdings, LLC to be used for general corporate purposes, including the return of capital to the stockholders of McGraw-Hill Education, Inc. In connection with and in order to, amongst other things, permit the extension of the MHSE Term Loan, MHSE, McGraw-Hill School Education Holdings, LLC, each Subsidiary Loan Party, as a party thereto, the Lenders, as parties thereto, and Bank of Montreal as ABL Agent entered into amendments to McGraw-Hill School Education Holdings, LLC’s existing MHSE Revolving Facility on November 26, 2013 and December 18, 2013.

The interest rate on the borrowings under the MHSE Term Loan is based on LIBOR or Prime, plus an applicable margin. The interest rate at December 31, 2015 was 6.25% for the MHSE Term Loan as there is a floor of 1.25% for LIBOR. The MHSE Term Loan was issued at a discount of 1%. Debt issuance costs and the discount are amortized over the term of the MHSE Term Loan and are included in interest expense, net within the combined consolidated statements of operations. The amount of amortization included in interest expense, net was $1.3 million and $1.3 million for the years ended December 31, 2015 and 2014 (Successor), respectively. There was no amortization expense recorded in the Predecessor period in 2013.

The MHSE Term Loan requires quarterly amortization payments totaling 1% per annum of the original principal amount of the facility, with the balance payable on the final maturity date of December 18, 2019. The MHSE Term Loan also includes customary mandatory prepayment requirements based on certain events such as asset sales, debt issuances, and defined levels of free cash flows.

The fair value of the MHSE Term Loan was approximately $241.3 million and $247.5 million as of December 31, 2015 and 2014, respectively. The Company estimates the fair value of the MHSE Term Loan utilizing market quotations for debt that have quoted prices in active markets. Since the MHSE Term Loan does not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). As of December 31, 2015, the remaining contractual life of the MHSE Term Loan is approximately 4.0 years.

Scheduled Principal Payments

The scheduled principal payments required under the terms of the MHGE Senior Secured Notes, MHGE Facilities, MHGE PIK Toggle Notes and the MHSE Term Loan were as follows:


(Dollars in thousands)	As of December 31, 2015
2016	$	81,620
2017		9,290
2018		9,290
2019		1,318,700
2020 and beyond		800,000

		2,218,900
Less: Current portion		81,620

	$	2,137,280

Cash Flows

Cash and cash equivalents were $553.2 million, $414.0 million as of December 31, 2015 and 2014, respectively.

Cash flows from operating, investing and financing activities are presented in the following table:


	Successor									Predecessor
	Year Ended December 31,						March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
(Dollars in thousands)	2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013
Cash flows from operating activities	$	309,694		$	353,669		$	560,797		$	(15,741	)
Cash flows from investing activities		(151,763	)		(176,464	)		(2,345,978	)		(61,879	)
Cash flows from financing activities		(14,122	)		(191,281	)		2,192,054			6,109

Net cash flows from operating activities consist of profit after income tax, adjusted for changes in net working capital and non-cash items such as depreciation, amortization and write-offs, and movements in provisions and pensions. For the years ended December 31, 2015 and 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor):

Operating Activities

•

Cash flows provided by operating activities for the years ended December 31, 2015 and 2014 (Successor) were $309.7 million and $353.7 million, respectively, a decrease of $44.0 million. The decrease in cash provided by operating activities was primarily driven by unfavorable net changes in operating assets and liabilities of $72.5 million and an unfavorable net change in non-cash items of $127.2 million, offset by favorable change in the net loss of $155.7 million. These unfavorable net changes in operating assets and liabilities were primarily due to one-time working capital reductions made in 2014 that negatively impacted year-over-year comparability in 2015.

•

Cash flows provided by (used for) operating activities for the year ended December 31, 2014 (Successor) and for the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) were $353.7 million, $560.8 million and $(15.7) million, respectively. The cash provided by operating activities decreased as a result of lower contributions from working capital and higher interest payments.

Investing Activities

•

Cash flows used for investing activities for the years ended December 31, 2015 and 2014 (Successor) was $151.8 million and $176.5 million, respectively. Cash flows used for investing activities decreased as a result of $60.3 million spent on acquisitions for the year ended December 31, 2014 (Successor) as compared to $6.8 million during the year ended December 31, 2015 (Successor). This was partially offset by an increase in investments in pre-publication costs and capital expenditures of $10.0 million in the year ended December 31, 2015 (Successor) as compared to the year ended December 31, 2014 (Successor) as we continued to invest in advance of large new adoption opportunities in 2017 and 2018. We also made a $16.6 million payment to DRC, related to the CTB business divestiture, in lieu of transferring working capital.

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Cash flows used for investing activities for the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) were $2,346.0 million and $61.9 million, respectively. Cash used in the 2013 Successor period primarily reflected the Founding Acquisition and ALEKS acquisition. Cash used in the 2013 Predecessor period were the acquisition of the non-controlling interest in the operating company in India and the 20% investment in LearnSmart.

Financing Activities

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Cash flows used for financing activities for the years ended December 31, 2015 and 2014 (Successor) was $14.1 million and $191.3 million, respectively. The usage in the year ended December 31, 2015 (Successor) was primarily related to a $101.3 million dividend paid to common stockholders funded by additional borrowings of $100.0 million. The usage in the year ended December 31, 2014 (Successor) was primarily related to a $489.0 million dividend paid to common stockholders funded by additional borrowings of $396.0 million, a MHGE Term Loan payment and a MHSE Term Loan payment of $41.9 million and $2.5 million, respectively and a payment of deferred purchase price for ALEKS of $53.5 million.

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Cash flows used for financing activities in year ended December 31, 2014 (Successor), were $191.3 million primarily as a result of payments of MHGE Term Loan and MHSE Term Loan of $41.9 million and $2.5 million, respectively, and payment of deferred purchase price for ALEKS of $53.5 million.

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Cash flows provided by financing activities for the period from March 23, 2013 to December 31, 2013 (Successor) was $2,192.1 million which reflected the Founding Acquisition, primarily as a result of the borrowings and equity contribution partially offset by the funds allocated to McGraw-Hill School Education Intermediate Holdings, LLC and payment of transaction costs. Cash flows used for financing activities during the period from January 1, 2013 to March 22, 2013 (Predecessor) was $6.1 million, primarily as a result of transfers to MHC.

Capital Expenditures and Pre-publication Expenditures

Part of our plan for growth and stability includes disciplined capital expenditures and pre-publication expenditures.

An important component of our cash flow generation is our pre-publication efficiency. We have been focused on optimizing our pre-publication expenditures to generate content that can be leveraged across our full range of products, maximizing long-term return on investment. Pre-publication expenditures, principally external preparation costs, are amortized from the year of publication over their estimated useful lives, one to six years, using either an accelerated or straight-line method. The majority of the programs are amortized using an accelerated methodology. We periodically evaluate the amortization methods, rates, remaining lives and recoverability of such costs. In evaluating recoverability, we consider our current assessment of the market place, industry trends, and the projected success of programs. Our pre-publication expenditures were $99.8 million, $90.5 million and $96.5 million and $25.8 million for the years ended December 31, 2015 and 2014 (Successor), for the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), respectively.

Capital expenditures include purchases of property, plant and equipment and capitalized technology costs that meet certain internal and external criteria. Capital expenditures were $41.2 million, $40.5 million, $7.4 million and $2.5 million for the years ended December 31, 2015 and 2014 (Successor), for the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), respectively.

Our planned capital expenditures and pre-publication expenditures will require, individually and in the aggregate, significant capital commitments and, if completed, may result in significant additional revenues. Cash needed to finance investments and projects currently in progress, as well as additional investments being pursued, is expected to be made available from operating cash flows and our credit facilities. See “Indebtedness and Liquidity” for further information.

Off-Balance Sheet Arrangements

As of December 31, 2015 we did not have any relationships with uncombined entities, such as entities often referred to as specific purpose or variable interest entities where we are the primary beneficiary, which would

have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such we are not exposed to any financial liquidity, market or credit risk that could arise if we had engaged in such relationships.

Contractual Obligations

We typically have various contractual obligations, which are recorded as liabilities in our combined consolidated balance sheets, while other items, such as certain purchase commitments and other executory contracts, are not recognized, but are disclosed herein. For example, we are contractually committed to acquire paper and other printing services and make certain minimum lease payments for the use of property under operating lease agreements.

The following table summarizes our significant contractual obligations and commercial commitments over the next several years that relate to our continuing operations as of December 31, 2015:


	Payments due by Period
(Dollars in thousands)	Total		2016		2017-2018		2019-2020		2021 and beyond
Long-term debt, including current portion(1)	$	2,218,900	$	81,620	$	18,580	$	1,318,700	$	800,000
Interest on long-term debt(2)		743,908		169,696		337,957		197,255		39,000
Operating lease obligations(3)		129,262		31,228		56,367		27,443		14,224
Paper and printing services(4)		561,902		183,700		333,410		44,792		—
Purchase obligation and other(5)		218,512		105,267		110,145		3,100		—

(1)	Amounts shown include principal on the MHGE Facilities, the MHGE Senior Secured Notes, the MHGE PIK Toggle Notes, the MHSE Revolving Facility and the MHSE Term Loan.

(2)	Amounts shown include interest on the MHGE Facilities, the MHGE Senior Secured Notes, the MHGE PIK Toggle Notes, the MHSE Revolving Facility and the MHSE Term Loan.

(3)	Amounts shown include taxes and escalation payments related to our operating lease obligations.

(4)

We have contracts to purchase paper and printing services that have target volume commitments. However, there are no contractual terms that require us to purchase a specified amount of goods or services and if significant volume shortfalls were to occur during a contract period, then revised terms may be renegotiated with the supplier. These obligations are not recorded in our combined consolidated financial statements until contract payment terms take effect.

(5)	“Other” consists primarily of commitments for global technology support and enhancement activity related to the Oracle ERP system.

Critical Accounting Policies and Estimates

Critical accounting policies are those that require the Company to make significant judgments, estimates or assumptions that affect amounts reported in the financial statements and accompanying notes. On an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, revenue recognition, allowance for doubtful accounts and sales returns, inventories, pre-publication costs, accounting for the impairment of long-lived assets (including other intangible assets), goodwill and indefinite-lived intangible assets, stock-based compensation, income taxes and contingencies. The Company bases its judgments, estimates and assumptions on current facts, historical experience and various other factors that the Company believes to be reasonable and prudent under the circumstances. Actual results may differ materially from these estimates. For a complete description of our significant accounting policies, see Note 1 of Notes to Combined Consolidated Financial Statements included elsewhere in this prospectus.

Allowance for Doubtful Accounts and Sales Returns

The allowance for doubtful accounts and sales returns reserves methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, among other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators. The allowance for sales returns is a significant estimate, which is based on historical rates of return and current market conditions. The provision for sales returns is reflected as a reduction to “revenues” in our combined consolidated statements of operations. Sales returns are charged against the reserve as products are returned to inventory. Accounts receivable losses for bad debt are charged against the allowance for doubtful accounts when the receivable is determined to be uncollectible.

Inventories

Inventories, consisting principally of books, are stated at the lower of cost (first-in, first-out) or market value. The majority of our inventories relate to finished goods. A significant estimate, the reserve for inventory obsolescence, is reflected in operating and administration expenses. In determining this reserve, we consider management’s current assessment of the marketplace, industry trends and projected product demand as compared to the number of units currently on hand.

Pre-publication Costs

Pre-publication costs include both the cost of developing educational content and the development of assessment solution products. Costs incurred prior to the publication date of a title or release date of a product represent activities associated with product development. These may be performed internally or outsourced to subject matter specialists and include, but are not limited to, editorial review and fact verification, graphic art design and layout and the process of conversion from print to digital media or within various formats of digital media.

Deferred Technology Costs

We capitalize certain software development and website implementation costs. Capitalized costs only include incremental, direct costs of materials and services incurred to develop the software after the preliminary project stage is completed, funding has been committed and it is probable that the project will be completed and used to perform the function intended. Incremental costs are expenditures that are out-of-pocket to us and are not part of an allocation or existing expense base. Software development and website implementation costs are expensed as incurred during the preliminary project stage. Capitalized costs are amortized from the period the software is ready for its intended use over its estimated useful life, three to seven years, using the straight-line method. Periodically, we evaluate the amortization methods, remaining lives and recoverability of such costs. Capitalized software development and website implementation costs are included in other non-current assets in the combined consolidated balance sheets and are presented net of accumulated amortization.

Accounting for the Impairment of Long-Lived Assets (Including Other Intangible Assets)

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets held for sale are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of purchase price and related costs over the fair value of identifiable assets acquired and liabilities assumed in a business combination. Indefinite-lived intangible assets consist of the Company’s acquired brands. Goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment annually during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have three reporting units, Higher Education, Professional and International with goodwill and indefinite-lived intangible assets that are evaluated for impairment.

We initially perform a qualitative analysis evaluating whether there are events or circumstances that provide evidence that it is more likely than not that the fair value of any of our reporting units or indefinite-lived intangible assets are less than their carrying amount. If, based on our evaluation we do not believe that it is more likely than not that the fair value of any of our reporting units or indefinite-lived intangible assets are less than their carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative assessment determine that it is more likely than not that the fair value of any of our reporting units or indefinite-lived intangible assets are less than their respective carrying amounts we perform a two-step quantitative impairment test.

During the first step, the estimated fair value of the reporting units are compared to their carrying value including goodwill and the estimated fair value of the intangible assets is compared to their carrying value. Fair values of the reporting units are estimated using the income approach, which incorporates the use of a discounted free cash flow analysis, and are corroborated using the market approach, which incorporates the use of revenue and earnings multiples based on market data. The discounted free cash flow analyses are based on the current operating budgets and estimated long-term growth projections for each reporting unit. Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. Fair values of indefinite-lived intangible assets are estimated using avoided royalty discounted free cash flow analyses. Significant judgments inherent in these analyses include the selection of appropriate royalty and discount rates and estimating the amount and timing of expected future cash flows. The discount rates used in the discounted free cash flow analyses reflect the risks inherent in the expected future cash flows generated by the respective intangible assets. The royalty rates used in the discounted free cash flow analyses are based upon an estimate of the royalty rates that a market participant would pay to license the Company’s trade names and trademarks.

If the fair value of the reporting units or indefinite-lived intangible assets are less than their carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill or indefinite-lived intangible assets to the carrying value. The fair value of the goodwill or indefinite-lived intangible assets is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit or carrying value of the indefinite-lived intangible asset. If the implied fair value of the goodwill or indefinite-lived intangible assets is less than the carrying value, the difference is recognized as an impairment charge. Significant judgments inherent in this analysis include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rate and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and indefinite-lived intangible asset and for some of the reporting units and indefinite-lived intangible assets could result in an impairment charge, which could be material to our financial position and results of operations.

The following table summarizes the changes in the carrying value of goodwill by reporting segment:


	Higher Education			K-12			International		Professional		Total
Balance as of December 31, 2013	$	285,413		$	4,907		$	2,866	$	25,996	$	319,182

Adjustment to goodwill		150,745			20,842			1,223		11,082		183,892

Balance as of December 31, 2014	$	436,158		$	25,749		$	4,089	$	37,078	$	503,074
Adjustment to goodwill		(13,792	)		(326	)		—		—		(14,118	)

Balance as of December 31, 2015	$	422,366		$	25,423		$	4,089	$	37,078	$	488,956

Goodwill in the table above includes a $10.0 million and $2.2 million impact from foreign exchange as of December 31, 2015 and 2014.

Stock-Based Compensation

The Company issues stock options and other stock-based compensation to eligible employees, directors and consultants and accounts for these transactions under the provisions of Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation. For equity awards, total compensation cost is based on the grant date fair value. For liability awards, total compensation cost is based on the fair value of the award on the date the award is granted and is remeasured at each reporting date until settlement. For performance-based options issued, the value of the instrument is measured at the grant date as the fair value of the common stock and expensed over the vesting term when the performance targets are considered probable of being achieved. The Company recognizes stock-based compensation expense for all awards, on a straight-line basis, over the service period required to earn the award, which is typically the vesting period.

Revenue Recognition

Revenue is recognized as it is earned when goods are shipped to customers or services are rendered. We consider amounts to be earned once evidence of an arrangement has been obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured.

Arrangements with multiple deliverables

Revenue relating to products that provide for more than one deliverable is recognized based upon the relative fair value to the customer of each deliverable as each deliverable is provided. Revenue relating to agreements that provide for more than one service is recognized based upon the relative fair value to the customer of each service component as each component is earned. If the fair value to the customer for each service is not determinable based on stand-alone selling price, we make our best estimate of the services’ stand-alone selling price and recognize revenue as earned as the services are delivered. Because we determine the basis for allocating consideration to each deliverable primarily on prices experienced from completed sales, the portion of consideration allocated to each deliverable in a multiple deliverable arrangement may increase or decrease depending on the most recent selling price of a comparable product or service sold on a stand-alone basis. For example, as the demand for, and prevalence of, digital products increases, as new sales occur we may be required to increase the amount of consideration allocable to digital products included in multiple deliverable arrangements because the fair value of such products or services may increase relative to other products or services bundled in the arrangement. Conversely, in the event that demand for our print products decreases, thereby causing us to experience reduced prices on our print products, we may be required to allocate less consideration to our print products in our arrangements that include multiple deliverables.

Subscription-based products

Subscription income is recognized over the related subscription period that the subscription is available and is used by the customer. Subscription revenue received or receivable in advance of the delivery of services or publications is included in deferred revenue. Incremental costs that are directly related to the subscription revenue are deferred and amortized over the subscription period. Included among the underlying assumptions related to our estimates that impact the recognition of subscription income is the extent of our responsibility to provide access to our subscription-based products, and the extent of complementary support services customers demand to access our products.

Service arrangements

Revenue relating to arrangements that provide for more than one service is recognized based upon the relative fair value to the customer of each service component as each component is earned. Such arrangements may include digital products bundled with traditional print products, obligations to provide products and services in the future at no additional cost, and periodic training pertinent to products and services previously provided. If the fair value to the customer for each service is not objectively determinable, we make our best estimate of the services’ stand-alone selling price and recognize revenue as earned as the services are delivered.

Income Taxes

We determine the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities.

Valuation allowances are established when management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management evaluates the weight of both positive and negative evidence in determining whether a deferred tax asset will be realized. Management will look to a history of losses, future reversal of existing taxable temporary differences, taxable income in carryback years, feasibility of tax planning strategies, and estimated future taxable income. The valuation allowance can also be affected by changes in tax laws and changes to statutory tax rates.

We prepare and file tax returns based on management’s interpretation of tax laws and regulations. As with all businesses, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax assessments based on differences in interpretation of the tax law and regulations. We adjust our estimated uncertain tax positions reserves based on audits by and settlements with various taxing authorities as well as changes in tax laws, regulations, and interpretations. We recognize interest and penalties on uncertain tax positions as part of interest expense and operating expenses, respectively.

Earnings (Loss) per Share

The Company computes net income (loss) per share in accordance with ASC 260 which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

Valuation of Common Stock

As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by the Company on an annual basis with the assistance of an independent financial

advisor. We considered objective and subjective factors to determine our best estimate of the fair value of our common stock that we believed were appropriate at the time of the valuation. We estimated the fair value of our common stock using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation.

Estimating the fair value of our common stock required us to make complex and subjective judgments, including assumptions regarding our future operating performance. We considered a combination of valuation methodologies, including the market, income and transaction approaches to arrive at the estimated enterprise value of the Company. We converted the estimated enterprise value by subtracting the debt on the balance sheet as of each valuation date. The resultant equity value was divided by the number of outstanding common shares at each valuation date to determine the fair value of an individual share of common stock.

In the absence of a public market for our common stock, we exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each grant, including the following factors:

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independent third-party valuations of our common stock performed as of December 31, 2015 and 2014;

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our historical operating and financial performance;

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the market conditions for our business and our financial projections for the relevant period;

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our net leverage and effective interest rates;

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disposal of our summative testing business;

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our success in building our management team and efforts to retain and recruit the talent required to support our anticipated growth;

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the market performance of comparable publicly traded companies in our industry; and

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U.S. and global capital market conditions.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

Our exposure to market risk includes changes in foreign exchange rates. We have operations in various foreign countries where the functional currency is primarily the local currency. For international operations that are determined to be extensions of the parent company, the United States dollar is the functional currency. Our principal currency exposures relate to the Euro, British Pound, Australian Dollar, Canadian Dollar, Singapore Dollar and Mexican Peso. From time to time, we may enter into hedging arrangements with respect to foreign currency exposures.

Interest Rate Risk

MHGE Facilities

We have issued fixed and floating-rate debt and will be subject to variations in interest rates in respect of our floating-rate debt. Borrowings under our MHGE Facilities will accrue interest at variable rates, and a 100 basis point increase in the LIBOR on our debt balances outstanding as of December 31, 2015 would increase our annual interest expense by $3.8 million.

MHSE Term Loan

We have issued floating-rate debt and will be subject to variations in interest rates in respect of our floating-rate debt. Borrowings under our MHSE Revolving Facility will accrue interest at variable rates, and a 100 basis point increase in the LIBOR on our debt balances outstanding as of December 31, 2015 would increase our annual interest expense by $0.0 million as there were no outstanding loans. Borrowings under our Term Loan will accrue interest at variable rates with a LIBOR floor of 1.25%, and a 100 basis point increase in the LIBOR on our debt balances outstanding as of December 31, 2015 would increase our annual interest expense by $0.9 million.

While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk. From time to time we may enter into hedging arrangements with respect to LIBOR borrowings under our MHSE Revolving Facility or MHSE Term Loan or MHGE Facilities.

We do not purchase or hold any derivative financial instruments for trading purposes.

Recent Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02—Leases. This ASU requires that a lessee record an operating lease in the balance sheet with a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. This standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Adoption of this standard will be on a modified retrospective approach, which includes a number of optional practical expedients that the Company may elect to apply. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17—Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 eliminates the current requirement for companies to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, companies will be required to classify all deferred tax assets and liabilities as non-current. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company has elected to early adopt this guidance on a prospective basis as of December 31, 2015. Aside from the presentation on our consolidated balance sheets, the adoption of ASU 2015-17 does not have a significant impact on our consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16—Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments which requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period of a business combination in the reporting period in which the adjustment amounts are determined. The amendments also require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and eliminate the current requirement to retrospectively account for those adjustments. This guidance is effective prospectively for reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11—Inventory (Topic 330) Related to Simplifying the Measurement of Inventory, that applies to all inventory except that which is measured using last-in, first-out (LIFO) or the retail inventory method. Inventory measured using first-in, first-out (FIFO) or average cost is within the scope of the new guidance and should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using

LIFO of the retail inventory method. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of the standard on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03—Simplifying the Presentation of Debt Issuance Costs. This ASU changes the presentation of debt issuance costs by requiring an entity to present such costs as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated balance sheets.

In August 2014, the FASB issued ASU No. 2014-15—Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12—Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This ASU may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers, which supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. Entities must adopt the new guidance using one of two retrospective application methods. This guidance is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

INDUSTRY

Higher Education

We are a leading provider in the market for new instructional solutions in the United States higher education segment, which was estimated to be approximately $4.0 billion in 2015, according to MPI. This market includes digital learning solutions as well as traditional and custom print textbooks, but excludes used and rental print textbooks. Used and rental materials are commonly purchased by students as a substitute for new materials. Based on estimates for used and rental substitutes, the overall market for textbooks is significantly larger than the market for new instructional materials. Based on a report from Veronis Shuler Stevenson, used textbook purchases represent approximately 30% of the overall market, and textbooks represent approximately 8% of the overall market for instructional materials based on a report from Student Monitor. We believe the increased use of digital products will drive significant growth in our addressable market given digital products are not provided in a used or rental form.

The importance of higher education in the United States is clear. 65% of all jobs in the United States will require some form of postsecondary education or training by 2020, up from 28% in 1973 and 59% in 2010, according to Georgetown University Public Policy Institute. We expect another key long-term driver of growth in the higher education market to be increasing student enrollment, which has been steadily growing over the last several decades. Enrollment at degree-granting institutions in the United States was approximately 20 million in Fall 2014, representing a 2% CAGR since 2000 and a 2% CAGR since 1970, according to NCES. Although there was a decline in enrollment from 2012 to 2014, prior to that there have been only four years since 1970 during which enrollment declined by more than 1% over the prior year, and in three cases (1976, 1984, 1993), enrollment growth resumed within three years.

Despite the significant government expenditures in education, low college graduation rates and insufficient job placement in the United States have resulted in additional social and economic costs including rising aggregate and per capita student loan debt and increasing incidents of default. In addition, American students are not learning the skills and knowledge they need to succeed in an increasingly competitive global marketplace.

postsecondary student success is adequate preparation via primary and secondary education. Currently, 1.7 million students each year begin college in remediation and only about a third complete bachelor’s degrees in six years, according to Complete College America. In the United States, improved college readiness has been a focal point for lawmakers, which has led to an increased focus on the linkage between K-12 funding and higher student achievement of educational standards.

K-12

Our addressable K-12 market in the United States was approximately $5.6 billion for the 2015-2016 school year, including adoption and open territory states, according to Simba Information. Additionally, in a recent Simba Information report, the classroom formative assessment market is estimated at $1.4 billion in 2013-2014. According to NCES, K-12 enrollment in the United States as of 2011 was nearly 55 million, and enrollment is projected to grow at a compound annual growth rate of 0.4% from 2013 to 2023. We define our K-12 market as divided among basal (core or alternative required grade-level taught subjects that are delivered in a specific order with increasing difficulty), supplemental (academic instruction provided outside the required programs) and intervention products (targeted instruction to students lacking proficiency in a subject matter, or those who have special learning or behavioral needs). Eighteen states, known as adoption states, approve and procure new basal programs, usually every five to eight years on a state-wide basis for each major area of study, before individual schools or school districts are permitted to schedule the purchase of materials. In all remaining states, known as open territories, each individual school or school district can procure materials at any time, though they usually do so on a five to eight year cycle. Growth in the K-12 market is driven by demand for new materials to address college and career readiness standards, increasing state and local budgets for educational materials, and rising student enrollment. Property tax revenue, the primary source for state and local funds for purchases of instructional materials, has been increasing in the United States along with a rise in property values. A rebound in state and local tax revenues has allowed many locales to increase their K-12 spending to address years of pent-up demand created during the recession that started in 2008. Funding levels as reported by NASBO have been somewhat volatile recently, though it appears that funding is improving, particularly at a state level, as tax revenues improve. In 2015, there was a 4.6% annual increase in state level funding and it is expected by NASBO to increase by 4.1% in 2016. In a recent study by the Foundation for Excellence in Education, two-thirds of college professors report that what is taught in high school does not prepare students for college and, according to ACT, 2015, approximately one in four high school students graduates ready for college in all four core subjects (English, reading, math and science), resulting in a third of students who enter college requiring remedial courses to meet basic levels of proficiency.

Professional

As the United States economy continues to recover, we expect the market for professional education resources to grow, particularly among industry sectors that are experiencing more rapid growth in jobs. The Professional and Business Services and Healthcare and Social Assistance industry sectors are expected to add nearly 6 million jobs between 2014 and 2024, more than all other United States industries combined, according to BLS. We derive a substantial portion of our Professional revenue from these two markets.

International

We expect the investment in education to continue to grow as student enrollment rises around the world. According to UNESCO, global higher education enrollment was nearly 198 million students in 2013, and doubling since 2000. K-12 global enrollment was almost 1.5 billion students in 2013, representing an increase of 20% since 2000.

BUSINESS

We are a leading provider of outcome-focused learning solutions, delivering both curated content and digital learning tools and platforms to the students in the classrooms of approximately 250,000 higher education instructors, 13,000 K-12 school districts and a wide variety of academic institutions, professionals and companies in over 135 countries. We have evolved our business from a print-centric producer of textbooks and instructional materials to a leader in the development of digital content and technology-enabled adaptive learning solutions that are delivered anywhere, anytime. We believe we have established a reputation as an industry leader in the delivery of innovative educational content and methodologies. For example, in the higher education market, we were the first in our industry to introduce digital custom publishing, which permits instructors to tailor content to their specific needs. We also created LearnSmart, one of the first digital adaptive learning solutions in the higher education market, which leverages our proprietary content and technology to provide a truly personalized learning experience for students. Today we have over 1,400 adaptive products in higher education. Since 2009, all of our major K-12 programs have also been created in an entirely digital format.

We believe our brand, content, relationships, and distribution network provide us with a distinct competitive advantage. Over our 125 year history, the “McGraw-Hill” name has grown into a globally recognized brand associated with trust, quality and innovation. We partner with more than 14,000 authors and educators in various fields of study who contribute to our large and growing collection of proprietary content. Our collection includes well-known titles and programs across each of our principal markets. For example, in the United States higher education market, Economics: Principles, Problems, and Policies (McConnell/Brue/Flynn) is a leading Economics program. In the U.S. K-12 market, due to the strength of our learning solutions, we had 45% market share in K-12 new math adoptions and over 65% market share in secondary social studies in new adoptions we participated in during 2015. In addition, Harrison’s Principles of Internal Medicine is one of the most widely-sold global medical reference solutions to the professional market, with our complementary digital offering AccessMedicine available in almost every medical school in the United States. We sell our products and solutions across multiple platforms and distribution channels, including our large network of nearly 1,450 sales professionals.

We have conducted numerous case studies for several of our learning solutions for colleges that used Connect/LearnSmart, SmartBook and ALEKS, and in each case where our solutions have been implemented, our case studies have yielded positive findings when compared to class performance in periods immediately prior to implementation, many of which have been considerable. For example, according to a 2013 study by the Department of Chemistry, University of California, Riverside, it was found that general chemistry students who completed a pre-course assignment on ALEKS, an adaptive-responsive homework system could expect their average final exam score to increase by over 13 points when compared to nonparticipating students. Students who completed a precourse assignment on a traditional responsive homework system saw an average

increase in their final exam score by 8 points versus those who did not participate. Students who worked on the online homework for the entire quarter saw even greater gains in their final exam scores compared to non-participants.

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Our four operating segments are:

(1)

(2)

K-12 (32% of total revenue in 2015): We are a top-three provider in the United States K-12 curriculum and learning solutions market with a 24% market share for the year ended December 2015 according to AAP. We sell our learning solutions directly to K-12 school districts across the United States. While we offer all of our major curriculum and learning solutions in digital format, given the varying degrees of availability and maturity of our customers’ technological infrastructure, a majority of our sales are derived from selling blended print and digital solutions. We believe that the quality of our blended offerings has been driving significant growth in both print and digital revenue. For the year ended December 31, 2015, 17% of K-12 revenue was derived from digital learning solutions.

(3)

(4)

For the years ended December 31, 2015 and 2014 (Successor), we generated revenue of $1,835 million and $1,856 million, respectively. For the years ended December 31, 2015 and 2014 (Successor), we generated a net loss of $175 million and $331 million, respectively. For the years ended December 31, 2015 and 2014 (Successor), we generated Adjusted Revenue of $2,055 million and $2,035 million, respectively, and Adjusted EBITDA of $486 million and $472 million, respectively. See “Summary Historical Combined Consolidated Financial Data.”

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Our Digital Learning Solutions

Since the acquisition of our business in 2013 by Apollo, we have invested significantly in our digital learning solutions and DPG. DPG was formed in 2013 to drive innovation and develop, maintain and leverage our digital learning solutions, technology tools and platforms across our entire business. To maintain and grow our leading digital position, we have increased our annual digital learning solutions spending, including operating and capital expenditures, from less than $90 million in 2012 to approximately $150 million in 2014 and approximately $180 million in 2015. We believe that the effectiveness of our product platforms and DPG support capability give us a competitive advantage because we are not reliant on third parties and do not need to rationalize and integrate multiple product platforms obtained through acquisitions with siloed technology support models. In addition, our digital capabilities have allowed us to drive market share growth, promote recurring usage by instructors, sell directly to students and disintermediate used and rental printed textbooks.

We believe that user engagement data on our learning platforms is one of the most important metrics available to track learning progress. According to Student Attitudes Toward Content in Higher Education (2015, BISG), 80% of the higher education faculty in the United States who use an integrated digital learning system rely on completion of digital homework assignments to measure student progress. Therefore, we monitor growth in paid activations and number of homework assignments assigned and submitted as indicators of student and instructor engagement, all of which have experienced significant growth. In 2015, homework assigned by instructors and homework submitted by students increased by 47% and 14%, respectively. In addition, we believe the value that our learning solutions provide can be seen in the growth of our digital revenue. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor), digital revenue was $544 million, $479 million, $311 million and $82 million, respectively. This represents 30%, 26%, 20% and 33% of total revenue, respectively, or an increase of 13% from 2014 to 2015 and 22% from 2013 to 2014.

We organize our digital learning solutions in two categories: Open Digital Learning Environment and Adaptive / Intelligent Content.

LOGO

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Open Digital Learning Environment

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Engrade Pro: an open platform for K-12 education that unifies data, curriculum and educational tools to drive student achievement and inform district educational strategy; and

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ConnectEd: an open learning environment delivering our content for K-12.

Adaptive / Intelligent Content

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ALEKS: an adaptive learning math product for the K-12 and higher education markets, with 1.7 million paid activations as of December 31, 2015, an increase of 14% over the prior year;

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SmartBooks: an adaptive reading product introduced in Higher Education in 2013 designed to help students understand and retain course material by guiding each student through a highly personal study experience. The student reads the chapters in SmartBooks and is prompted by LearnSmart questions to identify recommended areas of focus. This product is primarily sold in the higher education market across a variety of courses. We began to release SmartBooks in the K-12 and international markets during 2015; and

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LOGO

Our Competitive Strengths

We believe the following to be our most important competitive strengths:

Widely recognized brand with global reach and expansive scale.

Proprietary and unique content, developed over many years, leveraged in digital adaptive learning.

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Diversified portfolio of education businesses and unified approach to digital.

First mover in digital adaptive learning solutions and strong capabilities in digital technology.

We believe the significant investment we have made in our digital capabilities has made us a longstanding leader in digital adaptive learning. Today, our annualized spend in our DPG, including operating and capital expenditures, has grown from less than $90 million in 2012 to approximately $150 million in 2014 and approximately $180 million in 2015. In addition to our organic investments, we have committed in excess of $200 million for the acquisitions of ALEKS, LearnSmart and Engrade, which have significantly strengthened our platform and adaptive digital offerings. Our LearnSmart solution has been one of the most widely used adaptive platforms in higher education since its launch in 2009, and ALEKS, our digital adaptive learning solution originally developed for K-12 math, originated in 1992 with a National Science Foundation grant. Our long history of offering adaptive learning solutions has allowed us to develop a growing and robust database of student interactions relating to achievement of learning objectives, which we use to continuously improve the effectiveness of our platforms. For example, LearnSmart has generated almost 5 billion interactions with students since inception in 2009, recently, growing at an average of more than 100 million interactions per month. Since 2010, ALEKS has seen nearly 3.6 billion interactions. In addition to using this information to enhance the effectiveness of our adaptive tools, we share data on interactions with instructors to help them more effectively integrate our solutions into their lessons, focusing on content that students are having difficulty learning, reinforcing our relationships and making our solutions more difficult to displace.

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Highly attractive business model positioning us for growth.

We enjoy a business model that is highly cash generative. Since 2013 through the end of 2015, we have generated Free Cash Flow From Operations of approximately $1.6 billion. As we derive an increasing amount of Adjusted Revenue from digital products, we have been able to operate our business with decreasing levels of pre-publication and capital expenditures and less working capital requirements. Our strong cash flow has enabled significant investment in our digital capabilities, several key strategic acquisitions, return of capital to our shareholders and continued deleveraging. Since the Founding Acquisition in 2013, our strong cash flow has funded three acquisitions, including ALEKS, LearnSmart and Engrade, that included cash components totaling $138 million. We also completed a minority interest buy-out of Ryerson Canada (our Canadian business) for $27 million and made a minority investment in English Language Learning provider Busuu for €6 million. In addition, we have made significant investments in the staffing of DPG, which supports ongoing innovation, development and maintenance of our technology platforms, reducing our pre-publication and capital expenditure requirements and our dependence on third parties.

Talented management team and employee base.

Since being acquired by Apollo in March 2013, we have enhanced our leadership team with the addition of proven leaders including a new CEO, Presidents of each business segment, a new CIO and a Head of Communications. Our leadership team consists of professionals averaging over 20 years of experience in a range of industries that include education, technology and media with various leadership positions at Bain, Gartner, Harvard Business School, Pearson, Reed Elsevier, Standard & Poor’s, Sylvan Learning, Symbian, UBM, and Wolters Kluwer as well as start-ups such as Intelligent Solutions. We have more than 4,750 employees world-wide with 475 full-time employees in DPG, including more than 210 engineers, over 75 user experience designers, 80 technical product managers, over 20 data scientists and software solutions architects and over 80 customer-facing and other supporting staff.

Our Growth Strategies

The key elements of our growth strategies are described below.

Further our leadership in digital solutions and digital technology.

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In order to better leverage technology across all of our businesses, drive product innovations and create a more efficient product development process, we are consolidating technologies to eliminate duplicative capabilities. We expect this effort will reduce maintenance costs and unlock creative synergies across our engineering teams. We will also streamline our tools and platforms for efficient and effective delivery with open application program interfaces. This rationalization and simplification of our delivery platforms will reduce costs, freeing up capital for investment in new products.

Increase our penetration in our largest, most profitable disciplines and sub-markets.

Introduce new enterprise solutions aimed at education effectiveness and student retention.

Leverage our digital solutions in International and Professional markets.

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License our software and platforms to other education industry participants and the corporate training market.

Continue to evolve our digital-centric business model to generate significant free cash flow.

Selectively pursue acquisitions.

Our Products

Higher Education Products

Higher Education provides adaptive digital learning tools, digital platforms, custom publishing solutions and traditional printed textbook products with capabilities in adaptive learning, homework tools, lecture capture and LMS integration for post-secondary markets. We have invested significantly in a suite of digital and custom learning solutions, and our instructional materials include digital and printed texts, lab manuals, interactive study guides, testing materials, software and other multimedia products covering the full spectrum of subjects. Although we cover all major academic disciplines, our content portfolio is organized into three key disciplines: (i) Business, Economics and Career; (ii) Science, Engineering and Math; and (iii) Humanities, Social Science and Languages. Substantially all of Higher Education’s revenue is generated from approximately 2,000 individual titles, including print and digital formats, with no single title accounting for more than 2% of revenue. We have longstanding and exclusive relationships with many authors and nearly all of our products are covered by

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copyright in major markets, providing us the exclusive right to produce and distribute such content in those markets during the applicable copyright term. Higher Education’s products consist of the following:

I. Digital Learning Solutions

Higher Education’s digital learning solutions include, among other features, adaptive digital learning tools, online assessment software, course management software, cloud-based classroom activity capture and replay, online access to eBooks and social network and community tools. These solutions form a seamless, fully-digital ecosystem that enhances the value and results of higher education over the entire learning lifecycle. We have increased the number of adaptive offerings from 40 in 2012 to over 1,400 at the end of 2015. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), Higher Education digital revenue represented 45% ($359 million), 38% ($319 million), 32% ($211 million) and 45% ($49 million), 28% ($216 million), 20% ($165 million) and 15% ($114 million) of total Higher Education revenue, respectively.

For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), Higher Education digital Adjusted Revenue (including the change in deferred revenue) represents 45% ($374 million), 39% ($322 million), 32% ($233 million) and 44% ($41 million), 29% ($229 million), 22% ($185 million) and 16% ($131 million) of total Higher Education Adjusted Revenue, respectively.

Our core digital learning platforms include:

McGraw-Hill Connect: an open learning environment that allows instructors to integrate digital content into their programs and create a customized learning environment, accessible by students anytime and anywhere through their devices. Students can learn interactively through homework and practice questions, embedded video, simulations, virtual laboratories, audio programs and online games. McGraw-Hill Connect contains a suite of tools, including integrated eBooks, course and assignment set-up tools, grading and feedback tools, learning aids, reporting tools and the ability to integrate with our LearnSmart and Tegrity products to create a more seamless course experience. McGraw-Hill Connect is offered for most core freshman and sophomore level courses in the United States with 3.0 million paid activations across campuses nationwide during the year ended December 31, 2015, an increase of 16% over the prior year.

LearnSmart: an adaptive learning program that personalizes learning and designs targeted study paths for students through specific courses. LearnSmart is an interactive product that determines which concepts the student does not know or understand and teaches those concepts using a personalized plan designed for each student’s success. All LearnSmart questions are tied to clear learning objectives. When students answer questions, they also rank how confident they are in their answers. Based on each student’s response and level of certainty, LearnSmart continuously adapts the content and probes presented to each student, so the material is always relevant and geared towards mastering the learning objectives. Once a concept is mastered, LearnSmart then identifies the concepts students are most likely to forget throughout the term and encourages periodic review to ensure that concepts are truly retained. LearnSmart has generated almost 5 billion interactions with students since inception in 2009, recently growing at an average of more than 100 million per month. According to studies, LearnSmart has consistently improved student outcomes.

SmartBooks: an adaptive reading product introduced in Higher Education in 2013 designed to help students understand and retain course material by guiding each student through a highly personal study experience. Each SmartBook helps make studying more efficient and effective by offering features not present in traditional print products, including adaptive content, search/index functionality, note taking capabilities, embedded video and interactive elements. The SmartBooks product also makes use of our LearnSmart adaptive technology. When a student reads the chapters in SmartBooks, they are prompted by LearnSmart questions to identify recommended

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areas of focus for the student. Our SmartBooks are primarily sold in the higher education market across a variety of courses and are designed to be compatible with a broad range of devices, including the Kindle and Nook eReaders, the iPad and other tablets and standard desktop and laptop computers. We believe that SmartBooks will continue to increase in popularity as the prevalence of these digital reading devices also increases.

Our SmartBooks contain rights management features that are designed to prevent copying or resale. Students pay for them based on usage for one school term. The amount paid is designed to be comparable to the cost of a one-term rental of a print textbook. Therefore, our SmartBooks are priced lower than print textbooks but cost us less to distribute and manufacture, leading to a comparable gross margin. Moreover, our bundling of digital solutions with SmartBooks augments the economics of a digital sale and further improves the economics relative to the traditional all-print model.

ALEKS: an adaptive learning math product for the higher education market initially developed in 1992 with a National Foundation grant. ALEKS uses research-based artificial intelligence to rapidly and precisely determine each student’s knowledge state, pinpointing exactly what a student knows. ALEKS then instructs the student on the topics he or she is most ready to learn, constantly updating each student’s knowledge state and adapting to the student’s individualized learning needs. Higher Education has marketed and sold ALEKS for math in the higher education space for more than 16 years. ALEKS had 0.9 million paid activations in Higher Education during the year ended December 31, 2015, an increase of 10% over the prior year.

Connect Insight: a visual analytics dashboard, available to both instructors and students, that provides actionable information about student performance to help improve class effectiveness. Connect Insight presents assignment, assessment, and topical performance results along with a time metric that is easily visible for aggregate or individual results. Using visual data displays that are each framed by an intuitive question, Connect Insight gives both instructors and students the ability to take a just-in-time approach to teaching and learning. By providing actionable recommendations, Connect Insight guides students towards behaviors that could increase performance and enables instructors to give targeted instruction precisely when and where it is needed.

McGraw-Hill Create: a self-service website that enables instructors to discover, review, select and arrange content into personalized print or electronic course materials. Instructors can curate customized course materials from a content portfolio consisting of 7,900 textbooks, 17,300 articles, 46,500 cases, 8,900 readings and 2,100 digital offers. Instructors can further supplement the materials with their own custom content. McGraw-Hill Create allows the creation of customized textbooks across a number of disciplines and study areas, including accounting, business law, economics, finance, management, marketing, philosophy, political science, sociology, world languages, anatomy and physiology, chemistry, engineering, biology, psychology, English and mathematics.

Tegrity: a fully-automated lecture capture solution used in traditional, hybrid and online courses to record lectures as well as supplementary course content. Tegrity is designed to enhance both on-campus and remote learning by allowing instructors to efficiently distribute lecture content and allowing students to learn anywhere and everywhere through digital devices. Unlike our other higher education products sold to instructors, Tegrity is sold primarily on an institutional basis.

McGraw-Hill Campus: a service that makes digital learning resources accessible to faculty and students. All faculty, whether or not they use McGraw-Hill titles, can browse, search and access the entire library of McGraw-Hill instructional resources and services, including eBooks, test banks, PowerPoint slides, animations and learning objects. This service can be accessed from any LMS at no additional cost to the institution. Users also have single sign-on access to McGraw-Hill digital platforms, including McGraw-Hill Connect, ALEKS, Create, and Tegrity and can help teachers build an effective digital course. It also provides the ability to sync and monitor student scores from most McGraw-Hill Higher Education platforms directly to the LMS gradebook.

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II. Custom Publishing

Higher Education’s custom publishing solutions provide educators the ability to weave together various elements including digital text, digital solutions, print, videos, charts and their own materials into a seamless, tailored learning solution, replacing traditional print textbooks and printed class materials. Custom materials, by their nature, have a higher sell-through rate and are more likely to have their content frequently updated by the instructor, resulting in frequent new publications, forced obsolescence of old editions and more limited re-distribution potential into used or rental markets. Custom products create strong loyalty from educators, as they typically invest significant time and effort into creating unique learning solutions tailored to their teaching styles. Our custom publishing solutions are often bundled arrangements that require us to attribute value to the digital component separately. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), Higher Education custom publishing revenue, excluding the digital component represented 18% ($148 million), 29% ($240 million), 32% ($211 million) and 15% ($16 million), 24% ($186 million), 19% ($153 million) and 13% ($104 million) of total Higher Education revenue, respectively.

III. Traditional Print

Higher Education continues to provide students with traditional print textbooks, including a library of titles covering the full spectrum of subjects, written by some of the top authors and experts in their respective fields. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), Higher Education traditional print represented 37% ($302 million), 33% ($281 million), 37% ($243 million) and 40% ($43 million), 48% ($365 million), 61% ($491 million) and 72% ($569 million) of total Higher Education revenue, respectively.

K-12 Products

Our K-12 product portfolio includes thousands of instructional resources across hundreds of programs, covering nearly all courses offered in K-12. We also provide the ability to tie instruction and assessment together into a robust platform for school district support and data-driven instruction. This includes strong curriculum resources plus adaptive and formative assessment engines. While the McGraw-Hill name has been a respected source for printed textbooks and teacher materials for generations, we are also recognized for our pure digital programs and our hybrid solutions that blend digital and print in customized packages. Our K-12 business is one of the few providers that offer the diversity of product to actively serve core K-12 markets and niche and specialized markets. In our core markets our offerings include Reading Wonders and My Math and in our niche and specialized markets we offer well known programs such as SRA Open Court Reading and Number Worlds. We focus on supporting each state’s chosen standards through comprehensive and robust offerings. All our key programs meet the Common Core and college and career readiness standards, as well as the standards chosen by each state to support its learning goals.

I. Core Programs

Core basal programs consist of digital and print products that serve mainstream educators with research-based, comprehensive learning solutions. Core basal programs are designed to provide the entire curriculum for a course, including student instruction, practice, assessment and remediation as well as teacher materials. These programs may have as few as five or six components (such as in some high school courses) or thousands of components (such as in K-5 reading and math programs). Core basal programs comprise approximately 79% of K-12’s sales and cover all major instructional subjects including Reading, Math, Social Studies, Science, and Literature, while the balance includes specialized programs that include a wide range of products targeted at certain niche markets.

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Alternative Basal Products: comprehensive classroom programs for particular segments of the market that require distinct learning methodologies, such as reading teachers who want more directed, skills-oriented programs and math teachers who want more reform-based, hands-on mathematics programs. These unique programs demand specialized authors, editing and design skills, marketing strategy and a true consultative selling model. K-12 is among the largest education providers in its ability to deliver all of these critical elements.

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Intervention Products: programs with targeted instruction to students lacking proficiency in a subject matter, or those who have special learning or behavioral needs. Nearly all students require extra instructional support at one time or another and K-12 builds this support into all of its Core Basal Programs while also providing separate targeted programs for intervention and remediation. Programs include products that focus on reading and mathematics support, and remediation solutions in science, social studies, career and college readiness, workplace skills and other areas of need.

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Supplemental Products: additional learning resources when core program solutions do not meet all of the needs of certain educators, such as extra online practice in multiplication, kits that enhance phonics skills, practice books for basic workplace skills or biography readers for middle school students. K-12 competes in this segment due to its specialized product development capabilities and experienced sales staff who know how to market to these educators.

For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), K-12 traditional print represented 83% ($495 million), 86% ($487 million), 90% ($475 million) and 73% ($38 million), 92% ($605 million), 94% ($692 million) and 94% ($883 million) of total K-12 revenue, respectively.

II. Digital Learning Solutions

Digital resources are an essential part of the instructional mix across both core basal and specialized programs. The recent and dramatic increase in hardware, online connectivity and educational focus on technology has brought many classrooms to a digital tipping point. With the significant investment in its digital portfolio over recent years, K-12 has an opportunity to capitalize on this ongoing digital transformation and has developed a number of fully online learning programs. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), K-12 digital revenue represented 17% ($99 million), 14% ($79 million), 10% ($50 million) and 27% ($14 million), 8% ($53 million), 6% ($46 million) and 6% ($53 million) of total K-12 revenue, respectively.

For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), K-12 digital Adjusted Revenue (including the change in deferred revenue) represented 37% ($292 million), 29% ($215 million), 21% ($135 million) and 24% ($11 million), 12% ($86 million), 6% ($51 million) and 5% ($49 million) of total K-12 Adjusted Revenue, respectively.

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ALEKS: an adaptive learning math product for the K-12 market. ALEKS uses research-based, artificial intelligence to rapidly and precisely determine each student’s knowledge state, pinpointing exactly what a student knows. ALEKS then instructs students on the topics they are most ready to learn, constantly updating each student’s knowledge state and adapting to the student’s individualized learning needs. While ALEKS specializes in remedial and developmental math, we have also integrated ALEKS into all of our secondary math offerings. During the year ended December 31, 2015, ALEKS had 0.7 million paid activations in K-12, an increase of 20% over the prior year.

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ConnectEd: an open learning environment providing access and customization of our content for K-12 users. The platform offers a digital learning solution for teachers and students to access teaching and learning resources.

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Engrade Pro: an open platform for K-12 education that unifies the data, assessment, curriculum and educational tools to drive student achievement and inform district educational strategy. Its K-12 stakeholders have access to content delivery and authoring tools, a communications suite, data reporting tools, and single sign-on interfaces. Based on its open architecture, Engrade can integrate third party content and partners along with K-12 instructional resources and Acuity assessments. Engrade will serve as a basis for the future MHE open digital learning platform, which is seamless, modular and open.

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Acuity: an interim and benchmarking formative assessment tool, used to deliver an adaptive assessment of student performance versus defined standards. We have developed approximately 100,000 unique assessment items to offer a powerful solution to customers. There are a variety of formative assessment types including placement/screener tests, interim/benchmark tests, progress monitoring, and curriculum/basic formative. Our Acuity program is focused on the digital arena of interim/benchmark tests to help educators measure progress against their district’s standards and the educational content presented throughout the year. It serves as practice for the student for their summative exams as well as validation of understanding from their taught curriculum. With the integration of Acuity to K-12’s wide array of curricular assets as well as our Engrade assessment capabilities, our formative assessment solutions will enhance the ability of the teacher to inform future instruction and remediation. In addition, integrating these assessments with our adaptive capabilities enhances the ability of the instructor to collect evidence of student learning.

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LearnSmart: similar to our higher education offering, LearnSmart is an adaptive learning program being deployed with the majority of K-12’s grade 6-12 resources. This allows for more robust data capture, the ability to provide strong reporting, insight into student understanding, an adaptive feedback loop, and the opportunity for increased student achievement.

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Thrive: K-12 delivers a solution for one-to-one school districts and classrooms with integrated curriculum supporting English language, arts, math and science. This program combines K-12’s content and services with a unique digital teaching platform to offer a completely digital, personalized educational environment for each student, while keeping the teacher at the center of the classroom.

International Products

International sells higher education, K-12, professional and other products and services to educational, professional and English language teaching markets in nearly 60 languages across Asia-Pacific, Europe, India, Latin America, the Middle East, and North America. While the business mix and strategic focus of International varies from region to region according to local market dynamics, International’s business strategy leverages the content, tools, services and expertise from our domestic businesses. As a result of the widespread use of English as a universal language, a majority of International’s revenue during the year ended December 31, 2015 was generated by selling our unmodified English language products internationally. Approximately 71% of International’s revenue was generated from such unmodified products together with minor regionally-driven cosmetic changes or translations of English language products. Approximately 29% of International’s revenue for the year ended December 31, 2015 was derived from content created in local markets or products originating from unrelated publishers for distribution in our international markets. Although approximately 90% of International’s 2015 revenue was generated by traditional print products, digital offerings are driving significant international growth. In more developed markets, with a greater prevalence of digital devices, many of our U.S.-developed digital solutions, such as McGraw-Hill Connect, ALEKS and LearnSmart are gaining market share. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), International traditional print revenue represented 90%

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($273 million), 91% ($303 million), 94% ($278 million) and 94% ($50 million), 97% ($358 million), 98% ($394 million) and 99% ($402 million) of total International revenue, respectively.

For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), International digital revenue represented 10% ($32 million), 9% ($30 million), 6% ($18 million) and 6% ($3 million), 3% ($13 million), 2% ($8 million) and 1% ($5 million) of total International revenue, respectively.

For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), International digital Adjusted Revenue (including the change in deferred revenue) represented 11% ($35 million), 9% ($31 million), 7% ($22 million) and 5% ($3 million), 4% ($14 million), 2% ($9 million) and 1% ($5 million) of total International Adjusted Revenue, respectively.

Professional Products

Professional is a leading provider of medical, technical, engineering, and business content and training solutions for the professional, education and test preparation communities. Professional’s products include digital product portfolios and textbooks easily accessible through whichever medium our student and professional customers prefer. Professional’s digital product portfolio spans two main categories: (i) digital subscription services and (ii) eContent (including eBooks and related applications).

I. Digital Subscription Services

Digital subscription services are platforms that provide searchable and customizable digital content integrated with highly functional workflow tools. Professional offers 22 digital subscription services which are organized across three broad subject categories: (i) Medical, (ii) Engineering and Science, and (iii) Test Preparation. These products are sold on an annual subscription basis to over 2,700 corporate, academic, library and hospital customers as of December 31, 2015. Our digital subscription services customer base has a retention rate across major platforms of 94% in 2015.

The flagship Access line of products provide an integrated digital workspace that combines Professional’s content, contextualized rich media and high-functionality workflow tools such as custom curriculum, which allows instructors to select specific reference content, videos, and animations, assign to students and monitor progress. For example, AccessMedicine is an innovative online resource that provides students, residents, clinicians, researchers, and other healthcare professionals with access to content from more than 90 medical titles, updated content, thousands of images and illustrations, interactive self-assessment, case files, time-saving diagnostic and point-of-care tools and a comprehensive search platform as well as the ability to view from and download content to a mobile device. Frequently updated and continuously expanded by world-renowned physicians, AccessMedicine provides fast, direct access to the information necessary to complete evaluations, diagnoses, and case management decisions, and pursue research, medical education, self-assessment and board review.

The value proposition of Professional’s digital subscription platforms is compelling for our subscribers, and the economics are attractive and highly scalable for us. Digital subscription platforms provide a stable, recurring revenue stream with high annual re-order rates. New competitors in the digital subscription market must overcome large volumes of proprietary content developed over many years. Digital products are highly profitable due to the low variable cost nature of these products, with gross margins of approximately 90%. For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013

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(Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), digital subscription revenue represented 33% ($39 million), 29% ($34 million), 24% ($23 million) and 29% ($7 million), 20% ($24 million), 15% ($19 million) and 11% ($14 million) of total Professional revenue, respectively.

II. eContent (eBooks) and traditional print

eBooks represent the majority of Professional’s eContent offerings. Professional’s more than 7,500 eBooks are sold on major eBook retail websites and through Professional’s own websites. Our eBooks are designed to be compatible with a broad range of devices, including the Kindle and Nook eReaders, the iPad, more than 200 medical, test preparation and business mobile applications for the iPhone, other tablets and standard desktop and laptop computers. Professional provides timely and authoritative knowledge to customers around the world through the release of over 300 titles per year. Our roster of distinguished authors and prestigious brands represent some of the best-selling professional publications, such as Harrison’s Principles of Internal Medicine, Perry’s Chemical Engineers’ Handbook and Graham & Dodd’s Security Analysis, and are well-regarded globally in both academic and professional career markets. Our products are sold and distributed worldwide in both digital and print format through multiple channels, including research libraries and library consortia, third party agents, direct sales to professional society members, bookstores, online booksellers, direct sales to individuals and other customers. Our top customers include retail trade, academic and government institutions and corporations. For the years ended December 31, 2015 and 2014 (Successor) and the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), Professional digital revenue represented 46% ($55 million), 44% ($51 million), 39% ($37 million) and 44% ($10 million), 34% ($41 million), 25% ($33 million) and 24% ($31 million) of total Professional revenue, respectively.

For the years ended December 31, 2015 and 2014 (Successor), the periods from March 23, 2013 to December 31, 2013 (Successor) and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012, 2011 and 2010 (Predecessor), Professional digital Adjusted Revenue (including the change in deferred revenue) represented 47% ($58 million), 46% ($58 million), 41% ($41 million) and 45% ($11 million), 37% ($48 million), 26% ($34 million), and 25% ($33 million) of total Professional Adjusted Revenue, respectively.

Raw Materials, Printing and Binding

Paper is one of the principal raw materials used in our business. We have not experienced and do not anticipate experiencing difficulty in obtaining adequate supplies of paper for operations. We have contracts to purchase paper and printing services that have target volume commitments. However, there are no contractual terms that require us to purchase a specified amount of goods or services and if significant volume shortfalls were to occur during a contract period, then revised terms may be renegotiated with the supplier.

Environmental

We generally contract with independent printers and binders for their services. However, it is possible that we could face liability, regardless of fault, if contamination were to be discovered on properties currently or formerly owned, operated or leased by us or our predecessors, or to which we or our predecessors have sent waste. We are not currently aware of any material environmental liabilities or other material environmental issues at our properties or arising from our current operations. However, we cannot assure you that such liabilities or issues will not materially adversely affect our business, financial position or results of operations in the future.

Seasonality

Our revenues, operating profit and operating cash flows are affected by the inherent seasonality of the academic calendar, particularly with respect to Higher Education, K-12 and International. In 2015, we realized

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approximately 40% and 23% of our revenues during the third and fourth quarters, respectively. This seasonality affects operating cash flow from quarter to quarter and hence there are certain months when we operate at a net cash deficit from our activities. Changes in our customers’ ordering patterns may affect the comparison of our results in a quarter with the same quarter of the previous year, or in a fiscal year with the prior fiscal year, where our customers may shift the timing of material orders for any number of reasons, including, but not limited to, changes in academic semester start dates or changes to their inventory management practices.

Competition

We are one of the largest education companies in the world by revenue. Our product portfolio and customer base span the entire educational spectrum, and as a result we compete with a variety of companies in different product offerings. Our larger competitors are currently Pearson, Houghton Mifflin Harcourt, Wiley and Cengage. The focus on technology and digital products in education may result in the emergence of additional competitors over time. We believe that we are well positioned to compete in our markets. We primarily compete on the quality of our content and effectiveness of our digital solutions, product implementation support, brand and reputation, author reputation, customers’ history using our products and, to a lesser extent, price.

Personnel

As of December 31, 2015, we had more than 4,750 employees worldwide directly supporting our operations with over 3,450 employed in the United States. None of our employees in the United States are represented by a union.

Properties

Our corporate headquarters are located in leased premises at Two Penn Plaza, New York, NY 10121. We lease offices, warehouses and other facilities at 56 locations, of which 16 are in the United States. In addition, we occupy real property that we own at 6 locations, of which 4 are in the United States. Our properties consist primarily of office space used by our operating segments, and we also utilize warehouse space and book distribution centers. We believe that all of our facilities are well maintained and are suitable and adequate for our current needs.

The properties listed in the table below are our principle owned and leased properties:


Location	Lease Expiration		Approximate Area		Principle Use of Space
Owned Premises:
Blacklick, Ohio		Owned		548,144	Warehouse & Office
Monterey, California		Owned		209,204	Office
Whitby, Ontario, Canada		Owned		175,654	Warehouse & Office
Columbus, Ohio		Owned		170,615	Office
Dubuque, Iowa		Owned		139,062	Office
Leased Premises:
Groveport, Ohio		2018		667,672	Warehouse & Office
Ashland, Ohio		2020		602,378	Warehouse & Office
New York, New York		2020		168,903	Office
Indianapolis, Indiana		2016		126,700	Warehouse & Office
Burr Ridge, Illinois		2018		108,102	Office
Noida, Uttar Pradesh, India		2020		90,500	Warehouse & Office
Irvine, California		2019		53,220	Office
Coslada, Madrid, Spain		2017		52,797	Warehouse
Seattle, Washington		2021		24,646	Office
East Windsor, New Jersey		2024		23,183	Office
Boston, Massachusetts		2021		37,622	Office

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In addition, we own and lease other offices that are not material to our operations.

Legal Proceedings

In the normal course of business both in the United States and abroad, we are a defendant in various lawsuits and legal proceedings which may result in adverse judgments, damages, fines or penalties and is subject to inquiries and investigations by various governmental and regulatory agencies concerning compliance with applicable laws and regulations. In view of the inherent difficulty of predicting the outcome of legal matters, we cannot state with confidence what the timing, eventual outcome, or eventual judgment, damages, fines, penalties or other impact of these pending matters will be. We believe, based on our current knowledge, that the outcome of the legal actions, proceedings and investigations currently pending should not have a material adverse effect on the Company’s combined financial condition.

Intellectual Property

Our products contain intellectual property delivered through a variety of media, including digital and print. We rely on a combination of copyrights, trademarks, patents, non-disclosure agreements and other agreements to protect our intellectual property and proprietary rights. We also obtain significant content, materials and technology through license arrangements with third party licensors.

We have registered certain patents, trademarks and copyrights in connection with our publishing businesses. We also register domain names, when appropriate, for use in connection with our websites and internet addresses. We believe we either own or have obtained the rights to use all intellectual property rights necessary to provide our products and services. We believe we have taken, and continue to take, in the ordinary course of business, appropriate legal steps to protect our intellectual property in all relevant jurisdictions.

We rely on authors for the majority of the content for our products. In most cases, copyright ownership has either vested in us, as a “work made for hire”, been assigned to us by the original author(s), or the author has retained the copyright and granted us an exclusive license to utilize the work.

Piracy of intellectual property can negatively affect the value of and demand for our products and services. We attempt to mitigate the risk of piracy through (1) the implementation of restrictive use mechanisms and other limitations inherent to our products and (2) the use of online monitoring combined with legal and regulatory actions and initiatives.

Some of our products contain inherent usage controls and other built-in safeguards that reduce the risk and ease of piracy, including: (a) requirements that users login to their accounts with user names and passwords; (b) the fact that sharing account access for many of our products would result in an abnormal user experience and inaccurate grading; (c) use by our eBook providers of time-based lockouts that allow our eBooks to be automatically disabled based on subscription length; and (d) the inherent limitations in the usefulness and ease of copying the text of many of our products, due to the adaptive and interactive nature of our key content together with certain limitations on copying and pasting.

We also use a variety of legal actions, regulatory initiatives and online monitoring efforts to further mitigate piracy concerns, including:

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Online monitoring of piracy-related activities;

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Initiation of litigation against certain infringers, both individually and jointly with other domestic and foreign publishers;

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Requesting that third parties take down infringing content;

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Lobbying efforts;

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•

Monitoring of our digital applications for abnormal load/usage; and

•

Anti-piracy educational programs.

Since 2007, we have engaged an outside firm that uses web-based technology to search for active titles that are illegally posted or distributed on the internet. We also perform other regular searches for illegal use or distribution of our content, investigate notices of illegal postings of our intellectual property and send take down notices to internet service providers and web sites where infringing material is identified. Over the past years, we have joined with other educational publishers to engage outside counsel to investigate and file numerous copyright and trademark suits in federal court against various online sellers and distributors of infringing copies of our copyrighted materials. We have partnered with various trade associations, such as the Association of American Publishers (AAP) and the Software Information Industry Association (SIIA), to pursue joint actions against sources of both print and electronic piracy, lobby legislative and other government officials in the U.S. and abroad to establish laws and regulations that might assist content owners in combating piracy. We place a “Report Piracy” button on various internal and external sites to enable employees, authors and third parties to report instances of illegal content distribution, which are investigated and actioned as appropriate.

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MANAGEMENT

The following table provides information regarding the executive officers and the members of the Board of the Issuer, as of the date of this prospectus.


Name	Age		Position(s)
David Levin		54	President, Chief Executive Officer and Director
Patrick Milano		55	Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Assistant Secretary
David Stafford		53	Senior Vice President, General Counsel and Secretary
Thomas Kilkenny		57	Senior Vice President and Controller
Peter Cohen		61	Group President, U.S. Education
Stephen Laster		51	Chief Digital Officer
Larry Berg		49	Chairman and Director
Nancy Lublin		44	Director
Jonathan Mariner		61	Director
Antoine Munfakh		33	Director
Ronald Schlosser		67	Director
Antonio Villaraigosa		63	Director
Lloyd G. Waterhouse		64	Director
Mark Wolsey-Paige		54	Director

David Levin became the President and Chief Executive Officer and a Director of McGraw-Hill Education, Inc. in March 2014. Mr. Levin previously served as the Chief Executive of UBM plc (“UBM”), a multinational media company headquartered in London. Before his tenure at UBM, Mr. Levin was Chief Executive of Symbian Software, a U.K. headquartered software group that built the operating system to power the first generation of smartphones. He has also served as Chief Executive of Psion PLC, a London-based consumer and business technology company, and as Chief Operating Officer and Finance Director of Euromoney Institutional Investor PLC. Mr. Levin also served as a Non-Executive Director on the Finance Committee of the Oxford University Press and Board of the Press Association. Mr. Levin received his bachelor’s degree in politics, philosophy and economics from Oxford University and his MBA from Stanford University. The Board believes that Mr. Levin provides leadership and valuable insight and perspective on strategy, international business and all aspects of technology transformation matters stemming from his extensive executive and management experience at UBM, Symbian Software and Psion PLC.

Patrick Milano has been the Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Assistant Secretary of McGraw-Hill Education, Inc. since the Founding Acquisition having held equivalent positions at the McGraw-Hill Education segment of MHC since May 2012. Before becoming an officer of McGraw-Hill Education in 2012, between 2000 and 2012 Mr. Milano held several leadership and financial roles at Standard & Poor’s, including his most recent role as Executive Vice President, Operations. Before that, Mr. Milano held a number of positions at McGraw-Hill Education, including Senior Vice President of Finance and Operations of Macmillan/McGraw-Hill. Mr. Milano is a graduate of Rutgers University, holds an MBA from Monmouth University and is a Certified Public Accountant.

David Stafford has been the Senior Vice President, General Counsel and Secretary of McGraw-Hill Education, Inc. since the Founding Acquisition having held equivalent positions at the McGraw-Hill Education segment of MHC since May 2012. Before becoming an officer of the McGraw-Hill Education segment of MHC in 2012, Mr. Stafford was Vice President and Associate General Counsel at MHC. From 2006 to 2009, he served as Senior Vice President, Corporate Affairs, and Assistant to the Chairman and Chief Executive Officer of MHC. Before joining MHC in 1992, he was an associate at two large New York City law firms. Mr. Stafford is a

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graduate of Columbia University and received his J.D. degree from Cornell Law School. He serves on the Board of Trustees of YAI Network, a not-for-profit that provides services to people who are developmentally disabled.

Thomas Kilkenny has been the Senior Vice President and Controller of McGraw-Hill Education, Inc. since the Founding Acquisition having held an equivalent position at the McGraw-Hill Education segment of MHC since July 2012. Before that, he was Senior Vice President and Controller of Core Media Group (renamed from CKX Entertainment, Inc.) from 2005 to 2012. From 2003 to 2004, he was Chief Financial Officer of Perseus Book Group. He previously held a number of positions at MHC from 1991 to 2003. Mr. Kilkenny is a magna cum laude graduate of Seton Hall University, holds an MBA from New York University and is a Certified Public Accountant.

Peter Cohen became Group President of the U.S. Education unit of McGraw-Hill Education, Inc. in January 2015, responsible for overseeing the Company’s U.S. K-12 and higher education businesses. Mr. Cohen joined McGraw-Hill Education in March 2013 as President of the School Education Group. Before joining McGraw-Hill Education, Mr. Cohen served as Chief Executive of Pearson Education’s School division. From 1996 until 2008, Mr. Cohen held positions as the president of Sylvan Learning and the CEO of Educate Inc., during which time he led the expansion of the Sylvan Learning consumer business, the acquisition of a 1,000-unit German tutoring business, the development of Educate On Line serving the K-12 market, and the expansion of Catapult Learning serving the K-12 market. From 1993 to 1996, Mr. Cohen served as Chief Executive for The Pet Practice, a publicly traded veterinary hospital chain, and served in various senior management positions at NutriSystem, Circle K and 7-Eleven. Mr. Cohen is a graduate of the University of Redlands, a board member of Primrose Schools, and a former member of the Board of Directors of Connections Academy, a for-profit virtual charter school company.

Stephen Laster has been the Chief Digital Officer of McGraw-Hill Education, Inc. since the Founding Acquisition having held the same position at the McGraw-Hill Education segment of MHC since September 2012. Before joining McGraw-Hill Education, Mr. Laster led Intelligent Solutions, LLC, and served as the Chief Information and Technology Officer of the Harvard Business School. Before joining Harvard, Mr. Laster held several leadership positions at Babson College, including Chief Technology Officer for Babson’s for-profit eLearning company and Director of Curriculum Innovation and Technology. While at Babson, Mr. Laster taught courses at the undergraduate, graduate and executive/professional level in technology leadership, problem solving, software design, and eLearning product development. Mr. Laster holds a bachelor’s degree from Bowdoin College, an MBA from the F.W. Olin Graduate School of Business at Babson College, is a former trustee of Babson College, is on the board of the Sloan Consortium for Online Learning and is a member of the board of directors of the IMS Global Learning Consortium.

Larry Berg has been the Chairman of the Board of McGraw-Hill Education, Inc. since March 2014 and has been a Director since March 2013. Mr. Berg is a Senior Partner at Apollo having joined in 1992, and oversees the Firm’s efforts in industrials and education. Before that time, Mr. Berg was a member of the Mergers and Acquisitions group of Drexel Burnham Lambert Incorporated. Mr. Berg serves on the board of directors of Jacuzzi Bath, Panolam, and Crisis Text Line and he previously served on the boards of Laureate International Universities, Sylvan Learning, Berlitz, and Connections Academy. Mr. Berg graduated magna cum laude with a BS in Economics from the University of Pennsylvania’s Wharton School of Business and received an MBA from the Harvard Business School. The Board believes that Mr. Berg’s extensive experience in making and managing private equity investments on behalf of Apollo and his experience in financing, analyzing and investing in public and private companies enables him to provide meaningful input and guidance to the Board and the Company.

Nancy Lublin has been a Director of McGraw-Hill Education, Inc. since November 2015. Ms. Lublin has served as CEO of Crisis Text Line since 2015. From 2003 until 2015, Ms. Lublin has served as CEO of DoSomething.org. In 2013, while still the CEO of DoSomething.org, Ms. Lublin turned her popular TED talk into Crisis Text Line. Crisis Text Line is the first 24/7, free, nationwide-text line for people in crisis. Prior to her work at DoSomething.org and Crisis Text Line, Ms. Lublin founded Dress for Success, a global entity that

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provides interview suits and career development training to women in need. Ms. Lublin is the author of the best-selling business books, Zilch: The Power of Zero in Business and XYZ Factor. She serves on the board of trustees for The New School. Ms. Lublin serves as a director because her leadership experience provides valuable insight and perspective on general strategic and business matters.

Jonathan Mariner has been a Director of McGraw-Hill Education, Inc. since February 2016. Mr. Mariner is the Chief Investment Officer of Major League Baseball (MLB) and is responsible for managing the baseball industry’s endowment fund, its pension assets and potential new strategic investments. Mr. Mariner served as MLB’s Chief Financial Officer from 2002 until 2014. Before joining MLB, Mr. Mariner served as Executive Vice President and CFO of the Florida Marlins. Mr. Mariner earned a B.S. degree in accounting from the University of Virginia and received an MBA from Harvard Business School. He serves as a director because of his financial acumen and operational and leadership experience, which enables him to provide valuable insight and perspective on various strategic, financial, risk management, operational and business matters.

Antoine Munfakh has been a Director of McGraw-Hill Education, Inc. since the Founding Acquisition. Mr. Munfakh is a Principal at Apollo having joined in 2008. Before that time, Mr. Munfakh spent two years as an Associate at the private equity firm Court Square Capital Partners. Previously, Mr. Munfakh was an Analyst in the Financial Sponsor Investment Banking group at JPMorgan. Mr. Munfakh graduated summa cum laude from Duke University with a BS in Economics, where he was elected to Phi Beta Kappa. The Board believes that Mr. Munfakh provides valuable insight to the Board on strategic and business matters, stemming from his experience analyzing, making and managing investments in public and private companies.

Ronald Schlosser has been a Director of McGraw-Hill Education, Inc. since the Founding Acquisition and previously served as Executive Chairman of McGraw-Hill Education, Inc. since the Founding Acquisition through May 1, 2014. Mr. Schlosser currently advises global leaders in private equity investing in information services, including healthcare, data services and education. He has served as Chairman and Chief Executive Officer of Haights Cross Communications, an educational and library information company, and has served as a Senior Advisor to Providence Equity Partners and Chairman of several education and information services portfolio companies, including Jones & Bartlett, Assessment Technologies Institute, Edline and Survey Sampling International. Mr. Schlosser served as Chief Executive Officer of Thomson Learning Group, after serving as Chief Executive Officer of Thomson Scientific and Healthcare, after joining Thomson Financial Publishing as its President & Chief Executive Officer in 1995. He is a Board Member of Copyright Clearance Center, New York University POLY and The Peddie School. Mr. Schlosser is a graduate of Rider University and holds an MBA from Fairleigh Dickinson University. Mr. Schlosser serves as a Director because of his extensive industry and business experience in the education and information sectors, which enables him to offer the Board important industry-specific perspectives, and his experience as CEO of Thomson, which provides the Board with operational matters expertise.

Antonio Villaraigosa has been a Director of McGraw-Hill Education, Inc. since June 2014. Mr. Villaraigosa was the Mayor of Los Angeles from 2005 to 2013 and he was President of the U.S. Conference of Mayors from 2011 to 2012. He was also national co-chairman of Hillary Clinton’s presidential campaign, a member of President Obama’s Transition Economic Advisory Board, and Chairman of the 2012 Democratic National Convention. Mr. Villaraigosa is currently also a Senior Fellow at the Bipartisan Policy Center, Senior Advisor at Banc of California, and a professor of practice at the USC Price School of Public Policy. Mr. Villaraigosa serves as a director because his extensive leadership skills and public policy experience, particularly in the area of education, provides valuable knowledge to the Board.

Lloyd G. Waterhouse has been a Director of McGraw-Hill Education, Inc. since the Founding Acquisition and was the President and Chief Executive Officer since the Founding Acquisition until his retirement on April 8, 2014. He was previously the President of the McGraw-Hill Education segment of MHC since June 2012. Mr. Waterhouse began his career with International Business Machines Corporation (“IBM”) in 1973 in the firm’s data processing division. He later became General Manager of Marketing and Services for IBM Asia

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Pacific. In 1992, he was appointed President of IBM’s Asia Pacific Services Corporation and later became Director of Global Strategy at IBM. In 1996, Mr. Waterhouse was named General Manager Marketing and Business Development, IBM Global Services, before being promoted to General Manager, E-Business Services, a division focused on consulting, education and training for customers. In 1999, Mr. Waterhouse became President and Chief Operating Officer, and later Chief Executive Officer of Reynolds & Reynolds Co., a company primarily focused on software for the automotive industry. In 2006, he was appointed Chief Executive Officer of Harcourt Education, a leader in the United States School Education sector. The parent company of Harcourt Education decided to sell the business in 2007 and it merged with Houghton Mifflin Harcourt at the end of that year. Mr. Waterhouse has since served as a director of SolarWinds, Inc., ITT Educational Services, Ascend Learning LLC, Digimarc Corporation, i2 Technologies, Inc., Atlantic Mutual Insurance Companies, JDA Software and Instructure. Mr. Waterhouse is a graduate of Pennsylvania State University and holds an MBA from Youngstown State University. The Board believes that Mr. Waterhouse provides valuable insight and perspective on general strategic and business matters, stemming from his extensive executive and management experience with IBM and Houghton Mifflin Harcourt.

Mark Wolsey-Paige has been a Director of McGraw-Hill Education, Inc. since May 2013. From 2010 to 2014 Mr. Wolsey-Paige served as an advisor to Apollo, largely on healthcare-related deals. Before becoming an advisor to Apollo, Mr. Wolsey-Paige served as Executive Vice President, Product Development & Supply at Siemens Healthcare Diagnostics from 2007 to 2009. In 2007, he was appointed Chief Strategy and Technology Officer for Dade Behring Inc. before its acquisition by Siemens. Previously, Mr. Wolsey-Paige worked at Baxter Diagnostics, which became a part of Dade Behring, and became Vice President, Strategy and Business Development in 2000; he remained in this role until the company was acquired, while also becoming head of Research and Development, Instrument Manufacturing and Supply Chain Management. Before joining Dade Behring, he was a consultant at Bain & Company in Boston. Before that, Mr. Wolsey-Paige served four years in the U.S. Army, achieving the rank of Captain and worked in the Strategic Plans and Policy Directorate on the Army staff in the Pentagon. Mr. Wolsey-Paige holds an MBA from Harvard University and is a graduate of Washington University. Mr. Wolsey-Paige serves as a director because his product development, corporate strategy and technology experience provides valuable knowledge and to the Board.

Board Structure

The supervision of our management and the general course of our affairs and business operations is entrusted to the Board. Upon the completion of this offering, we expect that our Board will have eight directors, three of whom will be “independent” under the rules of the New York Stock Exchange.

Our second amended and restated bylaws require any incumbent director who fails to receive a majority of the votes cast in any uncontested election to submit an offer to resign from the Board to the Nominating and Corporate Governance Committee. See “—Committees of the Board.” The Nominating and Corporate Governance Committee will determine whether to accept or reject the resignation of such director.

Status as a Controlled Company

We intend to avail ourselves of the “controlled company” exception under the New York Stock Exchange rules, which eliminates the requirements that we have a majority of independent directors on the Board and that we have compensation and governance and nominating committees composed entirely of independent directors. We will be required, however, to have an audit committee with one independent director during the 90-day period beginning on the closing of this offering. After such 90-day period and until one year from the closing of this offering, we will be required to have a majority of independent directors on our audit committee. Thereafter, we will be required to have an audit committee comprised entirely of independent directors.

If at any time we cease to be a “controlled company” under applicable stock exchange rules, the Board will take all action necessary to comply with the applicable stock exchange rules, including appointing a majority of

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independent directors to the Board and establishing certain committees composed entirely of independent directors, subject to a permitted “phase-in” period. We will cease to qualify as a “controlled company” once Apollo ceases to control a majority of our voting stock.

Following the closing of this offering, the Board will be divided into three classes. The members of each class will serve staggered, three-year terms (other than with respect to the initial terms of the Class I and Class II directors, which will be one and two years, respectively). Upon the expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of stockholders in the year in which their term expires. In connection with this offering, will be designated as Class I directors, will be designated as Class II directors and will be designated as Class III directors.

Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of the Board may have the effect of delaying or preventing changes in control. See “Description of Capital Stock—Certain Anti-Takeover, Limited Liability and Indemnification Provisions.”

Committees of the Board

Audit Committee. Upon the closing of this offering, we expect that our Audit Committee will consist of three members. Under the New York Stock Exchange listing rules, we will be required to have an audit committee with one independent director during the 90-day period beginning on the closing of this offering. After such 90-day period and until one year from the date of the closing of this offering, we will be required to have a majority of independent directors on our audit committee. Thereafter, we will be required to have an audit committee comprised entirely of independent directors.

Compensation Committee. Upon the closing of this offering, we expect that our Compensation Committee will consist of three members. The Compensation Committee is responsible for formulating, evaluating and approving the compensation and employment arrangements of our senior officers. We intend to avail ourselves of the “controlled company” exception under the New York Stock Exchange listing rules which eliminates the requirement that we have a compensation committee composed entirely of independent directors. We expect that the Compensation Committee will initially consist of the following members: Messrs. Berg, Munfakh and Schlosser.

Nominating and Corporate Governance Committee. Upon the closing of this offering, we expect that our Governance and Nominating Committee will consist of three members. The Nominating and Corporate Governance Committee is responsible for assisting the Company in identifying and recommending candidates to the Board, recommending composition of the Board and committees and reviewing and recommend revisions to the corporate governance guidelines. We expect that the Nominating and Corporate Governance Committee will initially consist of the following members: Messrs. Berg and Waterhouse and Ms. Lublin.

Code of Ethics

We have adopted a code of ethics, referred to as our “Code of Business Ethics,” that applies to all of our employees, including our Chief Executive Officer, Chief Financial Officer and senior financial and accounting officers. A copy of our Code of Business Ethics is available on our website at www.mheducation.com.

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COMPENSATION DISCUSSION AND ANALYSIS

The following discussion describes our process of determining the compensation and benefits provided to our “named executive officers” in fiscal year 2015.

Our named executive officers for fiscal year 2015 are:

•

David Levin, President, Chief Executive Officer (“CEO”) and Director

•

Patrick Milano, Executive Vice President, Chief Financial Officer (“CFO”), Chief Administrative Officer (“CAO”) and Assistant Secretary

•

Peter Cohen, Group President, US Education

•

Stephen Laster, Chief Digital Officer

•

David Stafford, Senior Vice President, General Counsel and Secretary

Executive Compensation Programs

Compensation Philosophy and Objectives

Our executive compensation philosophy is focused on pay for performance and is designed to reflect appropriate governance practices aligned with the needs of our business. We grant target levels of compensation that are designed to attract and retain employees who are able to meaningfully contribute to our success. The Compensation Committee of the Board (the “Compensation Committee”) considers several factors in designing target levels of compensation, including, but not limited to, historical levels of pay for each executive, actual turnover in the executive ranks, market data on the compensation of executive officers at similar companies, and its judgment about retention risk with regard to each executive relative to his or her importance to the Company.

The Company’s mix of fixed versus variable compensation, within the target total level of pay, is driven by the Company’s emphasis on pay for performance. The Company uses variable compensation, including performance equity grants, together with management’s accumulated equity holdings, both vested and unvested, to enhance alignment of the interests of our named executive officers and the interests of the Company’s stockholders.

Specifically, for fiscal year 2015, the objectives of our executive compensation programs focused on delivering key initiatives and performance goals for our five-year plan. Our objectives were as follows:

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Deliver on our strategic imperatives for 2015: Focus, Simplify, Expand

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Focus on driving scale, leadership and increased market share

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Simplify by consolidating delivery platforms, optimizing content creation and course lifecycle management, and redesigning service and support model

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Expand our business frontiers to gain scale faster through enterprise, services and test preparation

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Achieve operational excellence by continuing to implement best practices, eliminate redundant or unnecessary practices, and streamline practices in order to achieve best quality results

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Align the interests of our executives with those of the Company’s stockholders, by rewarding them for delivering on the key initiatives that will position MHE as a leading force in digital education products and learning methods

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Encourage achievement of Plan EBITDA (as defined below) and free cash flow goals developed in conjunction with our five-year plan

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Enable the hiring and retention of high-caliber talent

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Provide appropriate incentives for both business and individual performance

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Encourage prudent, but not excessive, risk-taking

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Build value by linking a significant portion of compensation to long-term company performance

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Develop an entrepreneurial culture that contributes to our continued growth, by being performance-driven, nimble, and cost-conscious

Compensation Programs

For fiscal year 2015, the principal elements of our executive compensation programs were as follows:


Compensation Element	Brief Description	Objectives
Base Salary	Fixed compensation	Provide a competitive, fixed level of cash compensation to attract and retain the most talented and skilled employees

Annual Incentive Plan	Variable cash compensation earned based on achieving pre-established annual goals	Motivate and reward employees to achieve or exceed MHE’s current year Plan EBITDA goals

Equity Awards	Nonqualified option awards made to senior leaders, and restricted stock units granted in connection with corporate dividends	Align performance of our key talent with the Company’s stockholders Encourage achievement of annual and cumulative Plan EBITDA and free cash flow goals

Further, we provide our named executive officers with severance payments and benefits, retirement benefits, limited perquisites and other fringe benefits, and participation in health and welfare plans available to our employees generally.

The following discussion provides further details on these executive compensation programs.

Base Salaries

Base salaries provide a fixed amount of cash compensation on which our named executive officers can rely. As of December 31, 2015, the annual base salaries for our named executive officers were as follows:


Name / Title	Fiscal Year 2015 Base Salary
D. Levin	$	1,000,000
President, CEO and Director
P. Milano	$	550,000
Executive Vice President, CFO, CAO and Assistant Secretary
P. Cohen	$	650,000
Group President, US Education
S. Laster	$	500,000
Chief Digital Officer
D. Stafford	$	450,000
Senior Vice President, General Counsel and Secretary

In determining base salaries for fiscal year 2015, we reviewed relevant market data to obtain a general understanding of current market practices, so we can design our executive compensation program to be competitive. Market data is not used exclusively, but rather as a point of reference to draw comparisons and

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distinctions. We also take into account an executive officer’s job responsibilities, performance, qualifications and skills in determining individual compensation levels.

The survey data we primarily used in determining fiscal year 2015 compensation were (i) the Towers Watson Executive Compensation Media Survey, for which we utilized a sample of firms focusing on book publishers, business to business media, consumer magazines, newspapers, information services, and multiple media platforms, and (ii) the Radford Executive Compensation Survey, which focuses on technology firms. In all cases, data for firms with revenues in the $1 billion to $3 billion range was used.

2015 Annual Incentive Plan (AIP)

The 2015 Annual Incentive Plan (“AIP”) is designed to incentivize maximizing Plan EBITDA through revenue generation, platform growth and development, and operational efficiencies.

For 2015, the bonus pool was determined based on the level of achievement of our Company-wide annual Plan EBITDA goal as compared to our annual target Plan EBITDA goal, as follows:

AIP EBITDA Table


Annual Plan EBITDA achieved compared to target goal:	% of Target Pool Funded:	Actual Plan EBITDA achieved:	% of Target Pool Funded:
Less than $471 million	0%
Greater than or equal to $471 million but less than $523.3 million	Linear interpolation between 0% and 100%
$523.3 million	100%
Greater than $523.3 million, but less than $628 million	Linear interpolation between 100% and 200%	$528.1 million	100.9%
$628 million or greater	200%

The above Plan EBITDA targets exclude the financial impact of corporate costs allocated to our CTB business which was divested in 2015. Plan EBITDA results for 2015 were finalized and pool funding approved by the Compensation Committee in February 2016. Actual Plan EBITDA was $528.1 million, which corresponded to a 100.9% pool funding level. The bonus pool allocations to business units have historically been made based on the business unit’s achievement of unit-level performance metrics, considering the unit’s attainment of strategic objectives and the unit’s impact on our overall performance and success. The allocated portion of the bonus pool to each business unit will then be further allocated to individual participants. As in prior years, the amount of individual bonuses will be determined in each case based on the business unit manager’s recommendation of the individual’s performance, taking into account both quantitative and qualitative criteria, such as the individual’s performance against his or her objectives and the individual’s contributions to key strategic initiatives of the business unit or MHE overall.

Individual allocations to our named executive officers other than our CEO are based on the recommendations of the CEO and are subject to the review and approval of the Compensation Committee. The Compensation Committee also determines our CEO’s bonus achievement.

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The following table sets forth each of our named executive officers’ target and achieved bonus amounts under the 2015 AIP:


Executive	2015 AIP Target Bonus		2015 AIP Actual Bonus
David Levin	$	1,000,000	$	1,000,000
President, CEO and Director
Patrick Milano	$	550,000	$	550,000
Executive Vice President, CFO, CAO and Assistant Secretary
Peter Cohen	$	422,500	$	422,500
President, US Education
Stephen Laster	$	325,000	$	325,000
Chief Digital Officer
David Stafford	$	225,000	$	225,000
Senior Vice President, General Counsel and Secretary

McGraw-Hill Education, Inc. Equity Program

We established the McGraw-Hill Education, Inc. Management Equity Plan (the “Management Equity Plan”) in fiscal year 2013 as a platform to grant equity awards to our key employees, including our named executive officers. The Management Equity Plan was designed to align the interests of our most senior leaders with those of the Company’s stockholders. For our named executive officers and other senior leadership team members, we have historically granted awards of options to acquire common stock of the Company, with a per share exercise price not less than the fair market value of a share of the Company’s common stock as of the date of the grant. Messrs. Milano, Cohen, Laster and Stafford each received option awards at the time the Management Equity Plan was established in fiscal year 2013, Mr. Levin received option awards upon his hire in fiscal year 2014, and each of Messrs. Levin, Milano, Cohen and Laster received option awards in 2015 in recognition of their work on the divestiture of the Company’s CTB business as well as their contributions to the preparation of this prospectus.

In determining the size of the option awards granted to our named executive officers, our Compensation Committee took into account the named executive officer’s level of responsibility within the Company and potential to improve the long-term, overall value of the business.

The option awards are tied to service and performance goals which contribute to our five-year economic plan, and were generally designed to encourage appreciation of the business, retention and achievement of our performance goals for the next five years.

The vesting terms of the options are as follows: 50% of each option vests in equal installments of 20% over five years, except that 50% of Mr. Cohen’s 2013 grant vests in equal installments of 25% over four years, in each case, provided that the executive remains continuously employed by MHE through the applicable vesting date. The remaining 50% of the option vests in equal installments of 20% on each of the same five anniversaries, except that the remaining 50% of Mr. Cohen’s 2013 grant vests in equal installments of 25% on each of the same four anniversaries, in each case, provided that the executive remains continuously employed by MHE through the applicable vesting date and certain performance criteria are met with respect to each fiscal year during the vesting period. For Mr. Levin’s 2014 grant, performance is measured beginning with fiscal year 2014 and ending with fiscal year 2018, and for the 2013 grants to Messrs. Milano, Cohen, Laster and Stafford, performance is measured beginning with fiscal year 2013 and ending with fiscal year 2017. For grants made in 2015 to Messrs. Levin, Milano, Cohen and Laster, performance is measured beginning with fiscal year 2015 and ending with fiscal year 2019.

With respect to the portion of the option which vests based on achievement of performance criteria, 50% of such portion is based on achievement of annual Plan EBITDA targets and the remaining 50% of such portion is

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based on the achievement of annual free cash flow targets. In addition, the portion of the performance-vesting option that is eligible to vest in respect of MHE’s performance in fiscal 2015 will vest in connection with an initial public offering occurring prior to March 31, 2017, provided that the applicable target enterprise value in connection with such initial public offering is achieved (a “Qualified IPO”) (independent of Plan EBITDA and free cash flow achievement for such fiscal year). The applicable performance targets were designed to drive significant growth of our business yet still be achievable, and to focus on long-term value creation. The applicable annual and cumulative Plan EBITDA and free cash flow targets were equitably adjusted in fiscal year 2014 in light of the LearnSmart and Engrade acquisitions and in fiscal year 2015 in light of the divesture of the assets comprising the custom state assessment and shelf businesses of CTB. If any installment of the performance-vesting option does not vest as of the vesting date for the applicable year because either of the performance criteria are not met, that installment remains eligible for vesting on any future vesting date, if MHE’s cumulative Plan EBITDA or cumulative free cash flow, as applicable, for the year(s) prior to that vesting date equals or exceeds the target cumulative Plan EBITDA or target cumulative free cash flow. Excess performance in any given year may not be applied to cumulative results for subsequent years.

The option award agreements granted under the Management Equity Plan generally defined “Plan EBITDA” as consolidated net income before interest, income taxes, depreciation, amortization, extraordinary items (including Other Income and Expense items as well as LIFO Income and Expense items) and management or similar fees payable to Apollo Management or any of its affiliates, as reflected on the audited consolidated financial statements of the Company for the applicable measurement period. Plan EBITDA is derived from Adjusted EBITDA by excluding certain unbudgeted expenses. Consolidated net income is determined in accordance with generally accepted accounting principles except that gains or losses from extraordinary, unusual or non-recurring items may be excluded in the discretion of the Compensation Committee. “Free cash flow” is generally defined as operating cash flow minus capital expenditures. “Enterprise value” is generally defined as the sum of MHE’s market capitalization, interest-bearing debt, the value of any minority interest in any subsidiary company and the value of any outstanding preferred stock, minus any cash or cash investments on MHE’s balance sheet.

2015 results were determined and approved by the Compensation Committee in February 2016. As a result of our actual 2015 performance exceeding the applicable performance targets, the performance vesting condition in respect of 2015 performance has been satisfied.

Option Performance Criteria Table


2015 Option Performance Criteria:	2015 Target:	2015 Plan EBITDA Actual:	Performance Target Achieved?
Plan EBITDA	$483.1 million	$494.5 million	Yes
Free Cash Flow	$440.3 million	$454.5 million	Yes

The calculation of Plan EBITDA for the AIP and the Management Equity Plan may differ as certain revenues and expenses may be considered in Plan EBITDA for the AIP that were not contemplated at the time that the original Plan EBITDA targets for the Management Equity Plan were established. The actual 2015 Plan EBITDA shown above reflects an adjustment for $33.6 million of corporate costs allocated to our former CTB business to be consistent with the adjustment described above to the target Plan EBITDA for 2015. Even after taking into account this adjustment, Plan EBITDA for 2015 exceeded the target.

The option award agreements under the Management Equity Plan also contain noncompetition, nonsolicitation, confidentiality, nondisclosure and other restrictive covenants. These restrictions apply to all of the named executive officers. The duration of the noncompetition and nonsolicitation covenants for all named executive officers extend for one year following termination of employment.

In November 2015, we revised Mr. Cohen’s long-term bonus plan under his offer letter with respect to calendar years 2016 and beyond in order to ensure a strong alignment with our performance for the remaining

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time under such plan, covering calendar years 2016 through 2018. Mr. Cohen will be entitled to receive a grant of performance-based restricted stock units as soon as reasonably practicable following the earlier of the consummation of our initial public offering or May 1, 2016. These performance-based restricted stock units will generally be subject to both service-based vesting through the applicable payment date and performance-based vesting based on achievement against annual performance targets for each of calendar years 2016, 2017 and 2018. The annual performance targets for each calendar year will be established by our chief executive officer on an annual basis not later than 120 days following the beginning of each applicable year (and not later than April 1, 2016 with respect to the 2016 performance year). These performance-based restricted stock units will, if earned, vest as to 36.36%, 36.36% and 27.28% of such units based on achievement of the annual performance targets in calendar year 2016, 2017 and 2018, respectively. The number of units to be granted in respect of the three performance years will be determined based on the closing price of our common stock on the first full day of trading in connection with our initial public offering or, if the initial public offering has not occurred prior to the applicable grant date, the fair market value of our common stock on such date as determined under the Management Equity Plan. The number of units eligible to vest will provide a value as of the aforementioned grant date of approximately $1.85 million, $1.85 million and $1.41 million for 2016, 2017 and 2018, respectively. Any outstanding performance-based restricted stock units that remain upon Mr. Cohen’s termination of employment will be forfeited; provided that in the event of Mr. Cohen’s termination of employment on or prior to December 31, 2018 due to death, by his employer other than for “cause” (including as a result of his “disability”) or by him for “good reason” (each as defined in the Management Equity Plan), the performance-based restricted stock units that would have been eligible to vest in respect of the year in which such termination occurs will remain outstanding and eligible to vest on a prorated basis if the performance target for such year is achieved. In addition, if Mr. Cohen terminates his employment for good reason after the last day of a calendar year but before the determination of whether the performance target has been achieved for such year, he will vest in such year’s tranche of performance-based stock units if the performance target is finally determined to have been achieved.

Adjustments to Options; Dividend Restricted Stock Unit Grants

Options granted under the Management Equity Plan were equitably adjusted in fiscal year 2015 in light of an extraordinary dividend made on April 6, 2015. This dividend adjustment was delivered to option holders either through (i) reducing the exercise price by the full amount of the per share dividend, where possible, or (ii) through a combination of reducing the exercise price and granting restricted stock units (“dividend RSUs”).

Mr. Levin’s options outstanding as of April 6, 2015 were adjusted by reducing the exercise price by the full amount of the per share dividend. The exercise price of his options was adjusted from $122.97 to $113.42 on April 6, 2015.

For Messrs. Milano, Cohen, Laster and Stafford, their options outstanding as of April 6, 2015 were adjusted through a combination of reducing the exercise price and granting dividend RSUs. The exercise price of their options was adjusted from $30.75 to $29.02 on April 6, 2015. To adjust the option for the remaining value of the dividend, Messrs. Milano, Cohen, Laster and Stafford were each granted dividend RSUs which vest on the same vesting schedule and on the same conditions as the adjusted options. The number of shares covered by the dividend RSUs was determined by dividing (x) the per share dividend amount less the value of the exercise price adjustment by (y) the then-current value of a share of common stock.

See “—Potential Payments upon Termination or Change in Control” for a description of the treatment of options and dividend RSUs upon certain events.

Severance Benefits

We are obligated to pay severance or other enhanced benefits to our named executive officers upon certain terminations of their employment. Our severance programs are designed to promote loyalty, and to provide executives with security and reasonable compensation upon an involuntary termination of employment.

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Messrs. Levin, Milano, Cohen, Laster and Stafford participate in the McGraw-Hill Education, Inc. Executive Severance Plan (the “Executive Severance Plan”), which was established in fiscal year 2013 to become effective as of the first anniversary of the closing of the Founding Acquisition. Under certain circumstances, Mr. Levin is entitled to enhanced severance benefits if he incurs an involuntary termination within the first three years of his hire. These enhanced severance benefits were negotiated at arm’s-length in connection with his employment agreement, to encourage Mr. Levin’s relocation to New York City, where our headquarters are located.

Further details regarding the severance benefits provided to our named executive officers can be found under “—Potential Payments upon Termination or Change in Control.”

Retirement Benefits

Each named executive officer participates in our 401(k) plan, which is a qualified defined contribution plan available to our employees generally.

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