As filed with the Securities and Exchange Commission on April 28, 2017

Registration No. 333-206774

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 8

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	☒ (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐

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 28, 2017

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 , 2017.



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



Jefferies	RBC Capital Markets	Wells Fargo Securities



Piper Jaffray		Apollo Global Securities

The date of this prospectus is , 2017.

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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		18

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA		20

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		47

INDUSTRY		95

BUSINESS		98

MANAGEMENT		118

COMPENSATION DISCUSSION AND ANALYSIS		123

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		152

PRINCIPAL STOCKHOLDERS		154

DESCRIPTION OF CAPITAL STOCK		156

DESCRIPTION OF MATERIAL INDEBTEDNESS		161

SHARES ELIGIBLE FOR FUTURE SALE		166

U.S. FEDERAL INCOME TAX CONSIDERATIONS		168

UNDERWRITING (CONFLICTS OF INTEREST)		172

LEGAL MATTERS		178

EXPERTS		178

WHERE YOU CAN FIND MORE INFORMATION		178

INDEX TO 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.” MHC is now known as S&P Global 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 Billings, EBITDA and Adjusted EBITDA in this prospectus because we believe they provide investors with additional information to measure our performance and evaluate our ability to service our indebtedness.

Management reviews these measures on a regular basis and uses them to evaluate and manage the performance of our business, make resource allocation decisions and compensate key management personnel as these measures provide comparability from period-to-period as sales of digital solutions represent an increasing percentage of our total sales during this time of transition. We believe that, for the reasons outlined herein, these non-GAAP financial measures provide useful information to investors and provide increased transparency and a better understanding of our business performance trends as a supplement to reported revenue, net income (loss) from continuing operations and operating cash flows. However, these measures should be evaluated only in conjunction with the comparable GAAP financial measures and should not be viewed as alternative or superior measures of GAAP results.

Billings is a non-GAAP sales performance measure that we believe provides useful information in evaluating our period-to-period sales performance because it reflects the total amount of revenue that would have been recognized in a period if we recognized all print and digital revenue at the time of sale. We use Billings as a sales 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. As sales of our digital learning solutions have increased, so has the amount of revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it reflects the sales activity in a given period, provides comparability from period-to-period during this time of digital transition and is the basis for all sales incentive compensation. In the K-12 market where customers typically pay for five to eight year contracts upfront and the ongoing costs to service any contractual obligation are limited, the impact of the change in deferred revenue is most significant. Billings is U.S. GAAP revenue plus the net change in deferred revenue.

We believe that the presentation of Adjusted EBITDA which is defined in accordance with our debt agreements 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 to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.

Billings, EBITDA and Adjusted EBITDA are not presentations made in accordance with U.S. GAAP, and our use of these terms varies from others in our industry. Billings, EBITDA and Adjusted EBITDA should not be considered as alternatives to revenue, net income from continuing operations, operating cash flows, or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, debt covenant compliance or cash flows as measures of liquidity. Billings, EBITDA and Adjusted EBITDA 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, as defined in accordance with our debt agreements:

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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 and deferred royalties to a cash basis assuming the collection of all receivable balances and payment of all amounts owed;

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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.

Our definition of Adjusted EBITDA allows for the add back of 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 Billings, EBITDA and Adjusted EBITDA 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

iii

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; 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; The Condition of Education 2016, The National Center for Education Statistics; National Student Clearinghouse Research Center (“NSCRC”) Term Enrollment Estimates, Fall 2016; SIMBA Publishing for the PreK-12 Market 2015-2016, Simba Information’s 2015 Instructional Materials Adoption Scorecard and 2016 Outlook, 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 2016; 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 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.

Unless otherwise indicated by the context, references to “pro forma” information in this prospectus give pro forma effect to the Transactions as if they had occurred on January 1, 2016 for income statement purposes or as of December 31, 2016 for balance sheet purposes.

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 140 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 1,500 adaptive products in higher education. Since 2009, all of our major K-12 programs have also been created in an entirely digital format.

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. According to the Association of American Publishers (“AAP”), our programs and learning solutions in the U.S. K-12 market achieved a 30% market share in adoption states in 2016 driven by strong performance in the California reading/literacy new adoption and a 25% market share overall. 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 approximately 1,550 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 more than a 200 basis point increase in higher education market share from 2012 to 2016 according to Management Practice, Inc. (“MPI”), an independent education research firm.

Our four operating segments are:

(1)

proprietary e-commerce platform, primarily directly to students, which currently represents the largest distribution channel in this segment, with revenue having grown from $140 million for the year ended December 31, 2015 to $172 million for the year ended December 31, 2016. For the year ended December 31, 2016, 56% of Higher Education revenue was derived from digital learning solutions.

(2)

K-12 (35% of total revenue in 2016): We are a top-three provider in the United States K-12 curriculum and learning solutions market with a 25% market share for the year ended December 2016, an increase of more than 500 basis points as compared to 2013, according to the 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, 2016, 18% of K-12 revenue was derived from digital learning solutions.

(3)

International (16% of total revenue in 2016): We leverage our global scale, including approximately a 490 person sales force, brand recognition and extensive product portfolio to serve students in the higher education, K-12 and professional markets in 140 countries outside of the United States. Our products and solutions for the International segment are produced in more than 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, 2016, 14% of International revenue was derived from digital learning solutions.

(4)

Professional (7% of total revenue in 2016): 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 93% annual retention rate in 2016 and are sold to over 2,600 customers, including corporations, academic institutions, libraries and hospitals. For the year ended December 31, 2016, 51% of Professional revenue was derived from digital learning solutions, including digital subscription sales.

For the year ended December 31, 2016, we generated revenue of $1,757 million and a net (loss) of $116 million. For the year ended December 31, 2016, we generated Billings of $1,913 million. See “Summary Historical 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 over $170 million in 2016. We are committed to continuing our significant digital investment, but with scale the rate of growth has declined. 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 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 535 full-time employees in DPG, including more than 240 engineers, 90 user experience designers, more than 90 technical product managers, nearly 25 data scientists and software solutions architects and over 85 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 2016, homework submitted by students increased by 12%. 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, 2016, 2015 and 2014, digital revenue was $624 million, $543 million and $479 million, respectively. This represents 36%, 30% and 26% of total revenue, respectively, or an increase of 15% from 2015 to 2016 and 13% from 2014 to 2015.

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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Access Manager: An IMS Global Standards certified integration platform for K-12 Ed Tech interoperability. Access Manager reduces the cost and complexity of adopting educational technology. Access Manager is based on open standards and allows MHE to help schools reduce the costs of

technology adoption and enhance the opportunity for increased use of technology in the learning process.

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Connect: an open learning environment for the higher education market with 3.3 million paid activations as of December 31, 2016, an increase of 11% over the prior year. Using the Connect solution, students submitted over 98.9 million assignments, representing year-over-year growth rates of 12%;

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Connect2: MHE’s next generation offering of Connect with a greater focus on modularity and instructor driven customization. Connect2 provides curated courseware and adaptive technologies to meet instructor and student needs while allowing instructors to modify and customize the learning experience to meet particular goals and match their unique teaching styles. Connect2 enhances both teaching and learning through a rich user experience built upon an extensive use of learning data and an invaluable feedback loop with a seamless integration built upon a commitment to IMS Global learning technology integration standards.

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

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ELLevate English: a personalized and community based curriculum that efficiently supports English language learning. ELLevate English combines engaging resources with real-time feedback to help teachers assess student progress more timely and efficiently to allow for intervention and course customization to enhance learning.

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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.

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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ALEKS: an adaptive learning math product for the K-12 and higher education markets, with 3.3 million unique users for the year ended December 31, 2016, an increase of 24% over the prior year;

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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.

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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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Redbird: A personalized and adaptive math solution based on research from Stanford University and targeted to students in the K-5 grade ranges. The combination of Redbird and ALEKS allows MHE to provide personalized, efficient and adaptive learning to the complete continuum of learners (K-life) focused on developing their math abilities.

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SmartBook: 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 SmartBook 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 SmartBook in the K-12 and international markets during 2015; and

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StudyWise: MHE’s latest adaptive offering that supports students in adaptive practice on smartphones. StudyWise extends the reach of Connect and Connect2 allowing students to efficiently learn in their natural environment.

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. We offer all of our major curriculum and learning solutions in digital format with the vast majority of our K-12 sales derived from selling blended print and digital solutions. The product sales mix in any period can impact the percentage of total digital sales with our math and social studies programs being more heavily weighted in digital as compared to our reading and literacy programs, for example. 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 2016. In 2016, these two segments generated 77% 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 is 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 $3.4 billion in 2016, 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, which includes new instructional materials, courseware and formative assessment, was approximately $6.9 billion for the 2016-2017 school year, including adoption and open territory states, according to Simba Information. According to the latest available data from NCES, K-12 enrollment in the United States as of 2013-2014 was 55 million, and enrollment is projected to grow at a compound annual growth rate of 0.4% to nearly 58 million from 2013 to 2024. 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.

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.

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 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 approximately 207 million students in 2014, more than doubling since 2000, and K-12 global enrollment was more than 1.4 billion students in 2014, representing an increase of 19% 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 the NCES report published in 2016, approximately 60% of full-time students who graduated from 4-year institutions graduated within six years. For 2-year institutions, approximately 30% of full-time students who graduated completed their studies within three years.

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, 2016, 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. According to NCES, in the 2011-2012 school year, 1.9 million students began college in remediation. 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 140 countries across Asia-Pacific, Europe, India, Latin America and the Middle East, and approximately 27% of our more than 4,900 employees are based in 40 offices in 27 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 approximately 1,550 person sales force, which includes approximately 500 and 475 sales people in each of the United States higher education and K-12 markets, respectively, 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 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 2016.

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. From 2012 to 2015, we increased the market share of our top 10 Higher Education product categories by more than 225 bps from 20% to 22%, 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 42% of our revenue in 2016, 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.

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 over 6.9 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 over 5.0 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 SmartBook 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 outcomes. In the higher education market alone, we have increased our number of adaptive products to over 1,500 as of December 31, 2016.

Highly attractive business model positioning us for growth.

We enjoy a business model that is highly cash generative. Since 2013 through the end of 2016, we have generated cash flows from operating activities of approximately $1.4 billion. As we derive an increasing amount of Billings 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. Depending upon adoption cycles, pre-publication costs and working capital requirements could vary in a given year. 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 four acquisitions, including ALEKS, LearnSmart, Engrade and Redbird, that included cash components totaling $150 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. These opportunities improved our operating margins over time and allowed us to fund additional investment in our digital capabilities. Since our March 2013 sale to Apollo through December 31, 2016, we have identified and actioned approximately $160 million of annualized cost savings.

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 CIO, a Head of Communications and a Head of Human Resources. 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 4,900 employees world-wide with 535 full-time employees in DPG, including more than 240 engineers, 90 user experience designers, more than 90 technical product managers, nearly 25 data scientists and software solutions architects and over 85 customer-facing and other associated support 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.

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.

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 and leverage digital with other go-to-market product formats and distribution alternatives that are intended to disintermediate the used and rental market.

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, Open Court Reading, Reading Wonders, Impact Social Studies and Inspire Science. 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, including the remainder of the California English Language Arts (“ELA”) adoption in 2017-2018, as well as other new state adoptions including those in California, Texas, and Florida during the 2017-2019 period.

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 curriculum. 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 Billings and Adjusted EBITDA by segment.

Billings is a non-GAAP sales performance measure that we believe provides useful information in evaluating our period-to-period sales performance because it reflects the total amount of revenue that would have been recognized in a period if we recognized all print and digital revenue at the time of sale. We use Billings as a sales 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. As sales of our digital learning solutions have increased, so has the amount of revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it reflects the sales activity in a given period, provides comparability from period-to-period during this time of digital transition and is the basis for all sales incentive compensation. In the K-12 market where customers typically pay for five to eight-year contracts upfront and the ongoing costs to service any contractual obligation are limited, the impact of the change in deferred revenue is most significant. Billings is GAAP revenue plus the net change in deferred revenue.

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

Adjusted EBITDA by segment, as determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting, is a measure used by management to assess the performance of our segments. We exclude from Adjusted EBITDA by segment: interest expense (income), net, income tax (benefit) provision, depreciation, amortization and pre-publication amortization and certain transactions or adjustments that our management does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. In addition, Adjusted EBITDA by segment is calculated in a manner consistent with the definition and meaning of our Adjusted EBITDA non-GAAP debt covenant compliance measure.

Our key metrics are presented under the headings “Summary Historical 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.”

The Transactions

On May 4, 2016, McGraw-Hill Global Education Holdings, LLC (“MHGE Holdings”) and McGraw-Hill Global Education Finance, Inc. issued $400 million aggregate principal amount of 7.875% Senior Notes due 2024 (the “MHGE Senior Notes”). Concurrently with the issuance of the MHGE Senior Notes, MHGE Holdings entered into $1,925 million of senior secured credit facilities (the “Senior Facilities”), consisting of a six-year $1,575 million senior secured term loan (the “Term Loan Facility”) and a five-year $350 million senior secured revolving credit facility, which was undrawn at closing (the “Revolving Facility”).

The proceeds from the issuance of the MHGE Senior Notes and the entry into the Senior Facilities together with cash on hand were used to repay the MHGE Term Loan and the MHSE Term Loan, fund a $300 million cash distribution to the Issuer’s stockholders, repurchase or redeem all of the outstanding MHGE Senior Secured Notes, defease and discharge the indenture governing the MHGE Senior Secured Notes, and pay related fees and expenses. All commitments under the MHGE Revolving Facility and the MHSE Revolving Facility were terminated concurrently with the entry into the Senior Facilities. We refer to the issuance of the MHGE Senior Notes together with the entry into the Senior Facilities and the transactions described in this paragraph collectively as the “Refinancing.”

Concurrently with the issuance of the MHGE Senior Notes and the entry into the Senior Facilities, we completed a reorganization (the “Reorganization”) such that MHSE became a direct subsidiary of MHGE Holdings.

We refer to the Reorganization and the Refinancing together with this offering and the use of proceeds therefrom as the “Transactions.”

Corporate Structure

The diagram below sets forth a simplified version of our organizational structure and our principal indebtedness after giving effect to this offering. 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)	As of December 31, 2016, there were $500 million face value of loans outstanding under the 8.500% / 9.250% Senior PIK Toggle Notes due 2019 (the “MHGE PIK Toggle Notes”). As of April 28, 2017, the Company has repurchased $49 million face value of outstanding MHGE PIK Toggle Notes.

(2)	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 Senior Facilities and guarantee the MHGE Senior Notes.

(3)	As of December 31, 2016, there were no outstanding obligations under the Revolving Facility and were $1,575 million face value of loans outstanding under the Term Loan Facility.

Our Sponsor

Apollo, founded in 1990, is a leading global alternative investment manager with offices in New York, Los Angeles, Houston, Ballwin, Bethesda, Chicago, Toronto, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong and Shanghai. Apollo had assets under management of approximately $192 billion as of December 31, 2016 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 over 300 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 , 2016, 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 CONSOLIDATED FINANCIAL DATA

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

The consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014, and the consolidated balance sheet data as of December 31, 2016 and 2015 have been derived from the audited consolidated financial statements of the Company included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2014 has been derived from the audited consolidated financial statements of the Company, which are not included elsewhere in this prospectus.

The summary consolidated financial and operating results presented below should be read in conjunction with our audited 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 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.


	Year Ended December 31,
(Dollars in thousands, except per share data)	2016			2015			2014
Statement of Operations
Revenue	$	1,757,331		$	1,829,991		$	1,851,590
Cost of sales		429,766			479,604			523,765

Gross Profit		1,327,565			1,350,387			1,327,825

Operating expenses:
Operating and administration expenses		1,079,165			1,127,455			1,194,253
Depreciation		37,045			30,636			25,999
Amortization of intangibles		90,886			94,156			100,001
Impairment charge		—			—			23,800
Transaction costs		—			—			3,932

Total operating expenses		1,207,096			1,252,247			1,347,985

Operating income (loss)		120,469			98,140			(20,160	)
Interest expense (income), net		199,506			192,918			182,199
Loss on extinguishment of debt		26,562			—			—
Other (income) expense		—			(4,779	)		(8,420	)

(Loss) income from operations before taxes on income		(105,599	)		(89,999	)		(193,939	)
Income tax provision		8,518			4,925			110,678

Net (loss) income from continuing operations		(114,117	)		(94,924	)		(304,617	)
Net (loss) income from discontinued operations, net of taxes		(1,905	)		(76,338	)		(18,157	)

Net (loss) income		(116,022	)		(171,262	)		(322,774	)

Less: Net loss attributable to non-controlling interests		—			—			299

Net (loss) income attributable to McGraw-Hill Education, Inc.	$	(116,022	)	$	(171,262	)	$	(322,475	)

Net (loss) earnings per share from continuing operations—basic and diluted	$	(10.82	)	$	(9.07	)	$	(29.35	)
Weighted average shares outstanding—basic and diluted		10,542			10,467			10,368


Pro forma net (loss) income attributable to McGraw-Hill Education, Inc.(1)


Pro forma net (loss) earnings per share from continuing operations(2):
Basic
Diluted
Pro forma weighted average shares outstanding(2):
Basic
Diluted

Supplemental pro forma net (loss) earnings per share from continuing operations(3):
Basic
Diluted
Supplemental pro forma weighted average shares outstanding(3):
Basic
Diluted

Other Financial Data:
Billings(4)	$	1,912,902		$	2,057,951		$	2,039,441
Adjusted EBITDA by segment(4):
Higher Education		233,507			294,540			296,105
K-12		136,668			126,902			118,168
International		19,011			33,229			37,603
Professional		33,739			32,193			37,882
Other		(2,298	)		(1,274	)		(11,846	)
Capital expenditures		38,223			41,181			40,500
Total net debt(5)		1,926,503			1,581,601			1,618,875
Working capital(6)		181,023			183,675			206,820

Statement of Cash Flow Data:
Cash flows provided by (used for):
Operating activities	$	197,964		$	308,422		$	354,941
Investing activities		(139,418	)		(151,763	)		(176,464	)
Financing activities		(190,912	)		(12,850	)		(192,553	)


Dollars in thousands)	As of December 31,
	2016			2015			2014
Balance Sheet data:
Cash and cash equivalents	$	418,753		$	553,194		$	413,963
Total assets		2,576,026			2,722,291			2,686,578
Total debt(5)		2,345,256			2,134,795			2,031,638
Stockholders’ equity (deficit)		(1,086,387	)		(646,386	)		(364,030	)

(1)

We present consolidated statements of operations data on a pro forma basis to give effect to (i) the issuance of the MHGE Senior Notes and the entry into the Senior Facilities and the use of the proceeds therefrom together with cash on hand to repay the MHGE Term Loan, the MHGE Senior Secured Notes and the MHSE Term Loan and to pay a $300.0 million dividend to our existing common stockholders, (ii) reduction of interest expense and amortization of deferred financing costs related to the repayment of debt with a portion of the proceeds of this offering as described under the heading “Use of Proceeds,” and (iii) reduction of interest expense and amortization of deferred financing costs related to the Refinancing. The Transactions had no pro forma tax effect due to the Company recording a valuation allowance as of December 31, 2014.

The pro forma net (loss) income consists of the following:


		Year Ended December 31,
		2016
Net (loss) income attributable to McGraw-Hill Education, Inc.		$
Interest on Senior Facilities and MHGE Senior Notes
Less: historical interest expense

Pro forma net (loss) income attributable to McGraw-Hill Education, Inc.		$

(2)	We present certain per share data on a pro forma basis to give effect to the issuance of shares in connection with this offering, to the extent that the proceeds from the sale of such shares will be used to repay debt as described under “Use of Proceeds.”

(3)

We present certain per share data on a supplemental pro forma basis to the extent that the proceeds from this offering will be deemed to be used to fund the dividend of $300.0 million to existing common stockholders on May 4, 2016. For further information on the supplemental pro forma per share data, see Note 21 to the audited consolidated financial statements, respectively, included elsewhere in this prospectus.

(4)	Billings, a measure used by management to assess sales 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.

Billings is calculated as follows:


	Year Ended December 31,
(Dollars in thousands)	2016		2015		2014
Revenue	$	1,757,331	$	1,829,991	$	1,851,590
Change in deferred revenue(a)		155,571		227,960		187,851

Billings	$	1,912,902	$	2,057,951	$	2,039,441

(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 to a cash basis assuming the collection of all receivable balances.

Adjusted EBITDA by segment is a measure used by management to assess the performance of our segments and is calculated in a manner consistent with the definition and meaning of our Adjusted EBITDA non-GAAP debt covenant compliance measure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt Covenant Compliance”.

Billings is not a presentation made in accordance with U.S. GAAP and does not purport to be an alternative to revenue as a measure of operating performance or to cash flows from operations as a measure of liquidity. Such measure has limitations as our analytical tool, and you should not consider any such measure in isolation or as a substitute 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, this measure may not be comparable to other similarly titled measures of other companies. See “Use of Non-GAAP Financial Information.”

Management believes that Billings is helpful in highlighting the actual sales activity in a given period and provides comparability from period to period during our ongoing transition from the sale of printed materials to digital solutions which are required to be deferred and recognized as revenue over time in accordance with U.S. GAAP.

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.”

(5)	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.

(6)	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.

Changes in the timing and order patterns 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 sold through the campus bookstore, the timing of purchases was predictable because of the long lead time to order and receive printed books before the start of the semester and because the sale was made to a distribution partner that needed the inventory ahead of the school year. 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 and because the sale is frequently made directly to the student. The shift to digital and increasing competition for the campus bookstore has diminished the visibility that the traditional distribution channel has into student demand. As a result, distribution channels are ordering from us closer to the start of the school year and with increased variability in ordering and return patterns. These factors have detrimentally impacted industry sales in 2015 and 2016. There is no assurance that the trend to more digital purchases will continue, but given the current mix of digital versus print purchasing and increased competition among distribution channels, it has become more difficult to predict the timing and order patterns of customer purchases of our higher education products.

There is also timing uncertainty in the K-12 business. Within a year, timing of orders can vary significantly as the primary season for ordering occurs in the period between May and August, which spans our second and third quarters. As a result, states and school districts that have significant purchases scheduled for a given year could materially swing results between quarters based on when in the season the order is placed.

Additionally, the timing of a decision for a state-wide adoption or by an individual school district to purchase in a given year can be significantly impacted or delayed by various circumstances including but not limited to funding issues, development of standards and specifications, competing priorities or school readiness to implement the new curriculum or technology. 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.

Malfunction or intentional hacking of our technological systems could adversely affect our operations or business and cause financial loss and reputational damage.

We depend on complex technological systems to provide our products to our customers and to operate our business. Malfunction or intentional hacking of these systems could adversely affect the performance or availability of our products, result in loss of customer data , adversely affect our ability to conduct business, or result in theft of our funds or proprietary information. The occurrence of such problems could result in liability, harm to our reputation, loss of revenue, or financial loss.

Failure to comply with privacy laws or adequately protect personal data could cause financial loss and reputational damage.

Across our businesses we hold large volumes of personal data, including that of employees, customers and students. 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 with regards to access to, collection of, and use of personal data, including but not limited to (i) the Children’s Online Privacy Protection Act and state student data privacy laws in connection with 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 or prevent the improper use or disclosure of the personal data we hold could lead to penalties, significant remediation costs, reputational damage, potential cancellation of existing contracts, and an impaired ability to compete for future business.

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 an increase in efforts to combat such activities could increase our expenses.

Most of the value of our products consists of the intellectual property contained in them. As a result, the sale price of our products is high relative to the cost of copying them. This disparity makes our products tempting targets for unauthorized copying and distribution by both end users and illegal commercial enterprises. The risk of unauthorized copying and distribution of our products is greatest in the higher education and professional markets, where the purchasers of our products are usually students and other individual customers, who generally obtain our products through channels that are more susceptible to being used for the distribution of unauthorized copies. In recent years, technological and market changes have facilitated the unauthorized copying and distribution of our products to students and other individual customers. Of particular note is the development of on-line distribution services that allow illegal commercial enterprises to utilize reputable and efficient marketplaces and fulfillment services for the distribution and sale of counterfeit copies of products. Our management believes that increases in unauthorized copying and distribution of our products may have been a contributing factor in the decline in sales of our higher education print products in 2016. Further expansion of the unauthorized copying and distribution of our products could adversely affect our sales, and increased efforts to combat such activities could increase our expenses.

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 books.

Active markets exist for the sale of used copies of our printed books and the rental of copies of those books. The used and rental markets are particularly substantial with respect to our printed higher education and professional books, where most of the purchasers are students and other individual customers who may believe they only need to have the use of the book for a limited period of time. The sale of used books and rental of books provides a lower priced option for customers who do not prefer to own a new copy of a book. Recent technological and market developments have resulted in an increase in the size of the used and rental markets. Since we do not currently participate in the used or rental markets and sales of used books and rental of books compete with our sales of new books, sales of used copies of our printed books and rental of copies of our printed books adversely affect our revenue. Further expansion of the used and rental markets could adversely affect our revenue.

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

In addition to our own sales force and websites, 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.

Our distribution and retail channels continue to experience consolidation and a significant portion of our sales is concentrated on a small number of customers. Our profitability and financial results could be adversely impacted by continued channel consolidation, deterioration of customer financial results or default on obligations to us.

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 which could adversely affect our sales and financial results.

In addition, a significant portion of our sales are to a small number of customers. For the year ended December 31, 2016, the Company had no single customer that accounted for 10% or more of our gross revenue. For the year ended December 31, 2015, the Company had one customer, Follett Corporation, that accounted for 10% of our gross revenues. As of December 31, 2016 and 2015, two customers comprised approximately 25% and 29% of the gross accounts receivable balance, respectively.

Deterioration of customer financial results or a default by a material customer on its obligations to us could adversely affect our profitability and financial condition.

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 products as fast as revenues from those products decline.

As the portion of our business that consists of print 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 $1.2 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. 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. In 2016, we realized approximately 25%, 37% and 23% of revenue during the second, third and fourth quarters, respectively, making third-quarter results particularly material to our full-year performance. We cannot make assurances that our third quarter revenue will continue to be sufficient to meet our obligations or that they will be higher than revenue for our other quarters. In the event that we do not derive sufficient revenue 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, 2016 on a pro forma basis, we had $ million face value of outstanding indebtedness (in addition to $350.0 million of commitments under the Senior Facilities, none of which was drawn), and for the year ended December 31, 2016, we had total debt service of $ million (including approximately $ million of debt service relating to fixed rate obligations) on a pro forma basis. Our substantial indebtedness could have important consequences. For example, it could:

•

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

•

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

•

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;

•

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

•

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

•

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

•

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

•

cause us to make non-strategic divestitures; or

•

expose us to the risk of increased interest rates, as certain of our borrowings, including borrowings under the Senior Facilities 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, 2016, we had $350.0 million available for additional borrowing under the Revolving Facility portion of the Senior Facilities, all of which would be secured. 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 in 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 have an effective system of internal controls 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 accounting for deferred royalties and revenue recognition in our K-12 business.

During 2016 we identified material weaknesses 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. We identified a material weakness related to the accounting for royalty expense associated with digital subscription products in our K-12 segment. Historically, the Company expensed royalties related to digital subscription products at the time of sale instead of being recognized as a prepaid asset and expensed ratably over the term of the digital subscription period consistent with how digital subscription revenue is recognized. The Company evaluated the impact of this adjustment on prior periods and concluded that the adjustment was not considered material to any previously issued quarterly or annual financial statements. However, the Company determined that the cumulative impact of correcting the adjustment in the current period would be material to 2016. As a result, the Company has revised its consolidated financial statements for the years ended December 31, 2015 and 2014. Since this adjustment was not considered material to any previously issued quarterly or annual financial statements, the 2015 and 2014 previously issued consolidated financial statements can still be relied upon.

In addition, we also identified a material weakness in our K-12 segment for revenue recognition of certain multiple element arrangements. During the second and third quarters of 2016, the Company entered into certain customer contracts each of which contained multiple deliverables including free with order digital subscription products. However, the Company did not properly identify and account for the free with order digital subscription products as a separate deliverable, resulting in an overstatement of revenue recognized as a portion of the contract revenue allocated to the delivered elements should have been allocated to the undelivered free with order digital subscription products resulting in deferred revenues. Accordingly, the Company has revised its previously unaudited consolidated financial statements for the second and third quarters of 2016.

We appropriately accounted for our K-12 deferred royalties and multiple element arrangements during 2016 in the audited consolidated financial statements and unaudited consolidated quarterly financial information included in this prospectus.

Our management is in the process of remediating these material weaknesses. If we are unsuccessful in remediating these weaknesses 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 and cause a default under the agreements governing our indebtedness.

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 portions of our overseas business, we face exposure to the risks of doing business abroad, including, but not limited to:

•

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;

•

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

•

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

•

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

•

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 16% of our total revenue in the year ended December 31, 2016 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 $8.6 million for the year ended December 31, 2016. 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.

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 that 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. Our as adjusted net tangible book value as of December 31, 2016 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, some or all of which are 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, 2016 on a pro forma basis, the maximum amount MHGE would be permitted to distribute to us in compliance with its indebtedness was approximately $ million. Even if our subsidiaries 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, 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

•

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.

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.

shares of our common stock have been reserved for future issuance under our long-term incentive plan. All of these shares will be registered under a registration statement on Form S-8 that we intend to file with the SEC in connection with this offering. If issued, and subject to the satisfaction of vesting conditions and the expiration of any lock-up agreements, these shares will be available for resale 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.

•

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

•

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;

•

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

•

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 Senior Facilities and the indentures governing the MHGE Senior 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, 2016 (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, 2016 on an:

•

actual basis; and

•

as adjusted to give effect to this offering and the use of proceeds therefrom.


	As of December 31, 2016
	Actual			As Adjusted
	(in thousands, except per share and par value)
Cash and cash equivalents	$	418,753		$

Long-term debt, including current maturities
MHGE Senior Notes	$	400,000		$
Term Loan Facility		1,567,125
Revolving Facility		—
MHGE PIK Toggle Notes		500,000
Less: unamortized debt discount and deferred financing costs		(121,869	)

Total indebtedness, including current portion	$	2,345,256		$
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value; 1,000,000 shares authorized, 100,000 shares issued and 37,500 outstanding		—
Common stock—$0.01 par value; 100,000,000 shares authorized, 10,606,117 shares issued and 10,567,864 outstanding, actual; shares authorized, shares issued and outstanding, as adjusted		104
Additional paid-in capital		—
Treasury stock, 38,253 as of December 31, 2016		(6,727	)
Accumulated other comprehensive loss		(57,837	)
Accumulated deficit		(1,021,927	)

Total stockholders’ equity (deficit)	$	(1,086,387	)	$

Total capitalization	$	1,258,869		$

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, 2016 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, 2016 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, 2016 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, 2016 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, 2016, 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, 2016 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 the selected historical combined consolidated financial data and operating results of the Company.

The consolidated statement of operations for the years ended December 31, 2016, 2015 and 2014 and the consolidated balance sheet data as of December 31, 2016 and 2015 have been derived from the audited consolidated financial statements of the Company included elsewhere in this prospectus. The combined consolidated statements of operations for the periods from March 23, 2013 to December 31, 2013 and from January 1, 2013 to March 22, 2013 have been derived from the audited combined financial statements of the Company, which are not included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2014 and 2013 have been derived from the audited combined consolidated financial statements of the Company, which are not included elsewhere in this prospectus. The combined statement of operations for the year ended December 31, 2012 and the combined balance sheet data as of December 31, 2012 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 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, 2012
(Dollars in thousands except per share amounts)	2016			2015			2014			March 23, 2013 to December 31, 2013			January 1, 2013 to March 22, 2013			Year Ended December 31, 2012
Statements of Operations
Revenue		$1,757,331		$	1,829,991		$	1,851,590		$	1,594,427		$	229,441		$	1,917,599
Cost of sales		429,766			479,604			523,765			778,738			64,006			541,306

Gross Profit		1,327,565			1,350,387			1,327,825			815,689			165,435			1,376,293
Operating expenses:
Operating and administration expenses		1,079,165			1,127,455			1,194,253			841,803			208,816			1,224,126
Depreciation		37,045			30,636			25,999			19,625			5,817			28,083
Amortization of intangibles		90,886			94,156			100,001			73,337			6,326			25,130
Impairment charge		—			—			23,800			—			—			412,886
Transaction costs		—			—			3,932			56,820			—			—

Total operating expenses		1,207,096			1,252,247			1,347,985			991,585			220,959			1,690,225

Operating income (loss)		120,469			98,140			(20,160	)		(175,896	)		(55,524	)		(313,932	)
Interest expense (income), net		199,506			192,918			182,199			135,399			488			(1,688	)
Loss on extinguishment of debt		26,562			—			—			—			—			—
Other (income) expense		—			(4,779	)		(8,420	)		—			—			(16,868	)

(Loss) Income from operations before taxes on income		(105,599)			(89,999	)		(193,939	)		(311,295	)		(56,012	)		(295,376	)
Income tax (benefit) provision		8,518			4,925			110,678			(128,265	)		(20,410	)		(19,704	)

Net (loss) income from continuing operations		(114,117)			(94,924	)		(304,617	)		(183,030	)		(35,602	)		(275,672	)
Net (loss) income from discontinued operations, net of taxes		(1,905)			(76,338	)		(18,157	)		18,617			4,058			23,897

Net (loss) income		(116,022	)		(171,262	)		(322,774	)		(164,413	)		(31,544	)		(251,775	)

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

Net (loss) income attributable to McGraw-Hill Education, Inc.	$	(116,022	)	$	(171,262	)	$	(322,475	)	$	(166,664	)	$	(30,913	)	$	(256,334	)

Net (loss) earnings income per share from continuing operations—basic and diluted	$	(10.82	)	$	(9.07	)	$	(29.35	)	$	(18.43	)	$	(3.50	)	$	(28.02	)
Weighted average shares outstanding—basic and diluted		10,542			10,467			10,368			10,051			10,000			10,000


(Dollars in thousands except per share data; unaudited)

Pro forma net (loss) income attributable to McGraw-Hill Education, Inc. (1)


Pro forma net (loss) earnings per share from continuing operations(2):
Basic
Diluted
Pro forma weighted average shares outstanding(2):
Basic
Diluted
Supplemental pro forma net (loss) earnings per share from continuing operations(3):
Basic
Diluted
Supplemental pro forma weighted average shares outstanding(3):
Basic
Diluted

(Dollars in thousands except per share amounts)
Other Financial Data:
Billings (4)	$	1,912,902		$	2,057,951		$	2,039,441		$	1,758,299		$	212,137		$	1,978,112
Adjusted EBITDA by segment: (4)
Higher Education		233,507			294,540			296,105			280,950			(6,045	)		279,534
K-12		136,668			126,902			118,168			126,095			(51,255	)		56,575
International		19,011			33,229			37,603			50,958			(8,630	)		47,477
Professional		33,739			32,193			37,882			29,249			2,932			29,621
Other		(2,298)			(1,274	)		(11,846	)		10,874			28			(69	)
Capital expenditures		38,223			41,181			40,500			7,379			2,461			20,983
Total net debt (5)		1,926,503			1,581,601			1,618,875			1,241,667			—			—
Working capital (6)		181,023			183,675			206,820			360,231			232,956			339,321

Statement of Cash Flow Data:
Cash flows provided by (used for):
Operating activities		$197,964		$	308,422		$	354,941		$	560,797		$	(15,741	)	$	406,427
Investing activities		(139,418)			(151,763	)		(176,464	)		(2,345,978	)		(61,879	)		(197,983	)
Financing activities		(190,912)			(12,850	)		(192,553	)		2,192,054			6,109			(223,320	)


	Successor											Predecessor
(Dollars in thousands)	As of December 31,											As of December 31, 2012
(Dollars in thousands)	2016			2015			2014			2013		As of December 31, 2012
Balance Sheet data:
Cash and cash equivalents	$	418,753		$	553,194		$	413,963		$	430,691	$	98,188
Total assets		2,576,026			2,722,291			2,686,578			2,964,002		1,916,275
Total debt(5)		2,345,256			2,134,795			2,031,638			1,672,358		—
Stockholders’ equity (deficit)		(1,086,387	)		(646,386	)		(364,030	)		415,493		1,120,930

(1)

We present certain consolidated statements of operations data on a pro forma basis to give effect to (i) the issuance of the MHGE Senior Notes and the entry into the Senior Facilities and the use of the proceeds therefrom together with cash on hand to repay the MHGE Term Loan, the MHGE Senior Notes, the MHGE Senior Secured Notes and the MHSE Term Loan and to pay a $300.0 million dividend to our existing common stockholders, (ii) reduction of interest expense and amortization of deferred financing costs related to the repayment of debt with a portion of the proceeds of this offering as described under the heading “Use of Proceeds,” and (iii) reduction of interest expense and amortization of deferred financing costs related to the Refinancing. The Transactions had no pro forma tax effect due to the Company recording a valuation allowance as of December 31, 2014.

The pro forma net (loss) income consists of the following:


		Year Ended December 31,
		2016
Net (loss) income attributable to McGraw-Hill Education, Inc.		$
Interest on Senior Facilities and MHGE Senior Notes
Less: historical interest expense

Pro forma net (loss) income attributable to McGraw-Hill Education, Inc.		$

(2)	We present certain per share data on a pro forma basis to give effect to the issuance of shares in connection with this offering, to the extent that the proceeds from the sale of such shares will be used to repay debt as described under “Use of Proceeds.”

(3)

(4)	Billings, a measure used by management to assess sales 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.

Billings 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, 2012
(Dollars in thousands)	2016		2015		2014		March 23, 2013 to December 31, 2013		January 1, 2013 to March 22, 2013			Year Ended December 31, 2012
Revenue	$	1,757,331	$	1,829,991	$	1,851,590	$	1,594,427	$	229,441		$	1,917,599
Change in deferred revenue(a)		155,571		227,960		187,851		163,872		(17,304	)		60,513

Billings	$	1,912,902	$	2,057,951	$	2,039,441	$	1,758,299	$	212,137		$	1,978,112

(a)

Billings is not a presentation made in accordance with U.S. GAAP and does not purport to be an alternative to revenue as a measure of operating performance or to cash flows from operations as a measure of liquidity. Such measure has limitations as our analytical tool, and you should not consider such a measure in isolation or as a substitute 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, this measure may not be comparable to other similarly titled measures of other companies. See “Use of Non-GAAP Financial Information.”

(5)	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.

(6)	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, 2016, 2015 and 2014. 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.” MHC is now known as S&P Global 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.

On May 4, 2016, MHGE and McGraw-Hill Global Education Finance, Inc. (together with MHGE, the “Issuers”) closed their offering of $400 million aggregate principal amount of 7.875% Senior Notes due 2024 in a private placement (the “MHGE Senior Notes”). Concurrently with the closing of the MHGE Senior Notes, MHGE Holdings entered into $1,925.0 million of new senior secured credit facilities (the “Senior Facilities”), consisting of a five-year $350.0 million senior secured revolving credit facility (the “Revolving Facility”), which was undrawn at closing, and a six-year $1,575.0 million senior secured term loan credit facility (the “Term Loan Facility”).

The proceeds from the issuance of the MHGE Senior Notes and the Senior Facilities together with cash on hand were used to (i) repurchase and redeem all of the MHGE Senior Secured Notes, (ii) repay in full all amounts outstanding under our then existing MHGE Term Loan and MHSE Term Loan and terminate all commitments thereunder, (iii) terminate all commitments under our then existing MHGE Revolving Facility and MHSE Revolving Facility, (iv) fund a distribution to the Company’s shareholders and (v) pay related fees and expenses. We refer to the issuance of the MHGE Senior Notes together with the Senior Facilities and the transactions described above collectively as the “Refinancing”.

In addition, concurrently with the Refinancing, the Company completed a reorganization such that MHSE Holdings became a direct subsidiary of MHGE.

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 42%, 44% and 45% of total revenue for the years ended December 31, 2016, 2015 and 2014, respectively. Our K-12 segment generated 35%, 32% and 31% of total revenue for the years ended December 31, 2016, 2015 and 2014, respectively. Our International segment generated 16%, 17% and 18% of total revenue for the years ended December 31, 2016, 2015 and 2014, respectively. Our Professional segment represents 7%, 7% and 6% of total revenue for the years ended December 31, 2016, 2015 and 2014, 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 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 2016, for-profit colleges accounted for approximately 9% 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 the largest distribution channel 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 K-12 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 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. 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 140 countries. Our products and solutions for the International segment are produced in more than 60 languages and primarily originate from our offerings produced for the United States market 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. 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 2,600 customers, including corporations, academic institutions, libraries and hospitals. Our digital subscription products had a 93% annual retention rate in 2016.

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, 2016, approximately 56% of our Higher Education Billings 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. We offer all of our major curriculum and learning solutions in digital format with the vast majority of our sales derived from selling blended print and digital solutions. The product sales mix in any period can impact the percentage of total digital sales with our math and social studies programs being more heavily weighted in digital as compared to our reading and literacy programs, for example. 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 blended 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 the level of spend in a given period influenced most by the timing of new adoption opportunities in our K-12 business. 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 in-house by 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 over $170 million in 2016. We are committed to continuing our significant digital investment, but with scale the rate of growth has declined. 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 by the use of used or rental alternatives to our learning solutions and 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, based on an analysis of nine print products with a digital component, we believe we tend to generate more revenue per edition from a print product with a digital component than we would from a comparable stand-alone print product. 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 Billings to provide a consistent comparison of sales performance from period to period. See “—Non-GAAP Measures” for a description of Billings.

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.

We believe distributor destocking cycles and the timing of front-list revision cycles impact the longer term sales cycle in the higher education market. Visibility into distributor sell-through has been impacted by direct-to-

student sales and students’ ability to buy new learning solutions, used books or rent products from multiple sources as compared to years ago when campus bookstores were the only choice available to students. Cyclical distributor purchasing patterns impact all major publishers with excess ordering typically followed by higher physical product returns followed by reduced ordering and lower physical product returns. Inventory destocking impacts physical product sales, including print textbooks and physical digital activation cards. Unlike inventory destocking that impacts all publishers, the timing and materiality of front-list revision cycles are publisher specific and consist of brand new titles and revisions to previously published titles. Historically, front-list revisions have been an effective way to disintermediate the used and rental marketplace; however, front-list revision cycle changes in recent periods, including less frequent product revisions, have negatively impacted the ability to disintermediate the used and rental marketplace. Strategic focus on revision cycles is an important consideration for the industry. We have a larger 2018 copyright list for sale in 2017 as a result of the strategic decision to revise previously extended revision cycles for certain titles.

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 2013-2014 was 55 million and enrollment is projected to grow at a compound annual growth rate of 0.4% to nearly 58 million from 2013 through 2024.

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 Billings to provide a consistent comparison of sales performance from period to period. See “—Non-GAAP Measures” for a description of how we define Billings.

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 140 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:

•

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.

•

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.

•

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.

•

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.

•

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 2016, 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 Billings to provide a consistent comparison of sales performance from period to period. See “—Non-GAAP Measures” for a description of how we define Billings.

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 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 93% in 2016. 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 Billings to provide a consistent comparison of sales performance from period to period. See “—Non-GAAP Measures” for a description of Billings.

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.

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 Billings and Adjusted EBITDA by segment.

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 approximately 1,550 persons, which includes approximately 500 and 475 sales people in each of the United States higher education and K-12 markets, respectively, 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, Engrade and Redbird, 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 primarily includes interest related to our indebtedness, including the amortization of deferred financing fees and debt discounts, and outstanding capital lease and other financing obligations.

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. Interest expense for the year ending December 31, 2016 was $199.5 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, 2016 was $90.9 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, 2016, 2015 and 2014 was $29.8 million, $30.2 million and $30.2 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 38% of total spend in 2016. 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, 2016, 2015 and 2014 was $34.5 million, $52.7 million and $38.0 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, 2016, 2015 and 2014 was $17.5 million, $6.5 million and $10.0 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, 2016, 2015 and 2014 was $7.9 million, $9.4 million and $10.1 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, 2016, 2015 and 2014 our capital expenditures were $38.2 million, $41.2 million and $40.5 million, respectively.

Consolidated Operating Results

The following tables set forth certain historical consolidated financial information for the years ended December 31, 2016, 2015 and 2014. The following tables and discussion should be read in conjunction with the information contained in our historical consolidated financial statements and the notes thereto included elsewhere in this prospectus.

Consolidated Operating Results for the Years Ended December 31, 2016 and 2015


	Year Ended December 31,
	2016			2015			$ Change			% Change
Revenue	$	1,757,331		$	1,829,991		$	(72,660	)		(4.0	)%
Cost of sales		429,766			479,604			(49,838	)		(10.4	)%

Gross profit		1,327,565			1,350,387			(22,822	)		(1.7	)%

Operating expenses
Operating and administration expenses		1,079,165			1,127,455			(48,290	)		(4.3	)%
Depreciation		37,045			30,636			6,409			20.9	%
Amortization of intangibles		90,886			94,156			(3,270	)		(3.5	)%

Total operating expenses		1,207,096			1,252,247			(45,151	)		(3.6	)%

Operating income		120,469			98,140			22,329			22.8	%
Interest expense (income), net		199,506			192,918			6,588			3.4	%
Loss on extinguishment of debt		26,562			—			26,562			n/m
Other (income) expense		—			(4,779	)		4,779			(100.0	)%

(Loss) income from operations before taxes on income		(105,599	)		(89,999	)		(15,600	)		17.3	%
Income tax provision		8,518			4,925			3,593			73.0	%

Net (loss) income from continuing operations		(114,117	)		(94,924	)		(19,193	)		20.2	%
Net (loss) income from discontinuing operations, net of taxes		(1,905	)		(76,338	)		74,433			(97.5	)%

Net (loss) income	$	(116,022	)	$	(171,262	)	$	55,240			(32.3	)%

Revenue


	Year Ended December 31,
	2016			2015		$ Change			% Change
(Dollars in thousands)
Reported Revenue by segment:
Higher Education	$	733,782		$	805,360	$	(71,578	)		(8.9	)%
K-12		619,085			593,499		25,586			4.3	%
International		286,927			305,021		(18,094	)		(5.9	)%
Professional		117,749			119,589		(1,840	)		(1.5	)%
Other		(212	)		6,522		(6,734	)		(103.3	)%

Total Reported Revenue	$	1,757,331		$	1,829,991	$	(72,660	)		(4.0	)%

Revenue for the years ended December 31, 2016 and 2015 was $1,757.3 million and $1,830.0 million, respectively, a decrease of $72.7 million or 4.0%. 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 years ended December 31, 2016 and 2015 was $1,778.5 million and $1,855.2 million, respectively, a decrease of $76.7 million or 4.1%. The decrease was driven by the segment factors described below.

Higher Education

Higher Education revenue for the years ended December 31, 2016 and 2015 was $733.8 million and $805.4 million, respectively, a decrease of $71.6 million or 8.9%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2016 and 2015 was $733.8 million and $806.0 million, respectively, a decrease of $72.2 million or 9.0%. The decrease was primarily due to:

•

lower print revenues due to continued distribution partner inventory destocking and reduced reordering by distributors who are managing physical inventory more tightly in light of the ongoing digital transition in the marketplace. This includes print textbooks we previously sold to distributors, but also physical digital activation cards held in inventory; and

•

a smaller front-list for 2016 and 2017 copyrights (released in the year before copyright). The smaller front-list was driven primarily by extended revision cycles for certain titles, which in turn has led to increased used and rental alternatives for new print materials; partially offset by

•

digital revenue growth, primarily attributable to our core digital learning solutions which are increasingly sold direct-to-student via our e-commerce channel (paid activations of Connect/LearnSmart grew by 11% and unique users of ALEKS grew by 19%);

•

continued decline in actual product returns and a favorable product returns reserve rate; and

•

increased market share in a year with a cyclically smaller total market opportunity.

K-12

K-12 revenue for the years ended December 31, 2016 and 2015 was $619.1 million and $593.5 million respectively, an increase of $25.6 million or 4.3%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2016 and 2015 was $640.3 million and $618.3 million, respectively, an increase of $22.0 million or 3.6%. The increase was primarily due to:

•

lower revenue deferrals related to our digital solutions as the mix of digital in our blended math and social studies programs sold in 2015 was higher than the mix of digital in our blended reading program which accounts for the majority of year-over-year revenue growth; and

•

adoption related revenue driven by strong performance in the 2016 K-8 ELA new adoption in California; partially offset by

•

a decline in open territory sales due to lower than expected performance in select key urban districts; and

•

a smaller new adoption market in 2016 as compared to 2015.

International

International revenue for the years ended December 31, 2016 and 2015 was $286.9 million and $305.0 million, respectively, a decrease of $18.1 million or 5.9%. The decrease was primarily due to:

•

an $8.6 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

•

the multi-year digital subscription revenue arrangement entered into with the United Arab Emirates; and

•

growth in localized digital offerings, primarily in higher education.

Geographic performance was driven primarily by a decline in K-12 sales in all regions primarily due to lower adoption opportunities and a decline in Higher Education sales in Canada. This was partially offset by a new contract with the United Arab Emirates and Higher Education sales in Asia Pacific, most notably Australia.

Professional

Professional revenue for the years ended December 31, 2016 and 2015 was $117.7 million and $119.6 million, respectively, a decrease of $1.8 million or 1.5%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2016 and 2015 was $117.7 million and $119.7 million, respectively, a decrease of $1.9 million or 1.6%. The decrease was primarily due to:

•

a decrease in print and eBook revenue; partially offset by

•

an increase in digital subscription sales for our Access platform offerings.

Cost of Sales

Cost of sales for the years ended December 31, 2016 and 2015 was $429.8 million and $479.6 million, respectively, a decrease of $49.8 million or 10.4%. The decrease was driven primarily by lower manufacturing costs attributable to lower revenue and higher digital product sales as well as lower royalty rates and expense driven by product mix.

Operating and Administration Expenses

Operating and administration expenses for the years ended December 31, 2016 and 2015 were $1,079.2 million and $1,127.5 million, respectively, a decrease of $48.3 million or 4.3%. Included within operating and administration expense is the amortization of pre-publication expenditures which decreased by $14.6 million or 16.4%. The remaining variance was driven by:

•

a $18.3 million decrease in professional fees; and

•

a $7.7 million decrease in restructuring and cost savings implementation charges.

Depreciation & Amortization of Intangibles

Depreciation and amortization expenses for the years ended December 31, 2016 and 2015 were $127.9 million and $124.8 million, respectively, an increase of $3.1 million or 2.5%. This increase was driven by:

•

the acceleration of depreciation expense related to the early exit of an international leased facility as part of ongoing cost saving initiatives to optimize our facilities spend subsequent to the Founding Acquisition; and

•

an increase in depreciation expense associated with deferred technology projects that were previously in the development phase in 2015.

Interest expense, net

Interest expense, net, for the years ended December 31, 2016 and 2015 was $199.5 million and $192.9 million, respectively, an increase of $6.6 million or 3.4%. The increase was related to the $17.8 million expense of certain creditor and third-party fees partially offset by lower interest expense both in association with the Company’s debt refinancing on May 4, 2016. Refer to Note 10, “Debt,” of our consolidated financial statements included elsewhere in this prospectus for further discussion of our debt.

Loss on extinguishment of debt

The Company recorded a loss on extinguishment of debt of $26.6 million, consisting primarily of a redemption premium associated with the repurchase of MHGE Senior Secured Notes and the write-off of unamortized deferred financing fees and original debt discount associated with the debt refinancing on May 4, 2016. Refer to Note 10, “Debt,” of our consolidated financial statements included elsewhere in this prospectus for further discussion of our debt.

Other (income) expense

During the year ended December 31, 2015, the Company recorded a gain of $4.8 million related to the sale of an investment in an equity security.

Provision for Taxes on Income

Taxes on income from continuing operations for the years ended December 31, 2016 and 2015 were provisions of $8.5 million and $4.9 million, respectively. For the years ended December 31, 2016 and 2015, the effective tax rate on continuing operations was (8.1)% and (5.5)%, respectively. As of December 31, 2014, a full valuation allowance was recorded for federal and state deferred tax assets due to negative evidence associated with our estimation of the realization of cumulative book losses. For the years ended December 31, 2016 and 2015, no deferred income tax benefit was recognized for the domestic loss on operations as a result of the valuation allowance against these tax benefits.

Adjusted EBITDA by Segment for the Years Ended December 31, 2016 and 2015


	Year Ended December 31,
	2016			2015			$ Change			% Change
(Dollars in thousands)
Adjusted EBITDA by segment:
Higher Education	$	233,507		$	294,540		$	(61,033	)		(20.7	)%
K-12		136,668			126,902			9,766			7.7	%
International		19,011			33,229			(14,218	)		(42.8	)%
Professional		33,739			32,193			1,546			4.8	%
Other		(2,298	)		(1,274	)		(1,024	)		80.4	%

Higher Education

Adjusted EBITDA for the years ended December 31, 2016 and 2015 was $233.5 million and $294.5 million, respectively, a decrease of $61.0 million or 20.7%. The decrease was primarily due to:

•

the gross profit impact of the $89.3 million unfavorable Billings variance discussed under “—Non-GAAP Measures—Billings for the Years Ended December 31, 2016 and 2015—Higher Education”; partially offset by

•

lower manufacturing costs attributable to lower revenue and a shift to digital solution sales as well as lower royalties expense driven by product mix.

K-12

Adjusted EBITDA for the years ended December 31, 2016 and 2015 was $136.7 million and $126.9 million, respectively, an increase of $9.8 million or 7.7%. The increase was due primarily to:

•

reduced pre-publication investment cash costs driven by the timing of investment in prior years related to new adoption opportunities including the significant investment made in advance of the 2016 California ELA adoption; and

•

a decrease in professional fees; partially offset by

•

the gross profit impact of the $39.0 million unfavorable Billings variance discussed under “—Non-GAAP Measures—Billings for the Years Ended December 31, 2016 and 2015—K-12”;

•

increased royalties associated with a product that we redistributed as a part of our offerings in the California ELA adoption; and

•

increased samples expense primarily related to the California ELA adoption.

International

Adjusted EBITDA for the years ended December 31, 2016 and 2015 was $19.0 million and $33.2 million, respectively, a decrease of $14.2 million or 42.8%. The decrease was primarily due to:

•

the gross profit impact of the $12.9 million unfavorable Billings variance discussed under “—Non-GAAP Measures—Billings for the Years Ended December 31, 2016 and 2015—International”;

•

increased pre-publication investment cash costs associated with the development of localized digital solution offerings primarily related to the new United Arab Emirates contract; partially offset by

•

a $0.8 million favorable foreign exchange rate impact (estimated by re-calculating current period results of foreign operations using the average exchange rate from the prior period.)

Professional

Adjusted EBITDA for the years ended December 31, 2016 and 2015 was $33.7 million and $32.2 million, respectively, an increase of $1.5 million or 4.8%. The increase was due primarily to:

•

lower manufacturing costs as a result of the ongoing shift to digital solution sales as well as lower royalty expense driven by product mix; partially offset by

•

the gross profit impact of the $0.9 million unfavorable Billings variance discussed under “Non-GAAP Measures—Billings for the Years Ended December 31, 2016 and 2015— Professional”.

Other

Adjusted EBITDA for the years ended December 31, 2016 and 2015 was $(2.3) million and $(1.3) million, respectively, a decrease of $1.0 million. The decrease was due to:

•

impact of adjustments made for in-transit product sales; and

•

timing related corporate expense adjustments.

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


	Year Ended December 31,						$ Change			% Change
	2015			2014			$ Change			% Change
(Dollars in thousands)
Revenue	$	1,829,991		$	1,851,590		$	(21,599	)		(1.2	)%
Cost of sales		479,604			523,765			(44,161	)		(8.4	)%

Gross profit		1,350,387			1,327,825			22,562			1.7	%
Operating expenses
Operating and administration expenses		1,127,455			1,194,253			(66,798	)		(5.6	)%
Depreciation		30,636			25,999			4,637			17.8	%
Amortization of intangibles		94,156			100,001			(5,845	)		(5.8	)%
Impairment charge		—			23,800			(23,800	)		n/m
Transaction charge		—			3,932			(3,932	)		n/m

Total operating expenses		1,252,247			1,347,985			(95,738	)		(7.1	)%
Operating income		98,140			(20,160	)		118,300			(586.8	)%
Interest expense (income), net		192,918			182,199			10,719			5.9	%
Other (income) expense		(4,779	)		(8,420	)		3,641			(43.2	)%

(Loss) income from operations before taxes on income		(89,999	)		(193,939	)		103,940			(53.6	)%
Income tax provision		4,925			110,678			(105,753	)		(95.6	)%

Net (loss) income from continuing operations		(94,924	)		(304,617	)		209,693			(68.8	)%
Net (loss) income from discontinuing operations, net of taxes		(76,338	)		(18,157	)		(58,181	)		320.4	%

Net (loss) income	$	(171,262	)	$	(322,774	)	$	151,512			(46.9	)%

Revenue


	Year Ended December 31,				$ Change			% Change
	2015		2014		$ Change			% Change
(Dollars in thousands)
Reported Revenue by segment:
Higher Education	$	805,360	$	837,364	$	(32,004	)		(3.8	)%
K-12		593,499		562,791		30,708			5.5	%
International		305,021		333,764		(28,743	)		(8.6	)%
Professional		119,589		116,774		2,815			2.4	%
Other		6,522		897		5,625			627.1	%

Total Reported Revenue	$	1,829,991	$	1,851,590	$	(21,599	)		(1.2	)%

Revenue for the years ended December 31, 2015 and 2014 was $1,830.0 million and $1,851.6 million, respectively, a decrease of $21.6 million or 1.2%. 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 was $1,855.2 million and $1,877.1 million, respectively, a decrease of $21.9 million or 1.2%. This decrease was driven by the segment factors described below.

Higher Education

Higher Education revenue for the years ended December 31, 2015 and 2014 was $805.4 million and $837.4 million, respectively, a decrease of $32.0 million or 3.8%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2015 and 2014 was $806.0 million and $828.8 million, respectively, a decrease of $22.8 million or 2.8%. 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 and unique users of our core digital learning solutions Connect/LearnSmart and ALEKS, respectively (paid activations of Connect/LearnSmart grew by 16%, and unique users of ALEKS grew by 18%); and

•

a favorable product returns reserve rate 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 was $593.5 million and $562.8 million, respectively, an increase of $30.7 million or 5.5%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2015 and 2014 was $618.3 million and $592.3 million, respectively, an increase of $26.0 million or 4.4%. 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 was $305.0 million and $333.8 million, respectively, a decrease of $28.7 million or 8.6%. Excluding the impact of purchase accounting, revenue for the years ended December 31, 2015 and 2014 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 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 was $119.7 million and $120.5 million, respectively, a decrease of $0.8 million or 0.6%. 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,						$ Change			% Change
(Dollars in thousands)	2015			2014			$ Change			% Change
Cost of sales, as reported	$	479,604		$	523,765		$	(44,161	)		(8.4	)%
Impact of purchase accounting		—			35,221			(35,221	)		(100.0	)%

Cost of sales, excluding the impact of purchase accounting	$	479,604		$	488,544		$	(8,940	)		(1.8	)%

Excluding purchase accounting—% of revenue		26.2	%		26.4	%

Cost of sales for the years ended December 31, 2015 and 2014 was $479.6 million and $523.8 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 was $479.6 million and $488.5 million, respectively, a decrease of $8.9 million or 1.8%. 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 were $1,127.5 million and $1,194.3 million, respectively, a decrease of $66.8 million or 5.6%. Included within operating and administration expense is the amortization of pre-publication expenditures which increased by $5.8 million or 7.0% 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 were $124.8 million and $126.0 million, respectively, a decrease of $1.2 million or 1.0%. 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 was $192.9 million and $182.2 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 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 were provisions of $4.9 million and $110.7 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. 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 (“DRC”) in June 2015. The net loss from discontinued operations was $76.3 million for the year ended December 31, 2015 as compared to $18.2 million for the year ended December 31, 2014. The variance of $58.2 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.

Adjusted EBITDA by Segment for the Years Ended December 31, 2015 and 2014


	Year Ended December 31,						$ Change			% Change
	2015			2014			$ Change			% Change
(Dollars in thousands)
Adjusted EBITDA by segment:
Higher Education	$	294,540		$	296,105		$	(1,565	)		(0.5	)%
K-12		126,902			118,168			8,734			7.4	%
International		33,229			37,603			(4,374	)		(11.6	)%
Professional		32,193			37,882			(5,689	)		(15.0	)%
Other		(1,274	)		(11,846	)		10,572			(89.2	)%

Higher Education

Adjusted EBITDA for the years ended December 31, 2015 and 2014 was $294.5 million and $296.1 million, respectively, a decrease of $1.6 million or 0.5%. The decrease was due to:

•

the gross profit impact of the $13.4 million unfavorable Billings variance discussed under “—Non-GAAP Measures-Billings for the Years Ended December 31, 2015 and 2014—Higher Education”; and

•

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

•

K-12

Adjusted EBITDA for the years ended December 31, 2015 and 2014 was $126.9 million and $118.2 million, respectively, an increase of $8.7 million or 7.4%. The increase was due to:

•

the gross profit impact of the $63.1 million favorable Billings variance discussed under “—Non-GAAP Measures—Billings for the Years Ended December 31, 2015 and 2014—K-12”; 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 EBITDA for the years ended December 31, 2015 and 2014 was $33.2 million and $37.6 million, respectively, a decrease of $4.4 million or 11.6%. The decrease was due to:

•

the gross profit impact of the $27.9 million unfavorable Billings variance discussed under “—Non-GAAP Measures—Billings for the Years Ended December 31, 2015 and 2014—International”; and

•

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); partially offset by

•

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

Professional

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

•

the gross profit impact of the $4.3 million unfavorable Billings variance discussed under “—Non-GAAP Measures—Billings for the Years Ended December 31, 2015 and 2014—Professional”; 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 for the years ended December 31, 2015 and 2014 was $(1.3) million and $(11.8) million, respectively, an increase of $10.6 million or 89.2%. The increase was due to:

•

impact of adjustments made for in-transit product sales;

•

timing related corporate adjustments.

Non-GAAP Measures

Billings, 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 Billings, EBITDA and Adjusted EBITDA. These measures are derived on the basis of methodologies other than in accordance with U.S. GAAP.

Billings is a non-GAAP sales performance measure that provides useful information in evaluating our period-to-period sales performance because it reflects the total amount of revenue that would have been recognized in a period if we recognized all print and digital revenue at the time of sale. We use Billings as a sales 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. As sales of our digital learning solutions have increased, so has the amount of revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it reflects the sales activity in a given period, provides comparability from period-to-period during this time of digital transition and is the basis for all sales incentive compensation. In the K-12 market where customers typically pay for five to eight year contracts upfront and the ongoing costs to service any contractual obligation are limited, the impact of the change in deferred revenue is most significant. Billings 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 a non-GAAP debt covenant compliance measure that is defined in accordance with our debt agreements. Adjusted EBITDA is a material term in our debt agreements and provides an understanding of our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.

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, or any other measure derived in accordance with U.S. GAAP as a measure of operating performance, debt covenant compliance 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 certain transactions or adjustments that are non-recurring or non-operational 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, Billings and Adjusted EBITDA provide 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 presentation of Adjusted EBITDA, which is defined in accordance with our debt agreements, 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 to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.

For further information on our non-GAAP measures, see “Use of Non-GAAP Financial Information.”

Billings for the Years Ended December 31, 2016 and 2015


	Year Ended December 31,
	2016			2015		$ Change			% Change
(Dollars in thousands)
Reported Revenue by Segment:
Higher Education	$	733,782		$	805,360	$	(71,578	)		(8.9	)%
K-12		619,085			593,499		25,586			4.3	%
International		286,927			305,021		(18,094	)		(5.9	)%
Professional		117,749			119,589		(1,840	)		(1.5	)%
Other		(212	)		6,522		(6,734	)		(103.3	)%

Total Reported Revenue	$	1,757,331		$	1,829,991	$	(72,660	)		(4.0	)%

Change in deferred revenue		155,571			227,960		(72,389	)		(31.8	)%

Billings	$	1,912,902		$	2,057,951	$	(145,049	)		(7.0	)%

Billings by Segment:
Higher Education	$	735,623		$	824,951	$	(89,328	)		(10.8	)%
K-12		758,473			797,510		(39,037	)		(4.9	)%
International		295,000			307,932		(12,932	)		(4.2	)%
Professional		122,100			123,037		(937	)		(0.8	)%
Other		1,706			4,521		(2,815	)		(62.3	)%

Total Billings	$	1,912,902		$	2,057,951	$	(145,049	)		(7.0	)%

Billings for the years ended December 31, 2016 and 2015 was $1,912.9 million and $2,058.0 million, respectively, a decrease of $145.0 million or 7.0%.

These variances were driven by the segment factors described below.

Higher Education

Billings for the years ended December 31, 2016 and 2015 was $735.6 million and $825.0 million, respectively, a decrease of $89.3 million or 10.8%. The decrease was due to:

•

continued decline in actual product returns and a favorable product returns reserve rate; and

•

increased market share in a year with a cyclically smaller total market opportunity.

K-12

Billings for the years ended December 31, 2016 and 2015 was $758.5 million and $797.5 million, respectively, a decrease of $39.0 million or 4.9%. The decrease was due to:

•

a decline in open territory sales due to lower than expected performance in select key markets; and

•

smaller new adoption market in 2016 as compared to 2015; partially offset by

•

adoption sales growth driven by strong performance in this year’s K-8 ELA new adoption in California.

International

Billings for the years ended December 31, 2016 and 2015 was $295.0 million and $307.9 million, respectively, a decrease of $12.9 million or 4.2%. The decrease was due to:

•

an $8.1 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);

•

a decline in print revenue; partially offset by

•

the multi-year digital subscription revenue arrangement entered into with the United Arab Emirates; and

•

growth in localized digital offerings, primarily in higher education.

Professional

Billings for the years ended December 31, 2016 and 2015 was $122.1 million and $123.0 million, respectively, a decrease of $0.9 million or 0.8%. The decrease was due to:

•

a decrease in print and eBook revenue; partially offset by

•

an increase in digital subscription Billings for our Access platform offerings.

Billings for the Years Ended December 31, 2015 and 2014


	Year Ended December 31,				$ Change			% Change
(Dollars in thousands)	2015		2014		$ Change			% Change
Reported Revenue by segment:
Higher Education	$	805,360	$	837,364	$	(32,004)			(3.8	)%
K-12		593,499		562,791		30,708			5.5	%
International		305,021		333,764		(28,743	)		(8.6	)%
Professional		119,589		116,774		2,815			2.4	%
Other		6,522		897		5,625			627.1	%

Total Reported Revenue	$	1,829,991	$	1,851,590	$	(21,599)			(1.2	)%

Change in deferred revenue		227,960		187,851		40,109			21.4	%

Billings	$	2,057,951	$	2,039,441	$	18,510			0.9	%

Billings 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		4,521		3,606		915			25.4	%

Total Billings	$	2,057,951	$	2,039,441	$	18,510			0.9	%

Billings for the years ended December 31, 2015 and 2014 was $2,058.0 million and $2,039.4 million, respectively, an increase of $18.5 million or 0.9%.

The increase was driven by the segment factors described below.

Higher Education

Billings for the years ended December 31, 2015 and 2014 was $825.0 million and $838.3 million, respectively, a decrease of $13.4 million or 1.6%. The decrease was due to:

•

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

K-12

Billings for the years ended December 31, 2015 and 2014 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 adoption Billings of 23% or $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 $4.4 million decline in total open territory Billings.

International

Billings for the years ended December 31, 2015 and 2014 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.

Professional

Billings for the years ended December 31, 2015 and 2014 was $123.0 million and $127.3 million, respectively, a decrease of $4.3 million or 3.3%. 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.

Debt Covenant Compliance

Adjusted EBITDA is an important measure because, under our debt agreements, our ability to incur additional indebtedness or issue certain preferred shares, make certain types of acquisitions or investments, operate our business and make dividends, conduct asset sales or dispose of all or substantially all of our assets, all of which will impact our financial performance, is impacted by our Adjusted EBITDA, as our lenders measure our performance with a net first lien leverage ratio by comparing our senior secured bank indebtedness to our Adjusted EBITDA and a fixed charge coverage ratio, and several of our debt, investment and restricted payment baskets are measured using Adjusted EBITDA.

The Senior Facilities and the indentures governing the MHGE PIK Toggle Notes and the MHGE Senior Notes contain, among other provisions, certain customary covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales and affiliate transactions. Capacity for investments, debt, distributions and certain prepayments is measured in many instances by a multiple of Adjusted EBITDA. Our revolving credit facility requires that MHGE Holdings, after an initial grace period and subject to a testing threshold, comply on a quarterly basis with a maximum net first lien senior secured leverage ratio (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 Senior Facilities) of (a) with respect to the first, third and fourth fiscal quarters of any year, 4.80 to 1.00 and (b) with respect to the second quarter of any fiscal year, 5.25 to 1.00. Payment of borrowings under the debt agreements may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Our historical debt agreements, including the MHGE Facilities, the MHSE Revolving Facility and the MHSE Term Loan, contained similar covenants predicated on the same Adjusted EBITDA measure. Failure to comply with these covenants, which are based, in part, upon Adjusted EBITDA could limit our long-term growth prospects by hindering our ability to incur future debt or make acquisitions.

“Adjusted EBITDA” as defined in our Senior Facilities debt agreements, is net income, adjusted for the items summarized in the table below. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational or non-recurring losses or gains. Adjusted EBITDA is not a presentation made in accordance with U.S. GAAP, and our use of the term Adjusted EBITDA varies from others in our industry. This measure should not be considered as an alternative to net income (loss) from continuing operations or any other performance measures derived in accordance with U.S. GAAP. Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. For example, Adjusted EBITDA does not reflect: (a) our cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that may represent a reduction in cash available to us; (e) management fees paid to entities and investment funds affiliated with Apollo Global Management, LLC; (f) one-time expenditures to realize the synergies referred to above; or (g) the impact of earnings or charges resulting from matters that we and the lenders under our debt agreements may not consider indicative of our

ongoing operations. In particular, our definition of Adjusted EBITDA 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 are 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.

Further, although not included in the calculation of Adjusted EBITDA below, the measure may at times allow us to add estimated cost savings and operating synergies related to operational changes ranging from acquisitions or dispositions to restructurings, and/or exclude one-time transition expenditures that we anticipate we will need to incur to realize cost savings before such savings have occurred.

The calculation of Adjusted EBITDA in accordance with our debt agreements is presented in the table below. The results of such calculation could differ in the future based on the different types of adjustments that may be included in such respective calculations at the time.


	Year Ended December 31,
	2016			2015			2014
(Dollars in thousands)
Net income (loss) from continuing operations	$	(114,117	)	$	(94,924	)	$	(304,617	)
Interest (income) expense, net		199,506			192,918			182,199
Income tax provision		8,518			4,925			110,678
Depreciation, amortization and pre-publication investment amortization		202,081			213,523			208,905

EBITDA	$	295,988		$	316,442		$	197,165

Change in deferred revenue (a)		155,571			227,960			187,851
Change in deferred royalties (b)		(17,312	)		(10,731	)		(8,117	)
Restructuring and cost savings implementation charges (c)		17,080			24,766			39,888
Sponsor fees (d)		3,500			3,500			3,500
Impairment charge (e)		—			—			23,800
Purchase accounting (f)		—			—			35,221
Transaction costs (g)		—			—			3,932
Acquisition costs (h)		—			—			4,376
Physical separation costs (i)		—			—			46,716
Loss on extinguishment of debt (j)		26,562			—			—
Other (k)		28,933			22,470			30,665
Pre-publication investment cash costs (l)		(89,695	)		(98,817	)		(87,085	)

Adjusted EBITDA	$	420,627		$	485,590		$	477,912

(a)

We receive cash up-front for most 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 to a cash basis assuming the collection of all receivable balances.

(b)

Royalty obligations are generally payable in the period incurred with limited recourse. This adjustment represents the net effect of converting deferred royalties to a cash basis assuming the payment of all amounts owed in the period incurred. See Note 2 of Notes to the Consolidated Financial Statements included elsewhere in this prospectus.

(c)	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.

(d)	Beginning in 2014, $3.5 million of annual management fees was recorded and payable to Apollo.

(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.

(f)	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.

(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)	This amount represents the write-off of unamortized deferred financing fees, original debt discount and other fees and expenses associated with the Company’s refinancing of its existing indebtedness on May 4, 2016.

(k)	For the year ended December 31, 2016, the amount represents (i) non-cash incentive compensation expense and (ii) other adjustments required or permitted in calculating covenant compliance under our debt agreements.

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.

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

Seasonality and Comparability

Our revenues, operating profit and operating cash flows are affected by the inherent seasonality of the academic calendar. In 2016, we realized approximately 15%, 25%, 37% and 23% of our revenues during the first, second, 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


	2015⁽¹⁾												2016⁽²⁾
	First Quarter 2015			Second Quarter 2015			Third Quarter 2015			Fourth Quarter 2015			First Quarter 2016			Second Quarter 2016			Third Quarter 2016			Fourth Quarter 2016
Statement of Operations:
Revenue	$	244,778		$	422,071		$	739,220		$	423,922		$	264,737		$	447,173		$	644,093		$	401,328
Cost of sales		64,290			121,712			179,916			113,686			60,205			122,148			157,498			89,915

Gross profit		180,488			300,359			559,304			310,236			204,532			325,025			486,595			311,413
Operating expenses
Operating and administration expenses		262,856			265,333			310,463			288,803			267,104			267,599			267,708			276,754
Depreciation		7,722			6,223			6,468			10,223			12,246			8,529			8,109			8,161
Amortization of intangibles		23,617			23,487			22,992			24,060			22,815			22,490			22,853			22,728

Total operating expenses		294,195			295,043			339,923			323,086			302,165			298,618			298,670			307,643
Operating income		(113,707	)		5,316			219,381			(12,850	)		(97,633	)		26,407			187,925			3,770
Interest expense (income), net		49,859			48,481			47,633			46,945			47,525			63,755			43,439			44,787
Loss on extinguishment of debt		—			—			—			—			—			26,562			—			—
Other (income) expense		—			(4,779	)		—			—			—			—			—			—

(Loss) income from operations before taxes on income		(163,566	)		(38,386	)		171,748			(59,795	)		(145,158	)		(63,910	)		144,486			(41,017	)
Income tax (benefit) provision		(2,685	)		158			4,087			3,365			(103	)		1,166			2,681			4,774

Net (loss) income from continuing operations		(160,881	)		(38,544	)		167,661			(63,160	)		(145,055	)		(65,076	)		141,805			(45,791	)
Net (loss) income from discontinued operations, net of taxes		(7,570	)		(54,593	)		(7,206	)		(6,969	)		(836	)		(624	)		(209	)		(236	)

Net (loss) income	$	(168,451	)	$	(93,137	)	$	160,455		$	(70,129	)	$	(145,891	)	$	(65,700	)	$	141,596		$	(46,027	)


	2015⁽¹⁾											2016⁽²⁾
	First Quarter 2015			Second Quarter 2015		Third Quarter 2015			Fourth Quarter 2015			First Quarter 2016			Second Quarter 2016			Third Quarter 2016		Fourth Quarter 2016
Reported revenue by segment:
Higher Education	$	125,605		$	147,888	$	309,896		$	221,971		$	133,923		$	142,142		$	248,850	$	208,866
K-12		47,093			172,310		298,606			75,490			60,434			213,520			274,254		70,877
International		44,692			74,056		93,952			92,321			42,652			66,089			88,077		90,109
Professional		26,092			27,576		32,812			33,109			27,701			28,995			30,008		31,045
Other		1,296			241		3,954			1,031			27			(3,573	)		2,904		431

Total Reported Revenue	$	244,778		$	422,071	$	739,220		$	423,922		$	264,737		$	447,173		$	644,093	$	401,328

Change in deferred revenue		(23,635	)		67,178		213,028			(28,611	)		(26,310	)		33,501			188,209		(39,829	)

Billings	$	221,143		$	489,249	$	952,248		$	395,311		$	238,427		$	480,674		$	832,302	$	361,499

Billings by segment:
Higher Education	$	118,981		$	124,868	$	386,182		$	194,920		$	127,296		$	109,065		$	326,004	$	173,258
K-12		36,558			259,167		435,364			66,421			46,200			274,852			382,957		54,464
International		42,969			73,603		100,155			91,205			42,514			65,289			95,170		92,038
Professional		22,079			29,996		30,241			40,721			22,048			31,226			28,133		40,658
Other		556			1,615		306			2,044			369			242			38		1,081

Total Billings	$	221,143		$	489,249	$	952,248		$	395,311		$	238,427		$	480,674		$	832,302	$	361,499


	2015⁽¹⁾											2016⁽²⁾
	First Quarter 2015			Second Quarter 2015		Third Quarter 2015			Fourth Quarter 2015			First Quarter 2016			Second Quarter 2016			Third Quarter 2016		Fourth Quarter 2016
Adjusted EBITDA by segment:
Higher Education	$	(2,540	)	$	10,885	$	234,603		$	51,592		$	6,662		$	(5,002	)	$	192,451	$	39,396
K-12		(90,398	)		78,618		225,590			(86,908	)		(73,927	)		99,504			184,906		(73,815	)
International		(9,533	)		5,597		24,206			12,959			(8,152	)		(2,030	)		17,331		11,862
Professional		761			8,080		7,267			16,085			(1,468	)		8,682			8,716		17,809
Other		53			1,488		(1,664	)		(1,151	)		(4,126	)		(4,168	)		5,813		183

(1)	The 2015 unaudited consolidated quarterly financial information presented in the table above reflects the revisions described in Note 2—Revision of Previously Issued Consolidated Financial Statements to the audited consolidated financial statements included elsewhere in this prospectus.

(2)

In addition to the revisions described in Note 2—Revision of Previously Issued Consolidated Financial Statements to the audited financial statements included elsewhere in this prospectus, the 2016 unaudited consolidated quarterly financial information for the second and third quarters reflect the correction of errors related to revenue recognition of certain multiple element arrangements. During the second and third quarters of 2016, we entered into certain customer contracts each of which contained multiple deliverables including free with order digital subscription products. However, we did not properly identify and account for the free with order digital subscription products as a separate deliverable, resulting in an overstatement of revenue recognized as a portion of the contract revenue allocated to the delivered elements should have been allocated to the undelivered free with order digital subscription products resulting in deferred revenues. To correct this accounting, previously reported revenue for the second and third quarters were reduced by $16.3 million and $11.3 million, respectively, with a corresponding increase to deferred revenue.

Indebtedness and Liquidity


	As of December 31,
(Dollars in thousands)	2016		2015		2014
Cash and cash equivalents	$	418,753	$	553,194	$	413,963
Current portion of long-term debt		15,750		81,620		9,380
Long-term debt		2,329,506		2,053,175		2,022,258

Historically, we have generated operating cash flows 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.

Cash and Cash Equivalents

As of December 31, 2016 and 2015, we had cash and cash equivalents of $418.8 million and $553.2 million, respectively. The cash held by foreign subsidiaries as of December 31, 2016 and 2015 was $57.4 million and $52.7 million, respectively. 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.

The Refinancing

On May 4, 2016, MHGE and McGraw-Hill Global Education Finance, Inc. (together with MHGE, the “Issuers”) closed their offering of $400.0 million aggregate principal amount of 7.875% Senior Notes due 2024 (the “Notes”) in a private placement (the “MHGE Senior Notes”). Concurrently with the closing of the MHGE Senior Notes, MHGE Holdings entered into $1,925.0 million of new senior secured credit facilities (the “Senior Facilities”), consisting of a five-year $350.0 million senior secured revolving credit facility (the “Revolving Facility”), which was undrawn at closing, and a six-year $1,575.0 million senior secured term loan credit facility (the “Term Loan Facility”).

The proceeds from the issuance of the MHGE Senior Notes and the Senior Facilities together with cash on hand were used to (i) repurchase and redeem all of the MHGE Senior Secured Notes (ii) repay in full all amounts outstanding under our then existing MHGE Term Loan and MHSE Term Loan and terminate all commitments thereunder, (iii) terminate all commitments under our then existing MHGE Revolving Facility and MHSE Revolving Facility, (v) fund a distribution to the Company’s shareholders and (vi) pay related fees and expenses. We refer to the issuance of the MHGE Senior Notes together with the Senior Facilities and the transactions described in this paragraph collectively as the “Refinancing”.

In addition, concurrently with the Refinancing, the Company completed a reorganization such that MHSE Holdings became a direct subsidiary of MHGE.

The Refinancing was accounted for in accordance with ASC 470 -50 Debt - “Modifications and Extinguishments”. As a result, we incurred a loss on extinguishment of debt of $26.6 million, consisting of a portion of the redemption premium paid of $14.5 million associated with the MHGE Senior Secured Notes and the write-off of unamortized deferred financing fees of $8.7 million and original debt discount of $3.4 million related to the portion of the debt accounted for as an extinguishment. With respect to the portion of the debt accounted for as a modification, the Company continued to capitalize $46.2 million of the unamortized deferred financing fees and $18.3 million of the original debt discount. In addition, the Company capitalized $45.5 million of the remaining redemption premium paid associated with the MHGE Senior Secured Notes which is included within unamortized debt discount.

Furthermore, we incurred $45.7 million of creditor and third-party fees on the MHGE Senior Notes and Senior Facilities, of which, $20.0 million were capitalized as deferred financing fees, $7.9 million were capitalized as debt discount and $17.8 million were expensed and included within interest expense, net in our consolidated statements of operations for the year ended December 31, 2016.

The following summarizes the terms of the agreements governing the Company’s debt outstanding as of December 31, 2016.

MHGE Senior Notes

On May 4, 2016, MHGE Holdings and McGraw-Hill Global Education Finance, Inc. issued $400.0 million in principal amount of the MHGE Senior Notes in a private placement. The MHGE Senior Notes mature on May 15, 2024 and bear interest at a rate of 7.875% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2016.

As of December 31, 2016, the unamortized debt discount and deferred financing costs were $48.7 million and $22.2 million, respectively, which are amortized over the term of the MHGE Senior Notes using the effective interest method.

MHGE Holdings and McGraw-Hill Global Education Finance, Inc. may redeem the MHGE Senior Notes at their option, in whole or in part, at any time on or after May 15, 2019, at certain redemption prices. In addition, prior to May 15, 2019 the MHGE Holdings and McGraw-Hill Global Education Finance, Inc. may redeem the MHGE Senior Notes at their option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the MHGE Senior Notes redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any. Notwithstanding the foregoing, from time to time on or prior to May 15, 2019 MHGE Holdings and McGraw-Hill Global Education Finance, Inc. may redeem in the aggregate up to 40% of the original aggregate principal amount of the Notes (calculated after giving effect to any issuance of additional notes) in an aggregate amount equal to the net cash proceeds of one or more equity offerings at a redemption price equal to 107.875%, plus accrued and unpaid interest, if any, so long as at least 50% of the original aggregate principal amount of the Notes (calculated after giving effect to any issuance of additional notes) must remain outstanding after each such redemption.

The MHGE Senior Notes are fully and unconditionally guaranteed by each of MHGE Holdings’ domestic restricted subsidiaries that guarantee the Senior Facilities.

The MHGE Senior Notes contain certain customary negative covenants and events of default. The negative covenants 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 loans, acquisitions or investments, materially change its business, engage in transactions with affiliates, conduct asset sales, restrict dividends from subsidiaries, 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 Notes was approximately $403.0 million as of December 31, 2016. The Company estimates the fair value of its MHGE Senior Notes based on trades in the market. Since the MHGE Senior 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, 2016, the remaining contractual life of the MHGE Senior Notes is approximately 7.25 years.

Senior Facilities

General

On May 4, 2016, MHGE Holdings entered into the Senior Facilities. The Senior Facilities provide for senior secured financing of up to $1,925.0 million, consisting of:

•

the Term Loan Facility in an aggregate principal amount of $1,575.0 million with a maturity of 6 years; and

•

the Revolving Facility in an aggregate principal amount of up to $350.0 million with a maturity of 5 years, including both a letter of credit sub-facility and a swingline loan sub-facility.

In addition, we may request one or more incremental term loan facilities and/or increase commitments under our revolving facility in an aggregate amount of up to the sum of (x) $425.0 million plus (y) such additional amount so long as, (i) in the case of loans under additional credit facilities that rank pari passu with the liens on the collateral securing the Senior Facilities, MHGE Holdings’ consolidated net first lien senior secured leverage ratio (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 Senior Facilities) would be no greater than 2.75 to 1.00 and (ii) in the case of loans under additional credit facilities that rank junior to the liens on the collateral securing the Senior Facilities, MHGE Holdings’ consolidated total net secured leverage ratio would be no greater than 3.00 to 1.00, subject to certain conditions and receipt of commitments by existing or additional lenders.

Adjusted EBITDA as presented earlier reflects EBITDA as defined in the credit agreement governing the Senior Facilities. Adjusted EBITDA by segment is consistent with the definition and meaning of our Adjusted EBITDA non-GAAP debt covenant compliance measure. Solely for the purpose of calculating the springing financial covenant, pre-publication investments should be excluded from the calculation of Adjusted EBITDA.

All borrowings under our revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties.

Interest Rates and Fees

Borrowings under the Senior Facilities bear interest at a rate equal to, at our option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.00% floor in the case of term loans or (b) a base

rate determined by reference to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate of Credit Suisse AG and (iii) the one-month adjusted LIBOR rate plus 1.00%, in each case plus an applicable margin. The initial applicable margin for borrowings is expected to be 4.00% with respect to LIBOR rate borrowings and 3.00% with respect to base rate borrowings.

As of December 31, 2016, the interest rate for the Term Loan Facility was 5.0%. As of December 31, 2016, the unamortized debt discount and deferred financing costs was $18.3 million and $24.4 million, respectively, which are amortized over the term of the facility using the effective interest method.

In addition to paying interest on outstanding principal under the Senior Facilities, we are required to pay a commitment fee of 0.50% per annum to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. The applicable commitment fee under the revolving credit facility may be subject to one step-down based on a specified leverage ratio. We are also be required to pay customary agency fees as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of each letter of credit.

Amortization and Prepayments

The Senior Facilities require scheduled quarterly payments on the term loans in amounts equal to 0.25% of the original principal amount of the term loans commencing with the end of the first full fiscal quarter ending after the closing date, with the balance paid at maturity.

In addition, the Senior Facilities require us to prepay outstanding term loans, subject to certain exceptions, with:

•

50% (which percentage will be reduced to 25% if MHGE Holdings’ net first lien senior secured leverage ratio is within a specified range and to 0% if MHGE Holdings’ net first lien senior secured leverage ratio is below a specified level) of our annual excess cash flow, as defined under the senior secured credit facilities;

•

100% of the net cash proceeds of all non-ordinary course asset sales or other non-ordinary course dispositions of property or certain casualty events, in each case subject to certain exceptions and provided that we may (a) reinvest within 12 months or (b) commit to reinvest those proceeds and so reinvest such proceeds within 18 months in assets to be used in its business, or certain other permitted investments; and

•

100% of the net cash proceeds of any issuance or incurrence of debt, other than proceeds from debt permitted under the senior secured credit facilities.

The foregoing mandatory prepayments will generally be applied pro rata among the term loans.

We may voluntarily repay outstanding loans under the Senior Facilities at any time, without prepayment premium or penalty except in connection with a repricing event as described below, subject to customary “breakage” costs with respect to LIBOR rate loans.

Any refinancing through the issuance or repricing amendment of any debt that results in a repricing event applicable to the term loans resulting in a lower yield occurring at any time during the first six months after the closing date will be accompanied by a 1.00% prepayment premium or fee, as applicable.

Collateral and Guarantors

All obligations under the Senior Facilities are unconditionally guaranteed by each of MHGE Holdings’ existing and future direct and indirect material, wholly owned domestic subsidiaries. Following this offering, the

obligations are secured by substantially all of MHGE Holdings’ assets and those of each subsidiary guarantor, capital stock of the subsidiary guarantors and 65% of the voting capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. Such security interests consist of a first-priority lien with respect to the collateral.

Restrictive Covenants and Other Matters

Our revolving credit facility requires that MHGE Holdings, after an initial grace period and subject to a testing threshold, comply on a quarterly basis with a maximum net first lien senior secured leverage ratio of (a) with respect to the first, third and fourth fiscal quarters of any year, 4.80 to 1.00 and (b) with respect to the second quarter of any fiscal year, 5.25 to 1.00. The testing threshold are satisfied at any time at which the sum of outstanding revolving credit facility loans, swingline loans and certain letters of credit exceeds thirty percent (30%) of commitments under the revolving credit facility at such time.

The Senior Facilities contain certain customary affirmative covenants and events of default. The negative covenants in the Senior Facilities include, among other things, limitations (none of which are absolute) on MHGE Holdings’ and its subsidiaries’ ability to:

•

incur additional debt or issue certain preferred shares;

•

create liens on certain assets;

•

make certain loans or investments (including acquisitions);

•

pay dividends on or make distributions in respect of capital stock or make other restricted payments;

•

consolidate, merge, sell or otherwise dispose of all or substantially all of their assets;

•

sell assets;

•

enter into certain transactions with affiliates;

•

enter into sale-leaseback transactions;

•

change their lines of business;

•

restrict dividends from their subsidiaries or restrict liens;

•

change their fiscal year; and

•

modify the terms of certain debt or organizational agreements.

Following this offering, the Issuer and MHGE Intermediate Holdings will not be bound by any financial or negative covenants contained in the Senior Facilities.

The fair value of the Term Loan Facility was approximately $1,567.1 million as of December 31, 2016. The Company estimates the fair value of its Term Loan Facility based on trades in the market. Since the Term Loan Facility 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, 2016, the remaining contractual life of the Term Loan Facility was approximately 5.25 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 MHGE and MHGE Parent Finance, Inc. The proceeds from this private offering were used to make a return of capital to the equity holders of MHGE.

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 consolidated statements of operations. As of December 31, 2016, the unamortized debt discount and deferred financing costs were $2.7 million and $5.6 million, respectively.

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 and February 1, 2016 relating to the second and third semi-annual interest payment, respectively. The determination as to whether interest is paid in cash or PIK Interest is determined based on restrictions in the credit agreement governing the Senior Facilities and in the indenture governing the MHGE Senior 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 and its subsidiaries, are not guaranteed by any of MHGE Intermediate Holdings or its subsidiaries and are a contractual obligation of MHGE.

On April 14, 2016, MHGE paid a dividend of $21.3 million to MHGE in advance of the interest payable on the MHGE PIK Toggle Notes which was due and paid on August 1, 2016.

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 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 $503.8 million as of December 31, 2016. 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, 2016, the remaining contractual life of the MHGE PIK Toggle Notes is approximately 2.50 years.

Scheduled Principal Payments

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


(Dollars in thousands)	As of December 31, 2016
2017	$	15,750
2018		15,750
2019		515,750
2020		15,750
2021		15,750
2022 and beyond		1,888,375

		2,467,125
Less: Current portion		15,750

	$	2,451,375

Pro Forma Scheduled Principal Payments

The scheduled principal payments required under the terms of our debt instruments on a pro forma basis:


(Dollars in thousands)		As of December 31, 2016
2017		$
2018
2019
2020
2021 and beyond


Less: Current portion

		$

Cash Flows

Cash and cash equivalents were $418.8 million, $553.2 million and $414.0 million as of December 31, 2016, 2015 and 2014, respectively.

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


	Year Ended December 31,
(Dollars in thousands)	2016			2015			2014
Cash flows from operating activities	$	197,964		$	308,422		$	354,941
Cash flows from investing activities		(139,418	)		(151,763	)		(176,464	)
Cash flows from financing activities		(190,912	)		(12,850	)		(192,553	)

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 provisions.

Operating Activities

•

Cash flows (used for) provided by operating activities for the years ended December 31, 2016 and 2015 were $198.0 million and $308.4 million, respectively, a decrease of $110.5 million. The decrease in cash used for operating activities was primarily driven by:

–

an increase in inventory primarily driven by higher inventory levels in our K-12 segment in advance of large new adoption market opportunities, most notably the California ELA adoption; and

–

a decrease in accounts payable and accrued expenses driven by the timing of payments; partially offset by

–

a decrease in accounts receivable due to lower revenue, partially offset by delayed customer collections related to the California ELA adoption that were primarily collected in the early part of 2017; and

–

decreased technology related prepayments driven by the timing of initial multiyear prepayments.

•

Cash flows provided by operating activities for the years ended December 31, 2015 and 2014 were $308.4 million and $354.9 million, respectively, a decrease of $46.5 million. The decrease in cash provided by operating activities was primarily driven by unfavorable net changes in operating assets and liabilities of $69.4 million and an unfavorable net change in non-cash items of $128.6 million, offset by favorable change in the net loss of $151.5 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.

Investing Activities

•

Cash flows used for investing activities for the years ended December 31, 2016 and 2015 were $139.4 million and $151.8 million, respectively, a decrease of $12.3 million. Cash flows used for investing activities decreased primarily as a result of a $10.1 million and a $3.0 million decrease in pre-publication costs and capital expenditures, respectively, driven by the timing of large K-12 adoption opportunities and capital lease arrangements for assets that were historically purchased outright. In addition, acquisition and divestiture related payments a $11.5 million in 2016 compared to $23.5 million in 2015. These variances were partially offset by $12.5 million of investment proceeds during the year ended December 31, 2015.

•

Cash flows used for investing activities for the years ended December 31, 2015 and 2014 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 as compared to $6.8 million during the year ended December 31, 2015. 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 as compared to the year ended December 31, 2014 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.

Financing Activities

•

Cash flows used for financing activities for the years ended December 31, 2016 and 2015 were $190.9 million and $12.9 million, respectively, an increase of $178.1 million. Cash flows used for financing activities increased primarily as a result of a $300.0 million dividend to common stockholders on May 4, 2016 as compared to a $100.0 million dividend to common stockholders on April 6, 2015. In addition, during 2016, the Company paid $29.5 million in dividend equivalents and to repurchase equity. These cash outflows were partially offset by an increase in net borrowings of $91.8 million associated with the Company’s debt refinancing on May 4, 2016.

•

Cash flows used for financing activities for the years ended December 31, 2015 and 2014 was $12.9 million and $192.6 million, respectively. The usage in the year ended December 31, 2015 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 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.

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 $89.7 million, $99.8 million and $90.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Capital expenditures include purchases of property, plant and equipment and capitalized technology costs that meet certain internal and external criteria. Capital expenditures were $38.2 million, $41.2 million and $40.5 million for the years ended December 31, 2016, 2015 and 2014, 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, 2016 we did not have any relationships with unconsolidated 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 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 and capital lease agreements.

The following table summarizes our significant debt related contractual obligations over the next several years that relate to our continuing operations as of December 31, 2016:


	Payments due by Period
(Dollars in thousands)	Total		2017-2018		2019-2020		2021 and beyond		2022 and beyond
Long-term debt, including current portion(1)	$	2,467,125	$	15,750	$	531,500	$	31,500	$	1,888,375
Interest on long-term debt(2)		784,805		154,918		307,440		218,289		104,158
Operating lease obligations(3)		101,027		33,839		45,775		10,491		10,922
Capital lease obligations(4)		11,475		3,842		6,795		838		—
Paper and printing services(5)		436,177		195,200		240,977		—		—
Purchase obligation and other(6)		137,888		93,749		38,702		5,227		210

(1)	Amounts shown include principal on the MHGE Senior Notes, the MHGE PIK Toggle Notes and the Senior Facilities.

(2)	Amounts shown include interest on the MHGE Senior Notes, the MHGE PIK Toggle Notes and the Senior Facilities.

(3)	Amounts shown include taxes and escalation payments related to our operating lease obligations net of sublease income.

(4)	Amounts shown include future minimum lease payments on our capital leases.

(5)

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 consolidated financial statements until contract payment terms take effect.

(6)	“Other” consists primarily of commitments for global technology support and maintenance and enhancement activity related to the Oracle ERP system.

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, 2016 on a pro forma basis:

Payments due by Period

(Dollars in thousands)

Total

2017-2018

2019-2020

2021 and
beyond

Long-term debt, including current portion(1)

Interest on long-term debt(2)

Operating lease obligations(3)

Capital lease obligations(4)

Paper and printing services(5)

Purchase obligation and other(6)

(1)	Amounts shown include principal on our debt instruments on a pro forma basis.

(2)	Amounts shown include interest on our debt instruments on a pro forma basis.

(3)	Amounts shown include taxes and escalation payments related to our operating lease obligations.

(4)	Amounts shown include future minimum lease payments on our capital leases.

(5)

(6)	“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 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 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 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 four reporting units, Higher Education, K-12, International and Professional 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, 2014	$	435,519		$	25,373	$	4,089	$	37,078	$	501,059
Adjustment to goodwill		(13,153	)		1,050		—		—		(12,103	)

Balance as of December 31, 2015	$	422,366		$	25,423	$	4,089	$	37,078	$	488,956
Adjustment to goodwill		(1,685	)		4,844		—		—		3,159

Balance as of December 31, 2016	$	420,681		$	30,267	$	4,089	$	37,078	$	492,115

Goodwill in the table above includes a $1.7 million and $10.0 million impact from foreign exchange as of December 31, 2016 and 2015, respectively.

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, Earnings per Share 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:

•

independent third-party valuations of our common stock performed as of December 31, 2016, 2015 and 2014;

•

our historical operating and financial performance;

•

the market conditions for our business and our financial projections for the relevant period;

•

our net leverage and effective interest rates;

•

disposal of our summative testing business;

•

our success in building our management team and efforts to retain and recruit the talent required to support our anticipated growth;

•

the market performance of comparable publicly traded companies in our industry; and

•

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 Australian Dollar, British Pound, Canadian Dollar, Euro, Mexican Peso and Singapore Dollar. From time to time, we may enter into hedging arrangements with respect to foreign currency exposures.

Interest Rate Risk

Term Loan Facility

Borrowings under our Term Loan Facility will accrue interest at variable rates with a LIBOR floor of 1%, and a 100 basis point increase in the LIBOR on our debt balances outstanding as of December 31, 2016 would increase our annual interest expense by $15.8 million.

From time to time we may enter into hedging arrangements with respect to floating interest rate borrowings. While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.

We do not purchase or hold any derivative financial instruments for trading purposes.

Recent Accounting Standards

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cashflows (Topic 230) Classification of Certain Cash Receipts and Cash

Payments.” which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718).” This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. This standard also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued 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 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 adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

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 did 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. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer, the application of identifying performance obligations and licenses of intellectual property. 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.

In early 2016, the Company established a cross-functional implementation team consisting of representatives from all of our business segments. The implementation efforts consist of analyzing the impact of the standard on our revenue streams by reviewing our current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts. The Company will transition either using a full retrospective approach or a modified retrospective approach. While the Company is currently evaluating the method of adoption and the impact of the new revenue standard, as amended, on its consolidated financial statements and related disclosures, the Company believes the adoption of the new standard will primarily impact its accounting for direct incremental costs of obtaining its customer contracts. The new standard requires deferral of certain direct incremental costs with amortization consistent with the pattern of transfer of each performance obligation.

Recently issued FASB accounting standard codification updates, except for the above standards, will not have a material to the Company’s consolidated financial statements for the year ended December 31, 2016.

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 $3.4 billion in 2016, 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.

According to NCES, in 2016 approximately 60% of full-time students who graduated from 4-year institutions graduated within six years. For 2-year institutions, approximately 30% of full-time students who graduated completed their studies within three years.

postsecondary student success is adequate preparation via primary and secondary education. According to NCES, in the 2011-2012 school year, 1.9 million students began college in remediation. 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, which includes new instructional materials, courseware and formative assessment was approximately $6.9 billion for the 2016-2017 school year, including adoption and open territory states, according to Simba Information. According to NCES, K-12 enrollment in the United States as of 2013-2014 was 55 million, and enrollment is projected to grow at a compound annual growth rate of 0.4% to nearly 58 million from 2013 to 2024. 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. 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, 2016, 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

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 approximately 207 million students in 2014, more than doubling since 2000. K-12 global enrollment was more than 1.4 billion students in 2014, representing an increase of 19% 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 140 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 1,500 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. According to the AAP, our programs and learning solutions in the U.S. K-12 market achieved a 30% market share in adoption states in 2016 driven by strong performance in the California reading/literacy new adoption and a 25% market share overall. 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 approximately 1,550 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.

Our four operating segments are:

(1)

Higher Education (42% of total revenue in 2016): We are a top-three provider in the United States higher education market with a 21% market share for the year ended December 2016 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 via our proprietary e-commerce platform, primarily directly to students, which currently represents the largest distribution channel in this segment, with revenue having grown from $140 million for the year ended December 31, 2015 to $172 million for the year ended December 31, 2016. For the year ended December 31, 2016, 56% of Higher Education revenue was derived from digital learning solutions.

(2)

(3)

(4)

For the years ended December 31, 2016, 2015 and 2014, we generated revenue of $1,757 million, $1,830 million and $1,852 million, respectively. For the years ended December 31, 2016, 2015 and 2014, we generated a net loss of $116 million, $171 million and $323 million, respectively. For the years ended December 31, 2016, 2015 and 2014, we generated Billings of $1,913 million, $2,058 million and $2,039 million, respectively. See “Summary Historical Consolidated Financial Data.”

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 over $170 million in 2016. We are committed to continuing our significant digital investment, but with scale the rate of growth has declined. 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 535 full-time employees in DPG, including more than 240 engineers, 90 user experience designers, more than 90 technical product managers, nearly 25 data scientists and software solutions architects and over 85 customer-facing and other associated support staff across our digital hubs in Boston, Seattle, Irvine, New York City and Columbus.

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

LOGO

Open Digital Learning Environment

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

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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.

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Adaptive / Intelligent Content

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ALEKS: an adaptive learning math product for the K-12 and higher education markets, with 3.3 million unique users for the year ended December 31, 2016, an increase of 24% over the prior year;

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SmartBook: 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 SmartBook 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 SmartBook in the K-12 and international markets during 2015; and

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StudyWise: MHE’s latest adaptive offering that supports students in adaptive practice on smartphones. StudyWise extends the reach of Connect and Connect2 allowing students to efficiently learn in their natural environment.

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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.

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 140 countries across Asia-Pacific, Europe, India, Latin America and the Middle East, and approximately 27% of our more than 4,900 employees are based in 40 offices in 27 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.

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

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2015, we increased the market share of our top 10 Higher Education product categories by more than 225 bps from 20% to 22%, 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.

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 over $170 million in 2016. We are committed to continuing our significant digital investment, but with scale the rate of growth has declined. In addition to our organic investments, we have committed in excess of $210 million for the acquisitions of ALEKS, LearnSmart, Engrade and Redbird, 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 over 6.9 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 over 5.0 billion interactions. In

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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.

Highly attractive business model positioning us for growth.

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 CIO, a Head of Communications and a Head of Human Resources. 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 4,900 employees world-wide with 535 full-time employees in DPG, including more than 240 engineers, 90 user experience designers, more than 90 technical product managers, nearly 25 data scientists and software solutions architects and over 85 customer-facing and other associated support 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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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.

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

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, Open Court Reading, Reading Wonders, Impact Social Studies and Inspire Science. 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, including the remainder of the California ELA adoption in 2017-2018, as well as other new state adoptions including those in California, Texas, and Florida during the 2017-2019 period.

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

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Leverage our digital solutions in International and Professional markets.

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

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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 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 to over 1,500 as of December 31, 2016. For the years ended December 31, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), Higher Education digital revenue represented 56% ($408 million), 45% ($359 million), 38% ($319 million), 32% ($211 million) and 45% ($49 million), 28% ($216 million) and 20% ($165 million) of total Higher Education revenue, respectively.

For the years ended December 31, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), Higher Education digital Billings (including the change in deferred revenue) represents 56% ($410 million), 45% ($374 million), 39% ($322 million), 32% ($233 million) and 44% ($41 million), 29% ($229 million) and 22% ($185 million) of total Higher Education Billings, 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 3.3 million paid activations across campuses nationwide during the year ended December 31, 2016, an increase of 11% 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 over 6.9 billion interactions with students

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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.

SmartBook: 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 SmartBook product also makes use of our LearnSmart adaptive technology. When a student reads the chapters in SmartBook, they are prompted by LearnSmart questions to identify recommended 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 SmartBook 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 SmartBook 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 17 years. ALEKS had 1.3 million unique users in Higher Education during the year ended December 31, 2016, an increase of 19% 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.

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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.

StudyWise: MHE’s latest adaptive offering that supports students in adaptive practice on smartphones. StudyWise extends the reach of Connect and Connect2 allowing students to efficiently learn in their natural environment.

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, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), Higher Education custom publishing revenue, excluding the digital component, represented 12% ($89 million), 18% ($148 million), 29% ($240 million), 32% ($211 million) and 15% ($16 million), 24% ($186 million) and 19% ($153 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, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), Higher Education traditional print represented 32% ($237 million), 37% ($298 million), 33% ($281 million), 37% ($243 million) and 40% ($43 million), 48% ($365 million) and 61% ($491 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.

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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.

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.

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.

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, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), K-12 traditional print represented 82% ($505 million), 83% ($494 million), 86% ($487 million), 90% ($475 million) and 73% ($38 million), 92% ($605 million) and 94% ($692 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, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), K-12 digital revenue represented 18% ($114 million), 17% ($99 million), 14% ($79 million), 10% ($50 million) and 27% ($14 million), 8% ($53 million) and 6% ($46 million) of total K-12 revenue, respectively.

For the years ended December 31, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), K-12 digital Billings (including the change in deferred revenue) represented 34% ($260 million), 37% ($292 million), 29% ($215 million), 21% ($135 million) and 24% ($11 million), 12% ($86 million) and 6% ($51 million) of total K-12 Billings, respectively.

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Our core digital learning platforms include:

Access Manager: an IMS Global Standards certified integration platform for K-12 Ed Tech interoperability. Access Manager reduces the cost and complexity of adopting educational technology. Access Manager is based upon open standards and allows MHE to help schools reduce the cost of technology adoption and enhance the opportunity for increased use of technology in the learning process.

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.

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.

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, 2016, ALEKS had 2.0 million unique users in K-12, an increase of 27% over the prior year.

Redbird: a personalized and adaptive math solution based on research from Stanford University and targeted to students in the K-5 grade ranges. The combination of Redbird and ALEKS allows MHE to provide personalized, efficient and adaptive learning to the complete continuum of learners (K-life) focused on developing their math abilities.

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.

International Products

International sells higher education, K-12, professional and other products and services to educational, professional and English language teaching markets in more than 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, 2016 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, 2016 was derived from content created in local markets or products originating from unrelated publishers for distribution in our international markets. Although approximately 86% of International’s 2016 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

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share. For the years ended December 31, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), International traditional print revenue represented 86% ($246 million), 90% ($273 million), 91% ($303 million), 94% ($278 million) and 94% ($50 million), 97% ($358 million) and 98% ($394 million) of total International revenue, respectively.

For the years ended December 31, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), International digital revenue represented 14% ($41 million), 10% ($32 million), 9% ($30 million), 6% ($18 million) and 6% ($3 million), 3% ($13 million) and 2% ($8 million) of total International revenue, respectively.

For the years ended December 31, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), International digital Billings (including the change in deferred revenue) represented 17% ($49 million), 11% ($35 million), 9% ($31 million), 7% ($22 million) and 5% ($3 million), 4% ($14 million) and 2% ($9 million) of total International Billings, respectively.

Our core digital learning platforms include:

Connect2: MHE’s next generation offering of Connect with a greater focus on modularity and instructor driven customization. Connect2 provides curated courseware and adaptive technologies to meet instructor and student needs while allowing instructors to modify and customize the learning experience to meet particular goals and match their unique teaching style. Connect2 enhances both teaching and learning through a rich user experience built upon an extensive use of learning data and an invaluable feedback loop with a seamless integration built upon a commitment to IMS Global learning technology integration standards.

ELLevate English: a personalized and community based curriculum that efficiently supports English language learning. ELLevate English combines engaging resources with real-time feedback to help teachers assess student progress more timely and efficiently to allow for intervention and course customization to enhance learning.

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 26 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 2,600 corporate, academic, library and hospital customers as of December 31, 2016. Our digital subscription services customer base has a retention rate across major platforms of 93% in 2016.

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

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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, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), digital subscription revenue represented 39% ($46 million), 33% ($39 million), 29% ($34 million), 24% ($23 million) and 29% ($7 million), 20% ($24 million) and 15% ($19 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, 2016, 2015 and 2014 and the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), Professional digital revenue represented 51% ($60 million), 46% ($55 million), 44% ($51 million), 39% ($37 million) and 44% ($10 million), 34% ($41 million) and 25% ($33 million) of total Professional revenue, respectively.

For the years ended December 31, 2016, 2015 and 2014, the periods from March 23, 2013 to December 31, 2013 and January 1, 2013 to March 22, 2013 (Predecessor) and for the years ended December 31, 2012 and 2011 (Predecessor), Professional digital Billings (including the change in deferred revenue) represented 52% ($64 million), 47% ($58 million), 46% ($58 million), 41% ($41 million) and 45% ($11 million), 37% ($48 million) and 26% ($34 million) of total Professional Billings, 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.

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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 2016, we realized approximately 15%, 25%, 37% and 23% of our revenues during the first, second, 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, 2016, we had more than 4,900 employees worldwide directly supporting our operations with nearly 3,600 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 59 locations, of which 19 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.

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The properties listed in the table below are our principal 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
Columbus, Ohio		Owned		170,625	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
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
Whitby, Canada		2018		46,634	Office
Boston, Massachusetts		2021		37,622	Office
Seattle, Washington		2021		24,646	Office
East Windsor, New Jersey		2024		23,183	Office

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.

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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

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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		55	President, Chief Executive Officer and Director
Patrick Milano		56	Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Assistant Secretary
David Stafford		54	Senior Vice President, General Counsel and Secretary
Peter Cohen		62	Executive Vice President, McGraw-Hill Education
Mark Dorman		46	President, McGraw-Hill Higher Education, Professional and International
Stephen Laster		52	Chief Digital Officer
Larry Berg		50	Chairman and Director
Nancy Lublin		45	Director
Jonathan Mariner		62	Director
Antoine Munfakh		34	Director
Ronald Schlosser		68	Director
Itai Wallach		29	Director
Lloyd G. Waterhouse		65	Director
Mark Wolsey-Paige		55	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.

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Before joining MHC in 1992, he was an associate at two large New York City law firms. Mr. Stafford is a 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.

Peter Cohen became Executive Vice President, McGraw-Hill Education in December 2016. Prior to that he had been Group President of the U.S. Education unit of McGraw-Hill Education, Inc. since 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.

Mark Dorman became President of the McGraw-Hill Higher Education, Professional and International Group of McGraw-Hill Education, Inc. in December 2016. Previously he served as President of the company’s Professional and International Group. Before joining McGraw-Hill Education in 2013, he was president and CEO of Wolters Kluwer Law & Business, having previously served as vice president of Wolters Kluwer’s Legal Markets Group, where he was responsible for overall strategy, business development and sales and marketing. Prior to Wolters Kluwer, Mr. Dorman was head of global product management at Gartner Inc. and head of strategy for LexisNexis UK, a unit of Reed Elsevier. Mr. Dorman graduated from the Royal Military Academy Sandhurst and served as an officer in the British Army’s Corps of Royal Military Police.

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

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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 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 serves on the board of directors of Maxim Game Works, CH2M Hill Companies, Apollo Education Group Inc., and Claire’s Stores. 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.

Itai Wallach has been a Director of McGraw-Hill Education, Inc. since March 2017. Mr. Wallach is a Principal at Apollo, having joined in 2012. Before joining Apollo, Mr. Wallach was a member of the Financial Sponsors Group at Barclays Capital. Mr. Wallach also serves on the board of directors of Jacuzzi Brands and The Fresh Market. He graduated with distinction from the Richard Ivey School of Business at the University of Western Ontario where he was an Ivey Scholar. The Board believes that Mr. Wallach provides valuable insight on strategic and business matters, stemming from his experience analyzing, making and managing investments in public and private companies.

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,

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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 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 nine 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.

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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 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 2016.

Our named executive officers for fiscal year 2016 are:

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David Levin, President, Chief Executive Officer (“CEO”) and Director

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Patrick Milano, Executive Vice President, Chief Financial Officer (“CFO”), Chief Administrative Officer (“CAO”) and Assistant Secretary

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Peter Cohen, Executive Vice President

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Mark Dorman, President, Higher Education, Professional, and International

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Stephen Laster, Chief Digital Officer

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 2016, 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 2016: 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) goals

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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 2016, 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 executives

Annual Incentive Plan	Variable cash compensation earned based on achieving pre-established annual goals	Motivate and reward executives 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

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, 2016, the annual base salaries for our named executive officers were as follows:


Name / Title	Fiscal Year 2016 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
Executive Vice President
M. Dorman	$	525,000
President, Higher Education, Professional, and International
S. Laster	$	500,000
Chief Digital Officer

In determining base salaries for fiscal year 2016, 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 distinctions. We also take into account an executive officer’s job responsibilities, performance, qualifications and skills in determining individual compensation levels.

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The survey data we primarily used in determining fiscal year 2016 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.

2016 Annual Incentive Plan (AIP)

The 2016 Annual Incentive Plan (“AIP”) is designed to incentivize maximizing EBITDA, through revenue generation, platform growth and development, and operational efficiencies.

For 2016, 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 $441 million	0%	$417.3 million	0%
Greater than or equal to $441 million but less than $490 million	Linear interpolation between 90% and 100%
$490 million	100%
Greater than $490 million, but less than $588 million	Linear interpolation between 100% and 200%
$588 million or greater	200%

Plan EBITDA results for 2016 were finalized and pool funding approved by the Compensation Committee in March 2017. Actual Plan EBITDA was $417.3 million, which corresponded to a 0% pool funding level. 2016 was a difficult year for the education industry overall, and MHE experienced severe and unexpected declines in the Higher Education market and smaller than anticipated new adoption opportunities for K-12. Both of these factors materially impacted total MHE financial performance. While the total market opportunity was smaller in 2016, MHE was able to increase its market share for both Higher Education and K-12 segments. While actual Plan EBITDA performance was less than 90% of budget, in consideration of market outperformance, the collective effort that went into maximizing Plan EBITDA for the period, and the desire to retain top talent in the midst of a challenging market environment, the Compensation Committee approved a discretionary bonus pool which was used to recognize outstanding performance in difficult market conditions.

As in prior years, the bonus pool allocations to business units were made based on achievement of unit-level performance metrics, attainment of strategic objectives and impact on our overall performance and success. The allocated portions of the bonus pool to each business unit was further allocated to individual participants. Individual bonuses were determined based on the business unit manager’s assessment of the individual’s performance, taking into account quantitative and qualitative criteria, including 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. In balancing 2016 financial results against real gains made in market share and product development, the Compensation Committee awarded a special bonus to each named executive officer equal to 20% of each such named executive officer’s annual target bonus.

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The following table sets forth each of our named executive officers’ target and achieved bonus amounts under the 2016 AIP:


Executive	2016 AIP Target Bonus		2016 AIP Actual Bonus
David Levin	$	1,000,000	$	200,000
President, CEO and Director
Patrick Milano	$	550,000	$	110,000
Executive Vice President, CFO, CAO and Assistant Secretary
Peter Cohen	$	422,500	$	84,500
Executive Vice President
Mark Dorman	$	341,250	$	68,250
President, Higher Education, Professional & International
Stephen Laster	$	325,000	$	65,000
Chief Digital Officer

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, Dorman and Laster 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, Mr. Dorman received an additional option award in 2014 as he took on additional responsibility in his leadership of the Professional business unit, and each of Messrs. Levin, Milano, Cohen and Laster received additional 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 were initially 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 original vesting terms of the options were as follows: 50% of each option vested in equal installments of 20% over five years, except that 50% of Mr. Cohen’s 2013 grant vested in equal installments of 25% over four years, and Mr. Milano’s 2015 grant vests in full on the third anniversary of the grant date, in each case, provided that the executive remains continuously employed by MHE through the applicable vesting date. The remaining 50% of the option vested 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, and Mr. Milano’s 2015 grant vests in full on the third anniversary of the grant date, in each case, provided that the executive remains continuously employed by MHE through the applicable vesting date and certain performance criteria were met with respect to each fiscal year during the vesting period. As of December 31, 2016, each NEO had vested in each performance tranche through the fiscal 2015 performance period.

On July 15, 2016, the Compensation Committee amended the vesting conditions applicable to the unvested portion of the performance-based vesting portion of outstanding equity awards for all employees, including our

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named executive officers. Performance measures were removed so that all unvested options will vest based solely on continued employment through the remaining vesting period, which was extended in most cases beyond the original vesting schedule. The Option Agreements issued to Messrs. Milano, Dorman and Laster in fiscal year 2013 were amended to extend the vesting of the remaining unvested performance-based options to vest in equal annual installments in 2019 and 2020, subject to continued service through each such applicable vesting date. The Option Agreement issued to Mr. Cohen in fiscal year 2013 was amended to extend the vesting of the remaining unvested performance-based options to vest in equal annual installments in 2018 and 2019, subject to continued service through each such applicable vesting date. The Option Agreement issued to Mr. Levin in fiscal year 2014 was amended to extend the vesting of the remaining unvested performance-based options to vest in equal annual installments in 2019, 2020 and 2021, subject to continued service through each such applicable vesting date. The Option Agreement issued to Mr. Dorman in 2014 was amended to extend the vesting of the remaining unvested performance-based options to vest in equal annual installments in 2018, 2019 and 2020, subject to continued service through each such applicable vesting date. The Option Agreements issued to Messrs. Levin, Cohen and Laster in 2015 were amended to provide that the unvested performance-based options would vest based on continued service over the original vesting period, such that the options will continue to vest in 20% annual installments on each applicable vesting date. The Option Agreement issued to Mr. Milano in 2015 was amended to provide that unvested performance-based options would vest based on continued service over the original vesting period, such that the options will vest in full on the third anniversary of the date of grant.

The option award agreements under the Management Equity Plan also contain noncompetition, non-solicitation, confidentiality, nondisclosure and other restrictive covenants. These restrictions apply to all of the named executive officers. The duration of the noncompetition and non-solicitation covenants for all named executive officers extend for one year following termination of employment.

In April 2017, we revised Mr. Cohen’s long-term bonus plan. In lieu of all payments under the previous plan for 2016, 2017 and 2018, Mr. Cohen will be entitled to receive a bonus, payable in common shares or cash at the discretion of the Company, upon the earlier of a change in control (as defined in the Management Equity Plan) or an initial public offering based on the total enterprise value (“TEV”) of the Company in connection with such event. If neither event occurs on or prior to December 31, 2018, Mr. Cohen will remain eligible to receive a TEV bonus based on the TEV of the Company using the most recent third party valuation as of that date. The maximum bonus available under this plan is $1,875,000 if a predetermined TEV is achieved. In order to be eligible to receive the bonus, Mr. Cohen must remain employed through the earlier of a change in control, an initial public offering, or January 1, 2018, and must remain in compliance with applicable restrictive covenants. In addition, Mr. Cohen will remain eligible to receive the bonus if his employment terminates prior to such events or such date due to a “qualifying termination” (as defined in the bonus plan, and including death, termination by the Company other than for “cause” (including as a result of his “disability”) or by him for “good reason” (in each case, as defined in the Management Equity Plan)) or if he voluntarily resigns without good reason and shortly thereafter commences full time employment with the University of Phoenix, Inc. or its affiliates (collectively, a “Good Leaver Termination”); subject to continued employment with the University of Phoenix, Inc. or its affiliates, through the same dates as otherwise required under the bonus plan had his employment with the Company continued, or if his employment is terminated by the University of Phoenix, Inc. or its affiliates without cause prior to such dates. Payment of the bonus is contingent upon Mr. Cohen’s execution and non-revocation of a waiver and release of claims in favor of the Company and its affiliates. In addition, the revised bonus plan provides for a one-time special bonus of $84,500 to be paid in January 2018, subject to continued employment through January 1, 2018, or if his employment terminates pursuant to a Good Leaver Termination. Under the revised bonus plan, shares of our common stock held by Mr. Cohen will not be repurchased prior to July 1, 2019, and Mr. Cohen’s vested options will remain outstanding and exercisable until June 30, 2019, provided in each case that Mr. Cohen remains employed through January 1, 2018, or if his employment terminates pursuant to a Good Leaver Termination. In April 2018, Mr. Cohen will have a one-time special right to sell all (and not less than all) shares of our common stock held by him as of such time to the Company or Apollo, at a per-share price equal to the fair market value as of March 31, 2018, provided that he

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remains employed through January 1, 2018, or if his employment terminates pursuant to a Good Leaver Termination and provided that a change in control or IPO has not yet occurred. Pursuant to the terms of the revised bonus plan, Mr. Cohen shall no longer be a participant in, or eligible to receive payments or benefits under, the AIP, the Executive Severance Plan, or any other bonus or severance plan or arrangement of the Company or its affiliates.

Adjustments to Options and Dividend Restricted Stock Units

Options granted under the Management Equity Plan were equitably adjusted in fiscal year 2016 in light of an extraordinary dividend of $28.4551 made on May 4, 2016. In prior years, dividends were delivered to option holders either through (i) a reduction in the exercise price by the full amount of the per share dividend, where possible, or (ii) through a combination of a reduction in the exercise price and an equivalent value grant in restricted stock units for the remaining amount (“dividend RSUs”). In 2016, the full per share value of the dividend was instead delivered as (i) an immediately payable cash dividend equivalent on all vested options and (ii) for unvested options and dividend RSUs, a cash dividend equivalent payable upon vesting.

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. Messrs. Levin, Milano, Cohen, Dorman and Laster 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.

In addition, accounts held by one of our named executive officers under a nonqualified defined contribution plan sponsored by our prior parent company, called The McGraw-Hill Companies, Inc. 401(k) Savings and Profit Sharing Supplement Plan, transferred to MHE in connection with the Founding Acquisition. These accounts held amounts that our named executive officer was permitted to defer in 2012 in excess of the tax code limitations imposed on the 401(k) plan. The accounts will be payable upon the named executive officer’s retirement or termination. We will continue to credit these accounts until payment, at the rate equal to 120% of the annual applicable deferred long-term rate for December of the prior year. For the fiscal year 2016 portion of interest credited by MHE, the December 2015 rate was 3.13%.

Perquisites and Fringe Benefits

We provide a limited number of perquisites and fringe benefits to our named executive officers, such as health club memberships and annual physical exams, to be competitive with the marketplace. We also provide

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Mr. Levin with certain benefits related to the travel of his spouse between her workplace in the United Kingdom and their residence in New York City. See “—Fiscal Year 2016 Summary Compensation Table” for a discussion of these benefits.

Health and Welfare Benefits

Our named executive officers participate in our health and welfare benefit plans, which are available to our employees generally. Our health and welfare benefit plans include medical insurance, dental insurance, life insurance, accidental death and dismemberment insurance, and short-term and long-term disability insurance. We also provide our named executive officers supplemental benefits under the Executive AD&D Insurance and Management Supplemental Death & Disability Benefit plans. We provide these benefits in order to provide our workforce with a reasonable level of financial support in the event of illness or injury, to enhance productivity and job satisfaction, and to remain competitive.

Prior Company Performance Awards

In fiscal year 2012, our prior parent company granted cash-based performance awards to Messrs. Milano and Laster. The value of these awards was determined based on our prior parent company’s achievement of its earnings per share goals for 2012, and as a result of our prior parent company exceeding the applicable maximum performance goal, these awards were valued at 150% of target level. To encourage retention, the awards were conditioned on continued service with the Company until December 31, 2014, and each of Messrs. Milano and Laster satisfied this service requirement. 50% of Mr. Milano’s award was paid in fiscal year 2013 in recognition of his service towards closing the Founding Acquisition and transition efforts. The remaining 50% of Mr. Milano’s award and 100% of Messrs. Laster’s award were paid in 2015.

Fiscal Year 2016 Summary Compensation Table

The following table sets forth the compensation paid or awarded to our named executive officers by MHE and its affiliates for services rendered in all capacities to MHE and its affiliates in fiscal year 2016:


Name and Principal Position	Year		Salary		Bonus(1)		Stock Awards(2)		Option Awards(3)		Non-Equity Incentive Plan Compensation(4)		Change in Pension Value and Nonqualified Deferred Compensation Earnings(5)		All Other Compensation(6)		Total
David Levin		2016	$	1,000,000	$	200,000	$	—		—	$	—	$	—	$	1,616,140	$	2,816,140
Chief Executive Officer		2015		1,000,000		—		—		685,100		1,000,000		—		218,083		2,903,183
Chief Executive Officer		2014		753,788		100,000		435,787		9,595,769		1,000,000		—		921,544		12,806,888

Patrick Milano		2016		550,000		110,000		—		—		—		—		935,202		1,595,202
Executive Vice President,		2015		550,000		—		415,296		685,100		1,962,500		—		11,271		3,624,167
CFO and CAO		2014		550,000		—		1,160,386		—		605,000		—		—		2,315,386

Peter Cohen		2016		650,000		84,500		—		—		—		—		958,077		1,692,577
Executive Vice President, McGraw-Hill Education		2015		650,000		—		332,233		205,530		422,500		—		11,271		1,621,534

Mark Dorman		2016		461,288		68,250		—		—		—		—		619,348		1,148,886
President, Higher Education, Professional, and International

Stephen Laster		2016		500,000		65,000		—		—		—		—		573,825		1,138,825
Senior Vice President,		2015		450,000		—		249,177		137,020		600,000		—		7,650		1,443,847
Chief Digital Officer		2014		425,000		—		696,229		—		257,125		—		1,200		1,379,554

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(1)

For 2016, actual Plan EBITDA achievement corresponded to a 0% AIP bonus pool funding level. The Compensation Committee awarded special bonuses under the AIP equal to 20% of each NEO’s annual target bonus in balancing 2016 financial results against real gains made in market share and product development. Compensation reported under this column for Mr. Levin in 2014 represents a signing bonus upon hire.

(2)

For Messrs. Milano, Cohen and Laster, compensation reported in this column for 2014 represents the RSUs granted as dividends on July 18, 2014 and December 16, 2014, and for 2015 represents the RSUs granted as dividends on April 6, 2015. Mr. Levin received an equity grant of $200,000 in 2014. The value reported includes a gross-up payment for taxes on the imputed income in respect to Mr. Levin’s equity grant.

(3)

Option awards reported in 2014 and 2015 represent the aggregate grant date fair value of awards granted during the applicable period determined in accordance with the applicable accounting guidance for equity-based awards. See Note 1 to the consolidated financial statements for an explanation of the methodology and assumptions used in the FASB ASC Topic 718 valuations. The per share exercise price for each option award outstanding as of April 6, 2015 reflects the adjustment made to account for the extraordinary cash dividend declared on our common stock on such date. For purposes of ASC Topic 718, no incremental fair value resulted from such adjustment.

(4)

The amounts reported in this column include payments of cash incentive awards paid under the AIP for performance years 2014 and 2015. Awards reported in respect of a fiscal year are paid early in the following fiscal year. In addition, for Mr. Milano for 2014, this column includes the accelerated payment of 50% of his 2012 Cash-Based Performance Award ($562,500). For 2015, for Messrs. Milano, Dorman and Laster, this column also includes the payment of their 2012 Cash-Based Performance Awards. Additionally, Mr. Milano received payment of a 2012 Special Restricted Cash Award granted in 2012 ($350,000), and payment of a special award for successful disposition of CTB ($500,000). Additionally, Mr. Laster received a special bonus reflecting his work on the CTB disposition ($50,000).

(5)	None of our named executive officers received any above-market or preferential earnings in respect of any nonqualified deferred compensation plan or benefit provided by the Company.

(6)	“All Other Compensation” is reflected in the below table and notes.


Name	Airfare(1)		Tax Prep(2)		Health Club Reimbursement		Dividend Equivalent Payments(3)		Total
David Levin	$	43,734	$	39,353	$	1,200	$	1,531,852	$	1,616,140
Patrick Milano		—		—		—	$	935,202	$	935,202
Peter Cohen		—		—		—	$	958,077	$	958,077
Mark Dorman		—		—	$	1,200	$	618,148	$	619,348
Stephen Laster		—		—	$	1,200	$	572,625	$	573,825

(1)

This amount includes reimbursement for Mr. Levin’s spouse for roundtrip business-class travel from London to New York per Mr. Levin’s contract.

(2)

This amount includes reimbursement of 2014, 2015 and 2016 tax prep fees per Mr. Levin’s contract.

(3)

These amounts are for dividend equivalents paid or credited and accumulated on outstanding options and dividend RSUs which were or became vested and/or settled in 2016. Vesting and settlement of dividend RSUs and vesting of Options triggers payment to the holder of all associated credited and accumulated dividend equivalents.

Fiscal Year 2016 Grants of Plan-Based Awards Table

The following table includes each grant of an award made to the named executive officers in fiscal year 2016 under any equity-based and non-equity incentive plan:


		Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1)						Estimated Future Payouts Under Equity Incentive Plan Awards
Name	Grant Date	Threshold ($)		Target ($)		Max ($)		Threshold (#)		Target (#)		Max (#)		All Other Stock Awards: Number of Shares of Stock or Units (#)		All Other Option Awards: Number of Securities Underlying Options (#)		Exercise or Base Price of Option Awards ($/Sh)		Grant Date Fair Value of Stock and Option Awards ($)
D. Levin			—		1,000,000		2,000,000		—		—		—		—		—		—		—
P. Milano			—		550,000		—		—		—		—		—		—		—		—
P. Cohen			—		422,500		—		—		—		—		—		—		—		—
M. Dorman			—		341,250		—		—		—		—		—		—		—		—
S. Laster			—		325,000		—		—		—		—		—		—		—		—

(1)

Represents annual cash incentive targets under the AIP for fiscal year 2016. Pursuant to the terms of the AIP, participants are given a target award amount, but are not provided maximum or threshold award amounts on an individual basis, except that Mr. Levin’s Employment Agreement provides for a maximum bonus opportunity equal to 200% of his base salary. For 2016, actual Plan EBITDA achievement corresponded to a 0% AIP bonus pool funding level. The Compensation Committee awarded special bonuses under the AIP equal to 20% of each NEO’s annual target bonus in balancing 2016 financial results against real gains made in market share and product development, which bonuses were paid on March 15, 2017.

130

2016 Outstanding Equity Awards at Fiscal Year-End Table


	Option Awards										Stock Awards
Name(1)	Grant Date		Number of Securities Underlying Unexercised Options(2) #Exercisable		Number of Securities Underlying Unexercised Options(3) #Unexercisable		Option Exercise Price ($)(4)		Option Expiration Date		Number of Shares or Units of Stock That Have not Vested (#)(5)		Market Value of Shares or Units of Stock That Have not Vested ($)
D. Levin		4/29/2014		51,834		77,751	$	113.42		4/29/2024
		6/5/2015		2,000		8,000		160.45		6/5/2025

P. Milano		5/15/2013		31,864		21,243		29.02		5/15/2023
		7/18/2014										2,348	$	316,980
		12/16/2014										1,245	$	168,075
		4/6/2015										1,035	$	139,725
		6/5/2015				10,000		160.45		6/5/2025

P. Cohen		5/15/2013		31,864		10,621		29.02		5/15/2023
		7/18/2014										939	$	126,765
		12/16/2014										498	$	67,230
		4/6/2015										413	$	55,755
		6/5/2015		600		2,400		160.45		6/5/2025

M. Dorman		5/15/2013		19,118		12,746		29.02		5/15/2023
		7/18/2014										1,408	$	190,080
		12/16/2014										748	$	100,980
		4/6/2015										620	$	83,700
		10/3/2014		2,000		3,000		113.42		10/3/2024

S. Laster		5/15/2013		19,118		12,746		29.02		5/15/2023
		7/18/2014										1,408	$	190,080
		12/16/2014										748	$	100,980
		4/6/2015										620	$	83,700
		6/5/2015		400		1,600		160.45		6/5/2025

(1)	This table does not address any legacy equity award holdings by our named executive officers under the equity plans and programs of our prior parent company.

(2)

Stock options awarded to our named executive officers during fiscal years 2013, 2014 and 2015 vested 50% based on time-based vesting and 50% based on performance-based vesting for fiscal years 2013, 2014 and 2015. A 2016 amendment to these grants converted performance-based vesting to time-based vesting and extended the vesting period for the original performance-based options. The stock options reported here represent the stock options that were exercisable as of December 31, 2016 for Messrs. Levin, Milano, Cohen, Dorman and Laster.

(3)

The stock options reported in this column represent the stock options awarded during fiscal years 2013, 2014, and 2015 that have not vested. The stock options generally vest in annual installments on each anniversary of the grant date, except that options granted in 2013 vest on March 22 of each year. The stock options awarded in 2013 to Messrs. Milano, Dorman and Laster vest in 20% annual installments in years 1–3 and 10% annual installments in years 4–7, subject to continued service through the applicable vesting date. The stock options awarded in 2013 to Mr. Cohen vest in 25% annual installments in years 1–3, a 12.5% annual installment in year 4, and 6.25% annual installments in years 5–6, subject to continued service through the applicable vesting date. The stock options awarded in 2014 to Mr. Levin vest in 20% annual installments in years 1–2, 10% annual installments in years 3–4, a 20% annual installment in year 5, and 10% annual installments in years 6–7, subject to continued service through the applicable vesting date. The stock options awarded in 2014 to Mr. Dorman vest in 20% annual installments in years 1–2, a 10% annual installment in year 3, 20% annual installments in years 4–6, and a 10% annual installment in year 7, subject to continued service through the applicable vesting date. The stock options awarded in 2015 to Messrs. Levin, Cohen, and Laster vest in equal 20% annual installments over 5 years, subject to continued service through the applicable vesting date. The stock options awarded in 2015 to Mr. Milano vest in full in year 3, subject to continued service through the applicable vesting date.

(4)

The per share exercise price for each option award outstanding as of December 31, 2016 reflects all the adjustments made to account for extraordinary cash dividends declared on McGraw-Hill Education, Inc.’s common stock as of such date. For purposes of ASC Topic 718, no incremental fair value resulted from such adjustment.

(5)	Represents unvested dividend RSUs granted on July 18, 2014, December 16, 2014, and April 6, 2015.

131

Option Exercises and Stock Vested Table

The following table includes dividend RSUs that vested to the named executive officers in fiscal year 2016:


	Option Awards				Stock Awards
Name	Number of Shares Acquired on Exercise (#)		Value Realized on Exercise ($)		Number of Shares Acquired on Vesting (#) ⁽¹⁾		Value Realized on Vesting ($) ⁽²⁾
David Levin Chief Executive Officer		—		—		—		—

Patrick Milano Executive Vice President, CFO, and CAO		—		—		2,313	$	462,656

Peter Cohen Executive Vice President, McGraw-Hill Education		—		—		2,776	$	555,162

Mark Dorman President, Higher Education, Professional, and International		—		—		1,388	$	277,592

Stephen Laster Senior Vice President, Chief Digital Officer		—		—		1,388	$	277,592

(1)	Represents previously awarded dividend RSUs that vested when the underlying stock options vested on March 22, 2016.

(2)	Represents the value as of the date of vesting based on a share price of $200.

Employment Agreement with David Levin

Only one of our named executive officers, Mr. Levin, is party to an employment agreement. Mr. Levin’s employment agreement is dated December 14, 2013 and was amended as of March 31, 2014. Described below are the details of the compensation and benefits terms of Mr. Levin’s employment agreement, as amended.

•

Term; Transition: David Levin became President and CEO effective March 31, 2014, for an initial period of three years from that date, with an automatic renewal each year thereafter unless and until the Company or Mr. Levin provides written notice of non-renewal to the other party at least ninety (90) days before the expiration date.

McGraw-Hill Education, Inc. S-1/A