CENGAGE LEARNING HOLDINGS II, Inc.

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CENGAGE LEARNING HOLDINGS II, Inc.

Third Quarter Report

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During the period covered by this report, Cengage Learning Holdings II, Inc. and its consolidated subsidiaries (the “Company”) were not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. However, the Company does have an obligation to comply with the terms of its Shareholder Agreement, dated as of March 31, 2014 (the “Shareholder Agreement”). The Shareholder Agreement includes references to certain provisions of the U.S. Securities and Exchange Commission’s reporting requirements with modifications as agreed. The Company has complied with its obligations under the Shareholder Agreement and this report is made available pursuant to such obligations.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify forward-looking statements because they contain words such as “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “estimate,” “project,” “foresee,” “likely,” or “anticipate” or similar expressions that concern our strategies, objectives, plans, or goals. Although the forward-looking statements contained in this report reflect management’s current beliefs based upon information currently available to management and upon assumptions which management believes to be reasonable, actual results may differ materially from those stated in or implied by these forward-looking statements.

A number of factors could cause actual results, performance or achievements to differ materially from the results expressed or implied in the forward-looking statements, including the factors described in this quarterly report and those listed in the “Risk Factors” section of the Company’s Transition Report for the nine months ended March 31, 2014. These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. These risks and uncertainties include, without limitation:

 the impact of competition from established competitors and new businesses that have not traditionally participated in our markets, including the impact of new and enhanced product and service offerings and technology and

competitors’ ability to adapt more quickly to new or emerging technologies and market conditions;

 the impact of used textbook and/or rental textbook programs and our ability to compete with them;

 the effect of increased accessibility of free or relatively inexpensive information and materials on pricing and demand for our products and services;

 the effect of changes in government programs and private lending practices relating to student aid and library funding;

 our ability to successfully implement our business strategy;

 the impact of technology developments and our ability to continue to make effective investments in our technology infrastructure;

 the seasonality of our business;

 our ability to adequately protect, maintain and enforce our intellectual property rights and proprietary rights and the adequacy of protections of our intellectual property under applicable laws;

 liabilities resulting from, and costs of defending against, litigation including intellectual property infringement claims;

 the impact of changes to laws and regulations applicable to us and our customers, including rules that could result in decreased programs offered by, and limit enrollments in, institutions of higher and continuing education including for-profit schools;

 our ability to attract and retain key authors, content providers and employees;

 our ability to maintain licensing agreements with third party content providers;

 failures or disruptions of our and our third party providers’ hosting facilities and electronic delivery systems for our products and services;

 our reliance on third party providers of outsourced services and any failure of such providers to provide services effectively on a timely basis;

 our ability to adequately manage and develop our operational and managerial systems and processes including our enterprise resource planning software;

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 our ability to expand and conduct our operations outside the United States;

 the effect of fluctuations between foreign currencies and the United States dollar and our ability to effectively hedge foreign currency exposure;

 our ability to identify, complete and successfully integrate future acquisitions;

 adverse changes in domestic and global economic and political conditions, related availability of credit, government and private loans for students and consequential decline in consumer demand for our products;

 incurrence of impairment charges for goodwill and long-lived assets;

 the impact of business combinations in the markets in which we compete;

 our ability to react to changes in the economy or our industry;

 our debt agreements, which limit our flexibility in operating our business including, among other things, our ability under certain circumstances to engage in mergers or consolidations, sell assets and use the proceeds of such sale, pay distributions to our equity owners and/or buy back debt;

 potential security breaches involving our products and services or our customers’ credit and debit card and private data, which could subject us to material claims and costs and harm our reputation;

 changes in our credit ratings or macroeconomic conditions; and

 our ability to maintain effective internal controls over financial reporting.

Although we have identified important risks and factors that could cause actual actions, events or results to differ materially from those described in or implied by our forward-looking statements, other factors and risks may cause actions, events or results to differ materially from those anticipated, estimated or intended. We cannot assure you that forward-looking statements will prove to be accurate, as actual actions, results and future events could differ materially from those anticipated or implied by such statements. All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. These forward-looking statements are made as of the date of this report and, except as required by law, we undertake no obligation to update, amend, clarify or revise them to reflect new events or circumstances.

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THIRD QUARTER REPORT

THREE AND NINE MONTHS ENDED DECEMBER 31, 2014 (UNAUDITED)

TABLE OF CONTENTS

Page No. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets 1

Condensed Consolidated Statements of Operations 2

Condensed Consolidated Statements of Comprehensive (Loss) Income 3

Condensed Consolidated Statements of Cash Flows 4

Notes to the Condensed Consolidated Financial Statements 5

Management's Discussion and Analysis of Financial Condition and Results of Operations 20

Quantitative and Qualitative Disclosures about Market Risk 31

Legal Proceedings 32

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Successor

December 31, March 31,

(in millions) 2014 2014

Assets

Cash and cash equivalents $ 371.8 $ 118.4

Accounts receivable, net 182.7 163.0

Inventories 358.8 609.1

Deferred tax assets 0.5 0.6

Restricted cash 35.3 115.7

Prepaid expenses and other current assets 61.3 66.1

Total current assets 1,010.4 1,072.9

Property, equipment and capitalized software for internal use, net 213.4 218.7

Pre-publication costs, net 302.3 327.6

Author advances, net 29.5 19.2

Identifiable intangible assets, net 1,262.5 1,337.0

Goodwill 1,591.9 1,597.5

Deferred tax assets 12.9 0.3

Deferred financing costs 10.1 6.9

Other non-current assets 37.1 26.0

Total assets $ 4,470.1 $ 4,606.1

Liabilities and Stockholders' Equity

Accounts payable and accrued expenses $ 358.5 $ 382.3

Deferred revenue 181.0 110.1

Current portion of long-term debt 18.5 15.8

Income taxes payable 7.6 1.9

Deferred tax liabilities 80.6 81.2

Other current liabilities 3.1 15.6

Total current liabilities 649.3 606.9

Long-term debt 2,007.0 1,725.5

Deferred tax liabilities 207.6 260.2

Other non-current liabilities 50.3 36.3

Total liabilities 2,914.2 2,628.9

Commitments and contingencies (Note 15)

Common stock ($0.01 par value, 300 million shares authorized, 78 million shares issued and outstanding at December 31, 2014

and March 31, 2014) 0.8 0.8

Additional paid-in capital 1,679.2 1,976.4

Accumulated deficit (104.0)

-Accumulated other comprehensive loss (20.1)

-Total stockholders' equity 1,555.9 1,977.2

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Condensed Consolidated Statements of Operations (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements. - 2 -

Successor Predecessor Successor Predecessor

(in millions)

Three Months Ended December 31,

2014

2013

Nine Months Ended December 31,

2014

2013

Revenues $ 374.9 $ 414.6 $ 1,337.7 $ 1,406.1 Cost of revenues, excluding amortization of

pre-publication costs and depreciation stated below 203.2 158.4 770.8 516.5 Amortization of pre-publication costs 38.9 39.0 130.6 147.2 Total cost of revenues, excluding depreciation stated below 242.1 197.4 901.4 663.7

116.1

112.4 359.6 335.5 Operational restructuring charges (0.7) 1.5 0.3 4.8 Depreciation 22.3 17.4 65.9 50.4 Impairment of goodwill - - - (185.4) Amortization of identifiable intangible assets 22.5 40.4 67.9 121.3 Other (income) expense, net - (3.1) 0.9 (5.0)

Total costs and expenses 402.3 366.0 1,396.0 985.3 Operating (loss) income (27.4) 48.6 (58.3) 420.8 Mark-to-market of derivative instruments - - - 12.6 Interest income - 0.2 0.3 0.5 Interest expense (33.5) - (97.8) (179.1) Reorganization items, net - (82.1) (0.5) (132.7) (Loss) income before taxes and equity losses of affiliates (60.9) (33.3) (156.3) 122.1 Benefit from income taxes 21.5 2.8 52.3 7.7 Equity losses of affiliates, net of taxes - (0.4) - (1.7)

Net (loss) income $ (39.4) $ (30.9) $ (104.0) $ 128.1 Selling, general & administrative, excluding depreciation stated

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(in millions)

2014

2013

2014

2013

Net (loss) income $ (39.4) $ (30.9) $ (104.0) $ 128.1 Other comprehensive income:

Unrealized losses on derivative instruments

reclassified into earnings - - - 6.0 Foreign currency translation adjustments (13.1) (1.1) (20.1) (4.0) Other comprehensive (loss) income (13.1) (1.1) (20.1) 2.0 Comprehensive (loss) income $ (52.5) $ (32.0) $ (124.1) $ 130.1

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Condensed Consolidated Statements of Cash Flows (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements. - 4 -

Successor Predecessor

(in millions)

2014

2013

Cash Flows from Operating Activities

Net (loss) income $ (104.0) $ 128.1 Adjustments to reconcile net (loss) income

to net cash provided by operating activities:

Amortization of pre-publication costs 130.6 147.2 Depreciation 65.9 50.4 Impairment of goodwill - (185.4) Amortization of identifiable intangible assets 67.9 121.3 Amortization and write-off of debt discounts and deferred financing costs 2.2 53.4 Non-cash interest on derivative instruments - 10.6 Non-cash equity-based compensation expense 6.4 -Operational restructuring charges 0.3 4.8 Cash payments for operational restructuring charges (4.3) (8.1) Mark-to-market of derivative instruments - (12.6) Reorganization items, net 0.5 132.7 Gain on sale of property and equipment - (1.5) Cash payments for reorganization items, net (72.5) (66.7) (Benefit) provision for deferred taxes (65.3) 3.7 Equity losses of affiliates, net of taxes - 1.7 Changes in operating assets and liabilities, net of acquisitions 348.5 128.9 Other, net (0.2) (10.8) Net cash provided by operating activities 376.0 497.7

Cash Flows from Investing Activities

Acquisitions of businesses and investments in equity method investees (12.3) -Proceeds from settlement of derivative instruments - 0.2 Payments on settlement of derivative instruments - (0.1) Additions to pre-publication costs (108.8) (111.6) Additions to property, equipment and capitalized software for internal use (61.3) (45.5) Proceeds from disposition of property, equipment and

capitalized software for internal use - 10.1 Change in restricted cash 80.4 -Other, net - (1.4) Net cash used in investing activities (102.0) (148.3)

Cash Flows from Financing Activities

Proceeds from issuance of debt 297.0 -Repayments of long-term debt (13.9) (8.9) Repayments under the revolving credit facilities - (4.0) Proceeds from issuance of common stock 1.9 -Dividends (300.0) -Debt issuance costs and other financing fees (4.2) (0.1) Net cash used in financing activities (19.2) (13.0)

Impact on Cash and Cash Equivalents from Changes in Foreign Currency (1.4) (1.3)

Net Increase in Cash and Cash Equivalents 253.4 335.1

Cash and Cash Equivalents

Beginning of period 118.4 417.5 End of period $ 371.8 $ 752.6

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1. BASIS OF PRESENTATION

Basis of Presentation

Cengage Learning Holdings II, Inc. (“CL Holdings II, Inc.”), together with its consolidated subsidiaries, is hereinafter collectively referred to as “Cengage Learning,” or the “Successor.” Cengage Learning Holdings II, Inc. is the successor company to Cengage Learning Holdings II, L.P. (“CL Holdings II, L.P.”), together with its consolidated subsidiaries, collectively referred to as the “Predecessor.” The term “Company” (also referred to as “us” “we” and “our”) used throughout these financial statements collectively refers to Cengage Learning Holdings II, L.P. for the Predecessor periods and Cengage Learning Holdings II, Inc. for the Successor periods.

On July 2, 2013, CL Holdings II, L.P. and all of its domestic wholly-owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the Bankruptcy Court for the Eastern District of New York (“Bankruptcy Court”). Our non-U.S. subsidiaries were not part of the bankruptcy filing. On March 13, 2014, the Debtors received confirmation of their plan of reorganization (“Plan of

Reorganization” or the “Plan”) from the Bankruptcy Court and emerged from bankruptcy proceedings as of the end of the day on March 31, 2014 (the “Effective Date”). Prior to the Effective Date, the Debtors operated their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 and the orders of the Bankruptcy Court. Our non-U.S. subsidiaries continued to operate in the ordinary course of business during the post-petition period. Prior to July 2, 2013, the Predecessor was controlled by investment funds associated with or designated by Apax Partners, L.P. (“Apax”), together with OMERS Private Equity, Inc., hereinafter collectively referred to as the “Predecessor Sponsors.”

Upon emergence from bankruptcy on March 31, 2014, we adopted fresh start accounting which resulted in the Company becoming a new entity for financial reporting purposes. The effects of the Plan of Reorganization and the application of fresh start accounting were reflected on our consolidated balance sheet as of March 31, 2014. As a result, the consolidated balance sheet on March 31, 2014 and the consolidated financial statements after March 31, 2014, including the three and nine months ended December 31, 2014, are not comparable to the consolidated financial statements prior to the Effective Date. The application of fresh start accounting had a material impact on the financial results for the three and nine months ended December 31, 2014 as well as the historical trends of our financial results. Our condensed consolidated financial statements and related footnotes are presented with a black line division, which delineates the lack of comparability between financial statements on or after March 31, 2014 for the Successor and dates prior for the Predecessor.

We have prepared the accompanying condensed consolidated interim financial statements and accompanying footnotes (the “Financial Statements”) in accordance with the accounting policies described in our Transition Report for the nine months ended March 31, 2014 (the “2014 Transition Report”). Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. You should read these financial statements in conjunction with the consolidated financial statements included in the 2014 Transition Report.

The condensed consolidated balance sheet as of March 31, 2014 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes required by GAAP.

In the opinion of management, the Financial Statements include all adjustments (consisting of normal recurring adjustments) considered necessary by management to fairly state the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended December 31, 2014 are not necessarily indicative of the results for the fiscal year ending March 31, 2015.

Change of Fiscal Year End

The Company changed its fiscal year end to March 31 from June 30 effective beginning with the period ended on March 31, 2014. The Company made this change to better align its financial reporting period, as well as its budgeting and planning process, with the seasonality of its business cycle.

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Notes to the Condensed Consolidated Financial Statements (UNAUDITED)

- 6 - Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Although these estimates are based on management’s best knowledge of current events and actions that we may undertake in the future, actual results could differ from those estimates. These estimates include, but are not limited to, reserves for sales returns and inventory obsolescence, the allowance for doubtful accounts, valuation allowances for deferred tax assets, operational restructuring and related charges, legal and tax contingencies, the determination of fair values related to fresh start accounting, purchase accounting and equity-based compensation, as well as future cash flows and fair values used in the assessment of the realizability of long-lived assets, goodwill and identifiable intangible assets.

Seasonality and Comparability

Our revenues, operating profit and operating cash flows are impacted by the inherent seasonality of our business, which is aligned with the academic calendar. This seasonality affects our working capital requirements and hence our overall financing needs. For example, we typically incur a net cash deficit from all of our activities in the first and fourth fiscal quarters of our new fiscal year which ends on March 31st. In addition, changes in our customers’ ordering patterns may impact the comparison of our results in a quarter with the same quarter of the previous year, specifically in cases where our customers may shift the timing of material orders for a number of reasons, including, but not limited to, changes in academic semester start dates or changes in inventory management practices.

As we continue to migrate our product and service offerings toward hosted digital solutions that are delivered over a period of time, a larger proportion of our consolidated revenue will be recognized ratably over the applicable subscription period, with amounts billed in excess of revenues recognized reflected as deferred revenue. This represents a difference from traditional print products where revenue is typically recognized upon shipment of the materials to our customers.

Consequently, at this time, reported revenues may not be comparable to prior periods as a growing proportion of our revenues are recognized over a period of time. The current portion of deferred revenue, which represents amounts billed in advance to our customers that will be recognized as revenue in subsequent periods as products and services are delivered to customers, was $181.0 million at December 31, 2014 and $110.1 million at March 31, 2014.

New Accounting Standards and Accounting Changes

In August 2014, the Financial Accounting Standards Board ("FASB") issued a new standard establishing management’s responsibility to evaluate, at each annual and interim period, whether there is substantial doubt about an organization’s ability to continue as a going concern within one year from the date financial statements are issued, and to provide related footnote disclosure. The new standard is effective for us for the fiscal year beginning April 1, 2016, with early adoption permitted. We are evaluating the impact that this new standard will have on disclosures within our Financial Statements.

In June 2014, the FASB issued an update to its authoritative guidance on share-based compensation to address diversity in practice in accounting for awards linked to performance targets and how to account for share-based payment awards that require a specific performance target to be achieved for employees to become eligible to vest in the awards. The amendments require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. A reporting entity should apply existing guidance as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target would not be reflected in

estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the service has already been rendered. If it becomes probable that the performance target will be achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We are evaluating the impact that this update will have on our consolidated financial position, results of operations and cash flows.

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In May 2014, the FASB issued an update to add Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The authoritative guidance provides 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 through the application of the following steps:

• Step 1: Identify the contract(s) with a customer.

• Step 2: Identify the performance obligations in the contract. • Step 3: Determine the transaction price.

• Step 4: Allocate the transaction price to the performance obligations in the contract. • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The amendments in this update are to be applied on a retrospective basis, utilizing one of two different alternatives. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early application is permitted, with certain limitations. We are evaluating the impact of this update on our financial statements.

In July 2013, the FASB issued a new standard for presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The new standard was effective for us for the fiscal year beginning April 1, 2014. The adoption of this guidance did not have a material impact on our financial statements.

2. REORGANIZATION ITEMS, NET

Reorganization items, net consists of the following:

(in millions)

2014

2013

2014

2013

Professional fees $ - $ (33.2) $ (0.5) $ (81.1)

Accounts payable settlement gains - 0.5 - 0.5 Provision for estimated allowed claims - (49.4) - (52.1)

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- 8 - 3. EQUITY-BASED COMPENSATION

The following table summarizes the Company’s equity-based compensation expense for the three and nine months ended December 31, 2014 and 2013:

(in millions) Three Months Ended December 31, 2014 Three Months Ended December 31, 2013 Nine Months Ended December 31, 2014 Nine Months Ended December 31, 2013

Incentive stock options $ 0.9 $ - $ 2.7 $

-Restricted stock units 1.3 - 3.7

-Stock-based compensation expense $ 2.2 $ - $ 6.4 $

-As of December 31, 2014, there was $36.8 million of total unrecognized compensation cost related to equity-based awards expected to be recognized over a weighted-average vesting period of 4.0 years.

On December 17, 2014, we completed a leveraged recapitalization pursuant to which we paid a one-time cash dividend of approximately $3.85 per share to common shareholders of record on December 16, 2014. Upon distribution of a

qualifying dividend by the Company, the 2014 Cengage Learning Equity Incentive Plan (the “2014 Equity Incentive Plan”) provides all holders of restricted stock units (“RSUs”) the rights to dividend equivalents payable in cash subject to the vesting terms of the underlying RSUs awarded. Accordingly, the Company accrued a $5.6 million dividend equivalent payable to holders of RSUs as of the date of record. The dividend equivalents were recorded as a reduction of additional paid-in capital as the Company did not have retained earnings at the time of the dividend and the related liability was included in other non-current liabilities as of December 31, 2014. The 2014 Equity Incentive Plan also required the Company to proportionally adjust the terms of the incentive stock options (“ISOs”) outstanding on the dividend payment date through a combination of a reduction in exercise price and an increase in the number of awards outstanding. The provision is intended to provide equitable treatment of outstanding ISOs and preserve the value of such awards as a result of the one-time cash dividend. In accordance with the provision, the exercise prices of outstanding ISOs were reduced by multiplying the exercise price by a factor representing the ratio of the fair value of our common stock immediately after the recapitalization, to the fair value of our common stock immediately prior to the recapitalization. The number of outstanding ISOs was increased by multiplying the number of awards by a factor representing the ratio of the fair value of our common stock immediately prior to the recapitalization, to the fair value of our common stock immediately after the recapitalization. This adjustment did not result in additional equity-based compensation expense in the period as the fair value of the outstanding ISOs immediately following the payment of the one-time cash dividend was equal to the fair value immediately prior to such distribution and the equitable treatment afforded the ISOs was established as a term of the awards when granted. A summary of the stock options outstanding and the activity for the nine months ended December 31, 2014, including the proportional adjustments, is presented in the table below:

Incentive Stock Options

Weighted Average Exercise Price

Outstanding as of March 31, 2014 1,971,149 $ 25.00

Granted 221,925 25.00

Exercised -

-Forfeitures and cancellations -

-Proportional adjustment due to recapitalization 328,279

-Outstanding as of December 31, 2014 2,521,353 21.74

Similar to the proportional adjustment to the outstanding ISOs, as required by the 2014 Equity Incentive Plan, the maximum number of shares issuable under the plan was proportionally adjusted to reflect the one-time cash dividend. As a result, the remaining shares of common stock available for issuance under the 2014 Equity Incentive Plan increased from 990,390 to 1,138,643 immediately after the recapitalization.

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4. RESTRICTED CASH

As of December 31, 2014, we held $35.3 million of cash in restricted escrow accounts classified as current assets. The uses of funds in these accounts are restricted for settlement of outstanding unresolved Chapter 11 claims and unpaid bankruptcy-related professional fees. During the three and nine months ended December 31, 2014, we withdrew $1.3 million and $80.4 million of funds, respectively, from restricted cash. Of these amounts, $1.3 million and $72.5 million, respectively, was paid to settle claims and bankruptcy-related professional fees. The remainder was a refund of cash used as collateral which was no longer required after our emergence from Chapter 11 proceedings.

5. INVENTORIES

Inventories consisted of the following:

Successor

(in millions) 2014 2014

Raw materials $ 2.1 $ 1.7

Work-in-progress - 0.1

Finished goods, net 356.7 607.3

Inventories $ 358.8 $ 609.1

In connection with fresh start accounting, finished goods inventory was adjusted to its fair value based on our estimate of its net realizable value. The adjustment resulted in a $440.3 million step-up to the carrying value of finished goods as of March 31, 2014. As of December 31, 2014, $198.1 million of the step-up remains and is included in the carrying value of the finished goods inventory balance.

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- 10 - 6. OTHER BALANCE SHEET ACCOUNTS

The sales returns reserve and allowance for doubtful accounts were as follows: Successor

(in millions) 2014 2014

Sales returns reserve $ 195.9 $ 110.6

Allowance for doubtful accounts 4.4

-The provision for estimated sales returns is reflected as a reduction of revenue during the period in which the revenue is recognized. The increase in the sales returns reserve from March 31, 2014 reflects the seasonality of our business, as a higher proportion of our annual revenues is recognized during our fiscal second and third quarters due to sales in advance of the Fall and Spring school semesters.

In connection with fresh start accounting, the allowance for doubtful accounts was eliminated on the Effective Date as the fair value of accounts receivable considered the net realizability of the amounts due.

Accounts payable and accrued expenses consisted of the following:

Successor

(in millions) 2014 2014

Accounts payable $ 68.7 $ 107.6

Accrued interest payable 0.4

-Accrued royalties 154.7 51.3

Accrued bonuses 29.0 59.8

Other accrued expenses 105.7 163.6

358.5

$ $ 382.3

Royalty expense is recorded when revenue from the associated products or services is recognized. Accrued royalties increased from March 31, 2014 due to the seasonality of our business.

As of December 31, 2014 and March 31, 2014, other accrued expenses included bankruptcy-related accruals of

approximately $34.3 million and $97.0 million, respectively, for reinstated pre-petition liabilities at their estimated settlement amounts and bankruptcy-related professional fees. These amounts are expected to be satisfied with cash reserves in escrow accounts classified as restricted cash as of December 31, 2014.

7. LONG-LIVED ASSETS AND GOODWILL

During the three months ended June 30, 2013, we finalized the calculation of the fair values of our identifiable intangible assets and pre-publication costs in connection with step two of a goodwill impairment test on our Domestic reporting unit’s goodwill, which had been estimated during the three months ended March 31, 2013. Based on the final valuations, we reduced the previously estimated goodwill impairment charge that had been recorded in the three months ended March 31, 2013 by $185.4 million, which is reflected in our condensed consolidated statement of operations for the nine months ended December 31, 2013.

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Long-Lived Assets

The Company’s identifiable intangible assets were as follows:

Successor

(in millions) Copyrights

Customer

Relationships Trademarks Total

As of December 31, 2014

Identifiable intangible assets, gross $ 732.7 $ 367.2 $ 230.1 $ 1,330.0 Accumulated amortization (37.7) (18.3) (11.5) (67.5) Identifiable intangible assets, net $ 695.0 $ 348.9 $ 218.6 $ 1,262.5

Successor

(in millions) Copyrights

Customer

Relationships Trademarks Total

As of March 31, 2014

Identifiable intangible assets, gross $ 737.0 $ 369.0 $ 231.0 $ 1,337.0 Accumulated amortization - - - -Identifiable intangible assets, net $ 737.0 $ 369.0 $ 231.0 $ 1,337.0

At December 31, 2014, estimated annual identifiable intangible amortization expense for each of the next five fiscal years is as follows:

(in millions)

Years Ending March 31,

Remainder of fiscal year 2015 $ 22.7

2016 90.7

2017 90.7

2018 90.7

2019 90.7

8. OPERATIONAL RESTRUCTURING CHARGES

During the three months ended March 31, 2013, we initiated a company-wide operational restructuring plan designed to streamline operations under our new management team and optimize our cost structure. In connection with this plan, we recorded an additional $0.3 million of operational restructuring charges during the nine months ended December 31, 2014, within our Domestic segment. These charges were comprised of employee severance and other employee-related costs.

The following provides a summary of the changes in accrued liabilities associated with this program during the nine months ended December 31, 2014:

(in millions)

Severance and Related Costs

Balance as of March 31, 2014 (Successor) $ 6.3

Additions 0.3

Cash payments (4.3)

Balance as of December 31, 2014 (Sucecessor) $ 2.3

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- 12 - 9. DEBT

Our debt, related maturities and interest rates were as follows as of December 31, 2014 and March 31, 2014:

Interest Rate at Successor

(in millions)

Original Maturity

December 31, 2014

March 31, 2014

December 31, 2014

March 31, 2014 Current portion:

Term Loan 2020 7.00% 7.00% $ 20.5 $ 17.5

ABL Revolving Credit Facility 2019 - - -

-Unamortized Term Loan discount (2.0) (1.7)

Non-current portion:

Term Loan 2020 7.00% 7.00% 2,015.6 1,732.5

Unamortized Term Loan discount (8.6) (7.0)

Scheduled principal payments due on our debt as of December 31, 2014 for each of the years ended March 31 are as follows:

Years Ending March 31,

(in millions)

Remainder of

FY 2015 2016 2017 2018 2019 Thereafter Total

5.1

$ $ 20.5 $ 20.5 $ 20.5 $ 20.5 $ 1,949.0 $ 2,036.1

Exit Financing Facilities

Pursuant to the Plan of Reorganization, the Company was authorized to execute exit financing in the form of a senior secured credit facility and an asset based lending (“ABL”) revolving line of credit. The proceeds of the senior secured credit facility were used as a source of funds for distributions to first lien creditors. On March 31, 2014 (the “Effective Date”) Cengage Learning Acquisitions Inc., a wholly-owned subsidiary of the Company, entered into a Senior Secured Term Loan Credit Agreement (“Term Loan”) that provided total aggregate commitments of $1,750 million and an ABL revolving credit facility agreement (“ABL Revolving Credit Facility”) that provided total aggregate commitments of $250 million. See the Company’s 2014 Transition Report for additional information.

Incremental Term Loan

On December 17, 2014, the Company entered into Amendment No. 1 to its Term Loan (“Amendment No. 1”) that provided incremental commitments of $300 million (the “Incremental Term Loan”). The Incremental Term Loan was issued at a discount of 1.0%, or $3.0 million, and the net proceeds were used to fund nearly all of the payment of a one-time $300 million dividend to common shareholders. The Incremental Term Loan is subject to substantially the same terms and conditions, including applicable interest rate and maturity dates, as the existing Term Loan commitments. Amendment No. 1 provided for, among other things, a restricted payment, as defined, of $300 million and to hold the fiscal 2015 mandatory Excess Cash Flow prepayment percentage, as defined, at 25%. The Excess Cash Flow prepayment percentage will revert back to a tiered structure as determined by the Company’s leverage ratio in fiscal year 2016 and thereafter. Concurrent with the amendment to the Term Loan, the Company amended its ABL Revolving Credit Facility to allow for the increase in outstanding indebtedness affected by Amendment No. 1. We accounted for Amendment No. 1 as a modification of our existing indebtedness with each lender in the original Term Loan syndicate.

Senior Secured Term Loan

The Term Loan borrowings, as amended, may be either Eurocurrency Rate Loans or Base Rate Loans at the Company’s discretion. Eurocurrency Rate Loans bear interest at a rate per annum equal to the Adjusted Eurocurrency Rate for such Interest Period plus the Applicable Rate. The Eurocurrency Rate is the greater of (i) 1.0% or (ii) the product of the applicable LIBOR rate and the statutory reserve percentage. The Applicable Rate for Eurocurrency Rate Loans is 6.0% as of December 31, 2014. A Base Rate Loan bears interest at a rate per annum equal to the Base Rate plus the Applicable Rate. The Base

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Rate is the greatest of (i) the Federal Funds Rate plus 0.5%, (ii) the Prime Rate, or (iii) the Adjusted Eurocurrency Rate plus 1.0%. The Applicable Rate for Base Rate Loans is 5.0%. As of the December 31, 2014, the Company elected to carry the Term Loans as Eurocurrency Rate loans with an effective interest rate of 7.0%.

The Term Loan, as amended, matures on the sixth anniversary of the Effective Date, or March 31, 2020. The Company is required to repay 0.25% of the original Term Loan principal amount and the Incremental Term Loan on the last business day of each quarter. In the three and nine months ended December 31, 2014, the Company made $5.1 million and $13.9 million, respectively, of scheduled quarterly principal payments in accordance with provisions of the amended Term Loan. ABL Revolving Credit Facility

Borrowings under the ABL Revolving Credit Facility, as amended, are available for working capital purposes, capital expenditures, permitted acquisitions and general corporate purposes. The availability of credit under the ABL Revolving Credit Facility is limited by reference to a monthly borrowing base calculation (the “Borrowing Base”) which equals the sum of (i) 65% of eligible receivables, plus (ii) 85% of orderly liquidation value of eligible inventory, plus (iii) 100% of eligible cash not to exceed $35.0 million at any time, less (iv) certain reserves, as defined in the agreement. As of December 31, 2014, the ABL Revolving Credit Facility had no outstanding borrowings and $6.2 million in issued and outstanding letters of credit. The Company’s available Borrowing Base at December 31, 2014, which is based on the balance sheet at November 30, 2014, was $150.9 million, net of letters of credit.

The Company paid an unused commitment fee of 0.50% for the three and nine months ended December 31, 2014. Going forward, the unused commitment fee will range between 0.375% and 0.50%, based upon the average facility usage for the most recently ended fiscal quarter. Outstanding letters of credit are also subject to a quarterly letter of credit

participation fee which is 1.75% for the quarter ended December 31, 2014, and will vary between 1.75% and 2.25%, depending on the average daily availability, as defined. For the three and nine months ended December 31, 2014, the Company incurred approximately $0.3 million and $0.9 million of commitment fees and less than $0.1 million of letter of credit participation fees, respectively.

10. EQUITY

On December 8, 2014, the Company’s Board of Directors authorized management to execute a leveraged

recapitalization in which the Company would enter into incremental commitments under the existing term loan facility of $300 million and use the proceeds plus balance sheet cash to pay a one-time cash dividend of up to $350 million. The Company closed the incremental term loan financing on December 17, 2014 and declared an aggregate $300 million dividend payable to all common shareholders of record at the close of business on December 16, 2014 (the “Dividend Record Date”), which was subsequently paid on December 30, 2014. Based on the 77,999,981 shares of common stock outstanding on the Dividend Record Date, the dividend payment was approximately $3.85 per share. The dividend reduced additional paid-in capital as the Company did not have retained earnings at the time of the dividend. With the exception of this one-time cash dividend the Company has not historically declared any cash dividends and currently has no plans to pay additional cash dividends in the future.

11. INCOME TAXES

The benefit from income taxes was $21.5 million and $2.8 million for the three months ended December 31, 2014 and 2013, respectively. The difference between the effective income tax rate and the United Stated Federal statutory rate for the three months ended December 31, 2013 is primarily attributable to forecasted losses in jurisdictions in which we operate for which no tax benefits were recognized and the impact of nondeductible bankruptcy-related costs. The benefit from income taxes was $52.3 million and $7.7 million for the nine months ended December 31, 2014 and 2013, respectively. We recorded a benefit from income taxes in the nine months ended December 31, 2013 despite having pre-tax income due to an

adjustment to reduce our previously recorded goodwill impairment charge which represented a permanent tax difference for which income taxes were not provided.

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- 14 - 12. FAIR VALUE MEASUREMENTS

Recurring Measurements

As of December 31, 2014 and March 31, 2014, we had no assets and liabilities measured at fair value on a recurring basis.

Non-Recurring Measurements

Our non-financial assets and liabilities, which include goodwill, intangible assets, property and equipment and various liabilities, are not required to be measured at fair value on a recurring basis. However, if an impairment test is required, we evaluate the non-financial asset and liabilities for impairment. If impairment is determined to have occurred, the asset or liability is required to be recorded at its estimated fair value.

Other Fair Value Disclosures

In addition to fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require disclosures regarding the fair value of all of the Company’s financial instruments. In connection with our adoption of fresh start accounting, the assets and liabilities of the Successor entity were recorded at their estimated fair values on the Effective Date. Accordingly, the carrying value of our long-term debt as of March 31, 2014 is equivalent to its fair value. The carrying value and estimated fair value of our long-term debt is as follows:

Successor

(in millions)

Carrying Amount

Fair Value

Carrying Amount

Fair Value

Term Loan (1) $ 2,025.5 $ 1,964.7 $ 1,741.3 $ 1,741.3

December 31, 2014 March 31, 2014

(1)

The carrying amount for the Term Loan, which includes the Incremental Term Loan, is presented net of the unamortized original issue discount of $10.6 million and $8.75 million as of December 31, 2014 and March 31, 2014, respectively.

The estimated fair value of our debt is based on information from a pricing service or broker quotes and may not

represent prices on which such debt may be transacted. Therefore, the debt is classified as Level 3 in the fair value hierarchy. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses

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13. SUPPLEMENTAL CASH FLOW INFORMATION

Details of “Changes in operating assets and liabilities, net of acquisitions” were:

(in millions)

Nine Months Ended December 31, 2014

Accounts receivable, net $ (30.6) $ (28.9)

Inventories(1) 248.2 13.8

Prepaid expenses and other current assets (3.9) (7.2)

Author advances, net (10.5) (8.7)

Accounts payable and accrued expenses 50.7 118.3

Accrued interest payable 0.4 37.5

Deferred revenue 83.0 34.8

Income taxes payable 14.0 (19.2)

Other, net (2.8) (11.5)

348.5

$ $ 128.9

(1)

The change in inventories during the nine months ended December 31, 2014 included a $242.3 million non-cash flow-through of the inventory step-up recorded on the Effective Date resulting from the adoption of fresh start accounting.

Cash paid for interest and taxes was:

(in millions)

Net cash interest paid $ 94.9 $ 77.7

Income taxes, net of refunds (2.4) 17.7

During the nine months ended December 31, 2014, we had $12.3 million of investing cash flows related to payments for acquisitions of businesses and investments in equity and cost method investees, which included payments for the acquisition of the remaining equity interests in National Geographic Society’s School Publishing Unit of $6.5 million.

14. RELATED PARTY TRANSACTIONS

Due to related party relationships, it is possible that the terms of the following transactions are not the same as those that would result from transactions among wholly unrelated parties.

In the past, we, our Predecessor Sponsors, entities controlled by our Predecessor Sponsors and our affiliates acquired our outstanding debt, in privately negotiated or open market transactions, through the optional redemption and/or defeasance provisions of the applicable indenture, by tender or exchange offer or otherwise.

Transactions with our Predecessor Sponsors

We were party to advisory fee agreements with our Predecessor Sponsors (together, the “Predecessor Advisory Fee Agreements”). Under these Predecessor Advisory Fee Agreements, we were obligated to pay an aggregate annual fee of $10.7 million, payable quarterly in advance on the first day of each quarter, in consideration for services to be provided. The

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Operations. We were also obligated to pay associated out-of-pocket expenses incurred by our Predecessor Sponsors. On March 31, 2014, the Advisory Fee Agreements were terminated in connection with our emergence from Chapter 11 bankruptcy and the effect of our Plan.

Our Predecessor Sponsors informed us that, during the year ended June 30, 2013, funds advised by Apax purchased a substantial amount of our outstanding indebtedness through open market transactions and that a significant majority of such purchases consisted of Predecessor’s first lien debt.

The following is a summary of our activity and balances with our Predecessor Sponsors, including interest expense and interest payable on debt purchased:

(in millions)

2013

Expenses $ 2.7 $ 31.8

Predecessor

On the Effective Date, the Predecessor Advisory Fee Agreements were terminated. Other Related Party Agreements

We have a master services agreement currently in place with a former affiliate of the Predecessor, the terms of which were agreed upon at the time the Predecessor and the former affiliate were related parties. Under the master services agreement, we are to provide the former affiliate with various services including those relating to business and technology, content, customers and operations, management, fulfillment services, and business information support. The former affiliate provides us with certain real estate services. The Company’s total revenues from the master services agreement were $21.9 million and $23.8 million for the nine months ended December 31, 2014 and 2013, respectively, and $5.4 million and $5.8 million for the three months ended December 31, 2014 and 2013, respectively. Expenses incurred under the agreement were not material to any of the periods presented. Outstanding receivables and payables with the former affiliate as of December 31, 2014 and March 31, 2014 were not material.

15. COMMITMENTS AND CONTINGENCIES Claims, Disputes and Legal and Regulatory Actions

From time to time, we may become involved in various claims, disputes and legal or regulatory proceedings that arise in the ordinary course of business and are related to contractual and other obligations. We assess our potential contingent and other liabilities by analyzing our claims, disputes and legal and regulatory matters using available information, and develop our views on estimated losses in consultation with our legal and other advisors. We determine whether a loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. If the contingency is not probable or cannot be reasonably estimated, disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss may have been incurred.

Adverse developments relating to claims, disputes and legal and regulatory proceeding in which we are or become involved could cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual. Should any of these matters result in a final adverse judgment, settlement or other final resolution involving material amounts, it could have a material adverse effect on our financial position, results of operations and cash flows.

In October 2012, one of our vendors provided notice of a claim for amounts it asserts is owed under a contract with us. The vendor filed a proof of claim in the Chapter 11 proceedings in the amount of $235.4 million.

In addition, the Company has identified potential exposures related to allegations made by photographers for breach of contracts and/or infringement of copyrights. In conjunction with the Chapter 11 filing and the claims reconciliation process,

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we have received a total of $15.5 million in proof of claims alleging that we exceeded the print run limitation or other restrictions in licenses granted to us to reproduce photographs in our products.

The claims resolution process for the above matters may take considerable time to complete. In addition to the related exposure for such matters, we may identify other exposures for liabilities pertaining to services and goods received by the Predecessor prior to the petition date. Any probable incremental losses related to existing matters or probable losses related to currently unidentified matters would be recorded in the Successor financial statements.

Prior to the consummation of the Plan, we recognized a provision for estimated allowed claims related to the items discussed above, as well as certain known potential settlement claim amounts and estimated damages for rejection of executory contracts totaling $67.6 million in the pre-emergence consolidated balance sheet. The Plan of Reorganization established a fixed settlement value for each of the various classes of pre-petition claims, including those for which the $67.6 million provision had been established on the Predecessor’s pre-emergence balance sheet. As such, our obligations arising from these claims have been reduced as a result of their inclusion in the settlement values for each of these classes as recorded on the Effective Date.

Based on a review of the information available at this time, we do not expect the total cost of resolving all other current claims, disputes and legal and regulatory proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Warranties

Under our standard terms and conditions of sale, we warrant ownership of and/or licensing rights to our products and may provide certain other warranties and indemnifications. We are not aware of any instances that would result in any material payments being made as a result of these warranties and indemnifications, and therefore, no reserve has been recorded in the Financial Statements.

16. SEGMENT INFORMATION

We evaluate the performance of our consolidated operating group as one business unit. However, since our domestic and international operating segments have dissimilar long-term economic characteristics, we present two reportable business segments:

Domestic - In the United States, Cengage Learning produces a variety of print and digital educational solutions and associated services for the two- and four-year college, research, career, school, and professional markets.

International - Cengage Learning distributes educational solutions across all major academic disciplines, provides English-language teaching products and adapts United States resources for use in multiple countries and territories around the world.

The accounting policies applied by the segments are the same as those applied by the Company. All transactions between reportable segments are eliminated upon consolidation. We disclose information about our reportable segments based on the measures we use in assessing the performance of those reportable segments. We use Adjusted Revenues which is defined as revenues before the impact of the deferred revenue reduction recorded on the Effective Date in connection with our adoption of fresh start accounting. We use Adjusted EBITDA and Adjusted EBITDA less Capital Expenditures to measure the operating performance of our segments because we believe that these measures provide a meaningful basis for reviewing the results of our operations by eliminating the effects of financing and investing decisions, as well as excluding the impact of activities not related to our ongoing operating business. We use Post-Plate Adjusted EBITDA as a means to benchmark against our industry peers. Adjusted EBITDA is defined as Net income (loss) before: income (loss) from discontinued operations, net of tax; equity income (losses) of affiliates, net of taxes; benefit from (provision for) income taxes; reorganization items, net; interest expense, net; mark-to-market of derivative instruments; gain on early extinguishment of debt, net; gain on sale of businesses and other divestitures, net; other (income) expense, net; amortization and impairment of identifiable intangible assets; impairment of goodwill; depreciation; operational restructuring charges; the amortization of

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publication costs (or “Plate”). Adjusted EBITDA less Capital Expenditures reflects additions to Plate and additions to property, plant and equipment and capitalized software for internal use.

We include equity-based compensation, fees paid under Predecessor Advisory Fee Agreements and other corporate-related expenses, such as fees paid to advisors in connection with the review and assessment of our capital structure, in a reporting line item referred to as “Corporate and other.”

Select financial information for our segments is as follows:

Successor

Three Months Ended December 31, 2014 (in millions) Adjusted Revenues(1) Adjusted EBITDA

Post-Plate Adjusted EBITDA

Adjusted EBITDA less Capital Expenditures

Domestic $ 314.5 $ 99.4 $ 67.6 $ 52.3 International 64.1 11.0 7.5 7.1 Segments total 378.6 110.4 75.1 59.4 Corporate and other - (5.2) (5.2) (5.2) Total $ 378.6 $ 105.2 $ 69.9 $ 54.2

Predecessor

Three Months Ended December 31, 2013 (in millions) Adjusted Revenues(1) Adjusted EBITDA

Domestic $ 347.9 $ 132.1 $ 99.2 $ 84.5 International 66.7 11.7 7.9 7.4 Segments total 414.6 143.8 107.1 91.9 Corporate and other - - - Total $ 414.6 $ 143.8 $ 107.1 $ 91.9

Successor

Nine Months Ended December 31, 2014 (in millions) Adjusted Revenues(1) Adjusted EBITDA

Domestic $ 1,158.3 $ 448.8 $ 351.0 $ 291.3 International 210.2 42.1 31.1 29.5 Segments total 1,368.5 490.9 382.1 320.8 Corporate and other - (10.4) (10.4) (10.4) Total $ 1,368.5 $ 480.5 $ 371.7 $ 310.4

Predecessor

Nine Months Ended December 31, 2013 (in millions) Adjusted Revenues(1) Adjusted EBITDA

Domestic $ 1,209.6 $ 527.4 $ 428.7 $ 385.1 International 196.5 29.8 16.9 15.0 Segments total 1,406.1 557.2 445.6 400.1 Corporate and other - (3.1) (3.1) (3.1) Total $ 1,406.1 $ 554.1 $ 442.5 $ 397.0

(1)

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Segment Adjusted Revenues only include revenues from external customers. Total asset information by segment is not shown because it is not provided to or reviewed by our chief operating decision maker.

The following table reconciles Adjusted Revenues to Revenues per the Condensed Consolidated Statements of Operations:

(in millions) Three Months Ended December 31, 2014 Three Months Ended December 31, 2013 Nine Months Ended December 31, 2014 Nine Months Ended December 31, 2013

Adjusted Revenues $ 378.6 $ 414.6 $ 1,368.5 $ 1,406.1 Impact of fresh start accounting(1) (3.7) - (30.8) - Revenues $ 374.9 $ 414.6 $ 1,337.7 $ 1,406.1

(1)

The add-back of the impact of fresh start accounting includes the reduction in recognition of deferred revenue of $3.7 million and $30.8 million for the three and nine months ended December 31, 2014, respectively.

The following table reconciles Adjusted EBITDA less Capital Expenditures, Post-Plate Adjusted EBITDA, and Adjusted EBITDA to (Loss) income before taxes and equity losses of affiliates per the Condensed Consolidated Statements of

Operations:

(in millions) Three Months Ended December 31, 2014 Three Months Ended December 31, 2013 Nine Months Ended December 31, 2014 Nine Months Ended December 31, 2013

Adjusted EBITDA less Capital Expenditures $ 54.2 $ 91.9 $ 310.4 $ 397.0 Additions to property, equipment and capitalized

software for internal use 15.7 15.2 61.3 45.5 Post-Plate Adjusted EBITDA $ 69.9 $ 107.1 $ 371.7 $ 442.5 Additions to pre-publication costs 35.3 36.7 108.8 111.6 Adjusted EBITDA $ 105.2 $ 143.8 $ 480.5 $ 554.1 Less:

Impact of fresh start accounting(1) (49.6) - (273.2) -Amortization of pre-publication costs (38.9) (39.0) (130.6) (147.2) Restructuring charges 0.7 (1.5) (0.3) (4.8) Depreciation (22.3) (17.4) (65.9) (50.4) Impairment of goodwill - - - 185.4 Amortization of identifiable intangible assets (22.5) (40.4) (67.9) (121.3) Other income (expense), net - 3.1 (0.9) 5.0 Mark-to-market of derivative instruments - - - 12.6 Interest expense, net (33.5) 0.2 (97.5) (178.6) Reorganization items, net - (82.1) (0.5) (132.7) (Loss) income before taxes and equity losses of affiliates $ (60.9) $ (33.3) $ (156.3) $ 122.1

(1)

The add-back of the impact of fresh start accounting includes the flow-through of the inventory step-up of $45.8 million and $242.3 million and reduction in deferred revenue of $3.7 million and $30.8 million for the three and nine months ended December 31, 2014, respectively.

17. SUBSEQUENT EVENTS

There were no material subsequent events identified through February 17, 2015, the date these financial statements were issued.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

- 20 -

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to facilitate an understanding of the results of operations and financial condition of Cengage Learning Holdings II, Inc. and its consolidated subsidiaries. Cengage Learning Holdings II, Inc. (“CL Holdings II, Inc.”), together with its consolidated subsidiaries, is hereinafter collectively referred to as “Cengage Learning,” or the “Successor.” Cengage

Learning Holdings II, Inc. is the successor company to Cengage Learning Holdings II, L.P. (“CL Holdings II, L.P.”), together with its consolidated subsidiaries, collectively referred to as the “Predecessor.” The term “Company” (also referred to as “us,” “we” and “our”) used throughout this discussion collectively refers to Cengage Learning Holdings II, L.P. for the Predecessor periods and Cengage Learning Holdings II, Inc. for the Successor period.

On July 2, 2013, CL Holdings II, L.P. and all of its domestic wholly-owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the Bankruptcy Court for the Eastern District of New York (“Bankruptcy Court”). Our non-U.S. subsidiaries were not part of the bankruptcy filing. On March 13, 2014, the Debtors received confirmation of the Plan of Reorganization from the Bankruptcy Court and emerged from bankruptcy proceedings as of the end of the day on March 31, 2014 (the “Effective Date”). Prior to the Effective Date, the Debtors operated their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 and the orders of the Bankruptcy Court. Our non-U.S. subsidiaries continued to operate in the ordinary course of business during the post-petition period. Prior to July 2, 2013, the Predecessor was controlled by investment funds associated with or designated by Apax Partners, L.P. (“Apax”), together with OMERS Private Equity, Inc., hereinafter collectively referred to as the “Predecessor Sponsors.”

This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes (“Financial Statements”) and our Transition Report for the nine months ended March 31, 2014 (the “2014 Transition Report”). The following discussion and analysis of our financial condition and results of operations may contain forward-looking statements about our business, operations and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and intentions. Our future results and financial condition may differ materially from those we currently anticipate. See “Special Note Regarding Forward-Looking Statements” earlier in this report. In addition, we have presented certain risk factors relevant to the Company’s business operations under the “Risk Factors” section in the 2014 Transition Report. The MD&A includes the following sections:

 Impact of our Adoption of Fresh Start Accounting on our Fiscal 2015 Financial Results

 Seasonality and Comparability

 Change of Fiscal Year End

 December 2014 Leveraged Recapitalization and Dividend Distribution

 Critical Accounting Policies

 Financial Performance

o Executive Overview

o Consolidated Results of Operations

o Segment Operating Results

o Liquidity and Capital Resources

o Summary of Cash Flows

o Reconciliations of Non-GAAP Financial Measures

o New Accounting Standards and Accounting Changes

The discussion in the Financial Performance section of our MD&A begins with an Executive Overview that summarizes our results of operations for the three and nine months ended December 31, 2014 compared to the three and nine months ended December 31, 2013, followed by a more detailed discussion of our Consolidated Results of Operations and Segment Operating Results.

The discussion of our Consolidated Results of Operations includes a comprehensive analysis of our consolidated operating income (loss), with insights into significant changes in the components of our expenses. Our discussion of changes in expenses focuses primarily on changes in the nature of the underlying expenses, and not on the changes in each individual financial statement line item in our Consolidated Statements of Operations. We believe that this provides better insight into the trends impacting our business than changes in individual financial statement line items since certain expenses may be