New Perspective on Major Education

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Rewarding Innovation

• New Perspective on Major Education
• Acquisitions, Investments, and IPOs
• Moderator - Mona Westhaver
• President Co-Founder
• Inspiration Software, Inc.
• The leaders in visual thinking and learning

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Walk away with a better understanding of

• How the economy is/might influence buying and
  selling in 2008
• How innovative technologies (interactive
  whiteboards and student response systems) were
  merged to create a better, total solution for an
  emerging market
• The analysts view on the possibilities of
  innovation out of the recent HM
  Riverdeep/Harcourt transaction
• Current trends in MA activities

3
Panelists

• Michael Bijaoui - Managing Director, MESA
• Boutique investment banking firm that serves
  growth companies throughout media and
  entertainment industries
• Chris Curran - Managing Director, Berkery Noyes
• Provide value-added MA advisory services to
  emerging and established leaders in the K-12
  through post-secondary and for-profit education
  markets
• Trace Urdan - Managing Director, Signal Hill
• Trace is a research analyst for Signal Hill which
  provides investment banking services,
  institutional brokerage and equity research for
  small and mid-cap companies and their investors

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YEAR IN REVIEW Rewarding Innovation Perspective
on Major Education Acquisitions, Investments, and
IPOs
MAY 20, 2008
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A YEAR IN REVIEWBROADER TRENDS DRIVING
INVESTMENT/MONETIZATION

• Sustained GDP growth U.S. and overseas
• Growing tax receipts and government spending on
  education
• Consumer spending on education
• Flatwordization

Economy

• Accountability and graduation pressures
• Parents and students exercising discretion as
  consumers of education
• Technology acceptance (hardware, software, social
  networking)
• Business model acceptance (subscription,
  advertising)

Education Market

• Cash-rich financial investors
• Unprecedented availability of debt financing
• US Dollar relative affordability

Financial Markets
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A YEAR IN REVIEWTRANSACTION HIGHLIGHTS

• APAX - Thomson Learning (Cengage)
• Riverdeep Houghton Mifflin and Harcourt
• Pearson Harcourt Assessment
• Pearson eCollege
• K12.com IPO
• Follett CafeScribe
• Blackboard NTI
• eInstruction Interwrite Learning
• Intel Capital - Tutor.com
• Providence Equity Study Island
• Veronis Suhler - Cambium Learning
• Haights Cross (Triumph, Sundance) pending
• Voyager Learning pending
• Bain Capital Bright Horizons
• American Education Little Sprouts, Tampa Day
  School
• CFM Religion Benziger Silver Burdett Ginn
• Ad Venture Interactive Beautyschools.com
• Madrona Venture Teachstreet
• University of Phoenix Insight Schools

Economy
Education Market
Financial Markets
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LOOKING FORWARDWHAT HAS CHANGED?

• Sustained GDP growth U.S. and overseas
• Growing tax receipts and government spending on
  education
• Consumer spending on education
• Flatwordization

Economy

• Accountability and graduation pressures
• Parents students exercising discretion as
  consumers of education
• Technology acceptance (hardware, software, social
  networking)
• Business model acceptance (subscription and
  advertising)

Education Market

• Cash-rich financial investors
• Unprecedented availability of debt financing
• US Dollar relative affordability

Financial Markets
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FUNDAMENTAL VALUATION AND TRANSACTION DRIVERS

• Market Environment
• Current and forecast market growth
• Buyers/investors dynamics strategic and
  financial
• Availability of debt financing

• Strategy Business Model
• Market share upside
• Competition
• Length of sale cycle
• Predictability of revenue
• Resiliency of revenue
• Intellectual property

• Operations
• Strength and depth of management team
• Well managed
• Marginal cost structure
• Ability to scale
• Opportunities for synergies (revenue and cost)

• Financial Information
• Historical and projected revenue growth
• Historical and projected cash flow growth
• Capital expenditure needs
• Seasonality and working capital changes
• No bad surprise during process

• Not every driver is available
• Flexibility and time as an asset

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MESA OVERVIEW

• Founded in 2003, MESA is one of the nations
  leading independent investment banks specializing
  in media entertainment
• Exclusively focused on assisting early stage and
  middle market companies achieve their growth and
  transactional objectives
• Private placement agent, buy-side and sell-side
  representation, and strategic consulting services
• Transactions range from private placements to
  500 million acquisitions and divestitures
• MESAs partners have extensive expertise across
  the media industry, an expansive network of
  industry relationships, and the technical skills
  required to execute complex financial
  transactions
• Key areas of expertise and focus include

• Media Services
• Business Media
• Film
• Animation

• Digital Media
• Education
• Publishing Information
• Music

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MESA 85 FIFTH AVENUE, SIXTH FLOOR NEW YORK, NY
10003 212 792 3950 M.E.S.A. Securities, Inc.
is a registered broker dealer with FINRA
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SIIA Ed Tech Industry Summit Houghton Mifflin
Harcourt Innovation or Monopolization?May 20,
2008
Trace A. Urdan, 415-315-1661, turdan_at_signalhill.co
m
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The Transactions

• December 2006 Riverdeep plc acquired Houghton
  Mifflin to create Houghton Mifflin Riverdeep
  Group PLC. Price is 3.4 billion which amounts to
  3.3x sales and approximately 12-13x EBITDA.
• December 2007 HMR announces purchase of
  Harcourt K-12 publishing assets for 4.0 billion,
  including 3.7 billion in cash and 300 million
  in cash or 2.7x sales.

HMH Today
K-12 Curriculum Content Sales

• HMH generates 2.5 billion in annual sales from
• K-12 basal textbook programs
• Instructional technology
• Standards-based assessments for students and
  educators
• Reference works
• Trade for adults and young readers

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Competing Theories

• Innovation
• Riverdeep management understands power and
  efficacy of interactive, digital content.
• Larger scale of enterprise and concentration of
  revenue will allow for greater investment in RD
  and better distribution of digital content.
• Lesser development costs and faster turnaround
  will drive promotion of flexible, digital
  content.
• Brand strength will allow for digital content to
  be presented and taken seriously in the adoption
  process.

• Monopolization
• Riverdeep management ex-investment bankers
  looking at the financial transaction.
• Enormous leverage will restrain capacity for
  innovation as organization focuses on digesting
  and cutting costs.
• Tight margins and high leverage will intensify
  organizational pressure to sell core product
  first.
• Disproportionate size of print units make notion
  of upturning the core less likely rather than
  more likely.

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Relatively Small Piece of the Pie

• Size of industry quite small in relation to 500
  billion spent annually on K-12 education.
• Industry growth also modest and cyclical.

15
Cyclicality of K-12 Curriculum Market
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Industry FocusDelivering return to shareholders
requires improving efficiency
17
ELHI spending lagging overall state expenditure
in near-term
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Conclusion

• Cyclicality and shrinking share of ELHI dollar
  places pressure on basal publishers that leaves
  them more vulnerable than they might initially
  appear.
• Pressure on HMH is likely to cause the firm to
  be most focused on generating cash and creating
  efficiency.
• Consolidation primarily financial.
• Line between basal and other supplemental
  beginning to blur.
• Innovation unlikely to come from vendor side of
  equation, but rising knowledge and competency in
  alternative delivery methods cant hurt.
• Buyer-side demand and spending pressure in other
  sectors of the market more likely to drive
  innovation in basal.

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Important Disclosures

• Analyst Certification
• I, Trace Urdan, hereby certify that all of the
  views expressed in this research report
  accurately reflect my personal views about the
  subject securities or issuers. I also certify
  that no part of my compensation was, is or will
  be directly or indirectly related to the specific
  recommendations or views expressed in this
  research report. Signal Hill does not compensate
  its equity research analysts based on specific
  investment banking transactions. Signal Hill
  Equity research analysts receive compensation
  based on several factors, including overall
  profitability and revenues of the firm, which
  include investment banking revenues.
• Applicable current disclosures for all companies
  covered in this report are available in written
  or electronic format upon request. To request
  copies of applicable current disclosures please
  write to the Signal Hill Capital Group Research
  Department at the following address Signal Hill
  Capital Group Research Department, 300 East
  Lombard Street, Suite 1700, Baltimore MD 21202.
• Disclaimer
• This report has been prepared using sources we
  deem to be reliable but we do not guarantee its
  accuracy and
• it does not purport to be complete. This report
  is published solely for information purposes and
  is not intended to be used as the primary basis
  for making investment decisions, which should
  reflect the investment objectives and financial
  situation of the investor. The opinions expressed
  herein are subject to change without notice. This
  report is not an offer or the solicitation of an
  offer to buy or sell securities. Additional
  information is available upon request.