Houghton Mifflin Harcourt Secures New $650-Million Cash Investment and Recapitalizes Balance Sheet in Historic Restructuring

100% of votes submitted in favor of eliminating approximately 60% of Company’s debt, reducing annual interest expense by more than 75%, strengthening balance sheet and substantially increasing liquidity

Company launches $100-million innovation fund to develop industry-leading technology products and solutions

BOSTON — February 22, 2010 — Houghton Mifflin Harcourt Publishing Company (HMH) today announced that leading institutional investors have committed to invest $650 million of new equity capital in the Company, and that it has reached an historic agreement on a recapitalization that strengthens HMH’s balance sheet, significantly reduces its debt and provides for the substantial new equity investment and greater liquidity for growth. The transaction is expected to be completed on or about March 9.

As a result of the $650-million equity investment combined with the current senior lenders’ conversion of approximately 60% of their secured debt to equity, HMH will have the strongest capital structure in its history and the financial flexibility to continue to build the world’s leading education company. This development, coupled with previous changes in the capital structure, will reduce annual interest by more than 75%.

Barry O’Callaghan, Chief Executive Officer of Houghton Mifflin Harcourt, said, “With this important development, HMH will have successfully completed a comprehensive balance sheet deleveraging that places it on the strongest financial footing in the Company’s history and positions it for continued success. Thanks to the overwhelming support from our investor base, which sees unparalleled value in our underlying business and our future prospects, we now have greater financial flexibility and freedom with a vastly improved capital structure. As a result of their confidence, financial backing and commitment to our future, HMH is extremely well-positioned to maintain and grow our status as the preeminent pre-K–12 publisher leading the transformation of educational solutions. We will be able to realize our full competitive and growth potential and build the value of HMH for all of our stakeholders, including our loyal customers and dedicated employees.”

Michael Muldowney, Chief Financial Officer of Houghton Mifflin Harcourt, said, “We are extremely pleased to have received the overwhelming support from HMH’s stakeholders. Their level of support is truly unique and unprecedented, having obtained 100% of their votes. Upon completion in a few weeks, this transaction represents one of the largest balance sheet restructurings of its kind.”

Highlights of HMH’s financial restructuring include:

• Senior lenders will convert more than $2 billion of secured debt into equity.
• All of HMH’s nearly $2.1 billion of mezzanine level secured debt will be exchanged for equity and warrants to purchase additional equity.
• HMH will receive a $650-million investment of new equity capital from a deep, institutionalized investor base.
• HMH will reduce its total annual interest expense by more than 75%.

John Paulson, President of Paulson & Co., said, “With the new deleveraged capital structure, the Company is even better equipped to continue as the leader in delivering best-in-class educational products and solutions to teachers and students across the globe.”

Todd Boehly, Managing Partner in the Office of the CEO at Guggenheim Partners and a significant stakeholder in HMH said, “Houghton Mifflin Harcourt is set to capitalize on the opportunity to educate children in innovative and thoughtful ways, with its significant tools and education content in partnership with educators and schools across the country and around the world.”

As a part of its strategic business plan, HMH also announced the creation of a $100-million innovation fund to take advantage of its deep technological strength and develop the next generation of educational products and solutions. “This fund will invest in the future of education,” HMH CEO Barry O’Callaghan explained. “Today, schools, teachers, parents, entrepreneurs and even students are thinking about and developing the educational tools, services and businesses of tomorrow. This innovation fund is a first for our industry, providing the capital to identify and incubate the next generation of innovation in education.”

HMH will make use of the investment internally to take advantage of its vast industry resources and heritage of innovation, while also partnering with external sources to positively impact the educational landscape for the greatest number of students. The funds will be available over the next two years for distribution.

HMH’s legal advisor is Paul, Weiss, Rifkind, Wharton & Garrison LLP, and its financial advisors are Perella Weinberg Partners and Goldman Sachs & Co. The lenders were advised by Akin Gump Strauss Hauer & Feld LLP, Houlihan Lokey and Citigroup, Inc.

About Houghton Mifflin Harcourt
Boston-based Houghton Mifflin Harcourt Publishing Company is a global education leader and the world’s largest publisher of educational materials for pre-K–12 schools. The Company publishes a comprehensive set of best-in-class educational solutions, ranging from research-based textbook programs to instructional technology to standards-based assessments for students and educators. The Company also publishes an extensive line of reference works and award-winning literature for adults and young readers. With origins dating back to 1832, Houghton Mifflin Harcourt combines its tradition of excellence with a commitment to innovation. To learn more about Houghton Mifflin Harcourt, visit www.hmhpub.com.