Abril Educação S.A. Parent Company and Consolidated Financial Statements as at December 31, 2012 and Independent Auditor's Report

Transcription

1 Abril Educação S.A. Parent Company and Consolidated Financial Statements as at December 31, 2012 and Independent Auditor's Report

2 ABRIL EDUCAÇÃO S.A. Financial Statements As at December 31, 2012 and Independent Auditor's Report CONTENTS Page Management report 1-10 Balance sheets Statements of operations 13 Statements of changes in equity 14 Statements of cash flow 15 Statements of value added 16 Notes to the financial statements Board of Directors and Board of Executive Officers 80 Independent Auditor's Report 81-82

3 Abril Educação 2012 Management Report Dear Shareholders, We hereby present for your appraisal the Management Report and Financial Statements of Abril Educação S.A. for the fiscal year ended December 31, 2012, accompanied by the independent auditors report on the Company s financial statements, which were prepared in accordance with the accounting practices adopted in Brazil issued by the Accounting Pronouncements Committee (CPCs) and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The information presented herein is consolidated in different manners. The ph Schools and Preparatory Course and the Escolas Técnicas do Brasil (ETB) were acquired in April 2011, and the Maxi Learning System, in October In addition, in 2012 we acquired Escola Satélite in February, and announced the acquisition of the GEO Learning System in June. In November 2012, we acquired Jafar Preparatory Courses for Civil Service Examinations (AlfaCon) and the Red Balloon language school network. The assets arising from these transactions began to be booked in the Company s consolidated financial statements as of their respective acquisition dates, influencing Abril Educação s performance in the comparison between fiscal years 2011 and This Management Report aims to present the performance and main events of Abril Educação S.A. in For further information on the Company s operating and financial performance, as well as on its market, see the Reference Form available on the websites of Abril Educação ( the Brazilian Securities and Exchange Commission - CVM ( or the São Paulo Securities, Commodities and Futures Exchange - BM&FBOVESPA ( Message from the Management In 2012, Abril Educação took important steps in line with its mission to become a leader, a pioneer in technology and a benchmark for quality in Brazil s basic education, preparing students for higher education and the job market, nurturing citizenship and developing programs instilling ethical, moral and leadership values was the first full year after our IPO on the BM&FBOVESPA. Demand for the Company s shares has increased substantially as Abril Educação has become increasingly recognized and has delivered its promises, despite the adverse global economic scenario. In 2012, revenue came to R$883.5 million, 14% up over the R$772.1 million recorded in 2011, while adjusted EBITDA* totaled R$274.6 million, a 26% increase over 2011, accompanied by a margin of 31% in 2012, 3 p.p. above the 28% margin recorded in Adjusted EBITDA includes the R$9.4 million impact from the stock option plan, R$5.3 million of which had no cash effect, and excludes the non-recurring R$20.3 million inventories write-off from previous years. Also in 2012, net income after minority interest amounted to R$100.1 million, an increase of R$51.8 million over the R$48.3 million recorded in The net margin moved up by 5 p.p., from 6% in 2011 to 11% in We completed our leadership team and outlined new processes for the Company in order to meet the governance and transparency standards required from a publicly held company and to prepare the 1

4 Company for the growth we seek in the coming years, in line with the interests and expectations of our shareholders. We improved the performance of the Company s main business lines as we continued to diversify our revenue, mitigating the impact of seasonality on the Publishers business, focusing on acquisitions and initiatives to boost growth in business lines that generate more regular revenue throughout the year. We put efforts towards ensuring that the integration of new operations maintained the growth dynamics and allowed the exchange of good practices among the companies. These initiatives and results are described in detail below: In 2012, it is worth mentioning the remarkable participation of Editora Ática and Editora Scipione in the federal government s National Textbook Program (PNLD), increasing their share of the program from 31.0% to 33.8%, accompanied by a share of 39.3% of annual replacement subjects. We also obtained approval of 100% of the books submitted to the PNLD, even though we submitted a smaller number of collections, as we concentrated our best efforts in our main collections. This represented a delivery of 44.8 million textbooks to 32 million children and youngsters across 109,000 public basic education schools throughout Brazil. We will continue to grow through the production of digital content based on the requirements of the main federal government bids. In the last three years, the number of textbooks sold by our publishers in the private and public market grew at a rate higher than 7% per year. Our Learning Systems we estimate we have posted the highest growth rate among all market players and based on such estimate we believe we reached the leadership of the private market, with growth of 40% in relation to last year. We consolidated the restructuring process of SER through the adoption of Anglo s best operational practices, improving its margin by 14 p.p. We also consolidated our presence in the Northeast, a region with high growth potential, through the acquisition of the GEO Learning System. We consolidated the strength and reputation of the five brands making up our portfolio (Anglo, ph, Maxi, SER and GEO), present in 1,786 private schools, benefiting over 500,000 students. In June, Abril Educação entered into a partnership with Franklin Covey to implement The Leader in Me program in Brazil. Developed by Franklin Covey Co. in the United Stated and based on the renowned book The Seven Habits of Highly Effective People, by Stephen Covey, the program focuses on the concept of leadership, instilling citizenship values and developing skills into students in the first grades of basic education. The program has already been implemented in more than 1,000 schools across ten countries. In Brazil, the program will be offered exclusively by Abril Educação and has already been implemented in 16 schools in the states of São Paulo and Rio de Janeiro, benefiting more than 4,000 basic education students. The Company believes this program will help expand and complement its educational portfolio, increase its revenue with associated schools and add value to schools, helping attract new students. In the technical education segment, we concluded the development of a technical learning system based on our ETB (Escolas Técnicas do Brasil) experience, with 14 technical courses to qualify nurses, security personnel, accountants and electricians, among others, which began to be sold in 2012 and will begin to be delivered in 2013 at more than 50 teaching institutions. 2

5 We also acquired AlfaCon Concursos Públicos, in the city of Cascavel, state of Paraná, which has very high approval rates in civil service examinations all over Brazil among candidates with a high school diploma. This acquisition will strengthen our presence in this segment through distance learning via video-lessons over the Internet, the Escola Satélite platform, as well as through the sale of course material to other schools. Alfacon will be responsible for managing Siga Concursos, our former on-site preparatory system, which will benefit from the experience and effectiveness of AlfaCon. In 2012 and at the beginning of 2013, Abril Educação took two important steps towards becoming one of the largest players in the English teaching market in Brazil: 1) it announced the acquisition of 51% of Red Balloon, a traditional English school network for children and teenagers, with 13,000 students across 34 units, and 2) in February 2013, we signed an agreement for the acquisition of 100% the capital of OMETZ Group, owner of the Wise Up brand, a solid brand in the franchise business, with an innovative teaching methodology and an outstanding sales force. We believe that the foreign language teaching market, especially for the English language, has high growth potential, since Brazil s population has a low proficiency level in relation to other emerging countries. This potential is expected to increase even more due to the 2014 World Cup and 2016 Olympic Games to be hosted in Brazil. Finally, we took important steps towards growing in the digital and multimedia learning markets through the development of two startups: Ei Você Educação Interativa and Edumobi. The former is focused on distance learning services over the Internet, and the latter specializes in the sale of educational content over mobile phones. The acquisition of companies, nevertheless, brings new challenges such as to integrate different corporate cultures, retain talent, promote the exchange of good practices, and increase the profitability of each business. We seek to foster the growth of the companies we acquire by promoting best practices, exchanging experience, evaluating and retaining the talent that each business brings, and sharing supporting and service structures. Our DNA is grounded in the diversity of our various businesses, which allows us to have scalability and synergy. Focusing on talent is essential in our activities, which is why we have established more objective evaluation processes, with meritocracy playing an important role, and have invested in changing the culture of group companies, strongly encouraging entrepreneurship and hierarchy of ideas as opposed to hierarchy of positions. We have implemented a stock option program, with the delivery of the first lots to executives of the first three levels scheduled for the beginning of Our aim is to keep these professional in line with our strategy, culture and with our shareholders interest. Challenges for 2013 If in 2012 our growth was driven mostly by acquisitions and the development of new business fronts, which helped diversify revenue sources and, consequently, reduce risks and in 2013 we will focus even more on the exploration of synergies between existing businesses, without losing sight of the organic growth of our businesses and the expansion of operational profitability We will continue to lookout for acquisitions to consolidate our presence in educational segments in which we are not yet leaders - including language learning and presence in quality schools in relevant regions of Brazil, as we believe that experience in managing model schools, with solid academic results, is 3

6 strategic in order to obtain the necessary credentials to market our solutions to more schools across the country. Following the acquisition of Red Balloon and the agreement for the acquisition of 100% of Wise Up, we are seeking to expand our share of the language learning market through the geographic expansion of our business - by increasing the franchise network, offering franchises to associated partner schools or offering courses directly to students already enrolled in other initiatives of Abril Educação. Education is the springboard for Brazil s development - it protects us from major oscillations in the economic scenario. Government investments tend to increase with the adoption of the new National Education Plan, which estimates the allocation of around 10% of Gross Domestic Product (GDP) to the area by We are Brazil s largest basic education company in terms of revenue, content production and services. Additionally, the scenario is favorable for the fulfillment of our mission of integrating quality assets and sharing best practices, with a focus on gauging results and improving education in the country. (*) ADJUSTED EBITDA: Pursuant to CVM Instruction 527/12, EBITDA is defined as Earnings before Interest, Taxes (Income and Social Contribution Taxes), Depreciation and Amortization. In this context, in accordance with this Instruction, EBITDA totaled R$182.2 million in 2011 and R$223.6 million in Adjusted EBITDA is calculated based on operating income including amounts related to depreciation and amortization, as well as the amortization of editorial investments (R$30.7 million in 2012 and R$36 million in 2011). Pursuant to CVM Instruction 527/12, the company may opt to report EBITDA excluding the net amounts related to discontinued operations, as per Technical Pronouncement CPC 31 - Non-Current Assets Held for Sale and Discontinued Operations, and adjusted for other items that contribute to information on the potential gross cash generation. 4

7 2012 Financial Results Analysis Net Revenue Consolidated net revenue totaled R$883.5 million in 2012, up 14% over 2011, reflecting the solid performance in virtually all business lines in the period. It is also worth highlighting the organic contribution of our existing business, which jointly totaled R$863.2 million, up 10% over 2011 (R$787.8 million). The acquisitions carried out during 2012 (Escola Satélite, GEO, Red Balloon and Alfacon) added R$20.3 million in revenue in We continued to diversify our revenue, mitigating the impact of seasonality on the Publishers' business, focusing on acquisitions and initiatives with growth potential in business lines that generate more regular revenue throughout the year. Learning Systems % 2011 R$ million Learning Systems % 2012 R$ million Language 3.3 0% Holding 1.1 0% Schools and Prep. Courses % Publishers % Complementary 5.3 1% Schools and Prep. Courses % Publishers % *Eliminations (0.2) *Eliminations (8.4) Note: The above data excludes eliminations between the companies, e.g. SER s sales to GEO, Anglo s sales to ph and SER s sales to ETB. Total revenue from Learning Systems was R$211.9 million in 2012, up 40% over This amount includes revenue from the GEO (R$11.8 million) and Maxi (R$19.2 million) systems. Excluding the effects of these acquisitions, the learning systems expanded by 25% on a comparison basis, reflecting the, also, 25% upturn in Anglo and SER. The company s Learning Systems ended the year with 529,000 students enrolled in 1,786 schools, an increase of 14% compared to the 462,000 students enrolled in December The total number of students includes the 12,000 students enrolled in the ph system, launched at the end of 2011, as well as the 76,000 students enrolled in public schools. Anglo: in 2012, net revenue from the Anglo learning system, including revenue from the ph system, totaled R$141.4 million, up 25% from R$113.4 million in 2011, driven by the 16% increase in the number of students, from 257,000 in 2011 to 298,100 in 2012 and the 9% increase in net revenue per student. SER: net revenue totaled R$39.5 million in 2012, up 5% from the R$37.5 million registered in Since 2011, we have altered SER's sales cycle, anticipating part of the 1Q revenue to 4Q. As a result, 5

8 revenue recognition in 2011 was relatively higher than in 2012, given that it included a complete year plus the anticipated portion from 1Q12. When we adjust the two-years to a comparable basis, there was a 25% increase, resulting from a 16% increase in the number of students (from 119,700 in 2011 to 138,500 in 2012) and the 9% increase in net revenue per student during the period. Maxi and GEO: the systems, acquired in October 2011 and June 2012, respectively, added total revenue of R$19.2 million and R$11.8 million, respectively, in Number of Studants - ('000) Number of Schools % +14% % +4% , % +33% 1, % +19% 1, % % , % 1, % 1, Learning Systems Schools and Prep. Courses Learning Systems Schools and Prep. Courses The Publishers ended 2012 with net revenue of R$506.2 million, in line with Including the effect of revenue from books sold originated by the Anglo Learning System to the National School Library Program (PNBE) and by Abril Educação to the Learning to Read at the Right Age Program (PAIC), revenue totaled R$510.5 million, up 1% from It is important to point out that 2013 PNLD revenue (R$258.1 million) was fully booked in 2012, while part of 2012 PNLD revenue, totaling R$27.0 million, was transferred to 1Q12. For the year, on a comparable basis, excluding the transfer of 2012 PLND revenue to 1Q12, the Publishers revenue totaled R$483.0 million, down 9% from 2011 adjusted revenue (R$533.0 million), compatible with the smaller PNLD program sales cycle in 2012 Elementary School (1 st to 5 th grade) compared to 2011, whose PNLD program was High School (1 st to 3 rd year). Below is a timeline of the Publishers corporate revenue, which demonstrates the seasonality of the business: Q 2Q 3Q 4Q Year 6

9 In 2012, revenue from Schools and Preparatory Courses totaled R$164.1 million up 44% over 2011, when revenue of the ph Group and ETB was included as of April. Jointly, the Schools and Preparatory Courses (Anglo+Siga, ph and ETB) ended 2012 with 21,200 students enrolled in 19 units, 4% more than in December Anglo: In 2012, net revenue totaled R$50.7 million, in line with the R$50.6 million recorded in 2011, due to the negative impacts of the higher discounts granted at the beginning of the year for extensive courses, which were partially offset by the strong enrollment in intensive courses, concentrated at the end of the year. However, it should be noted that the strong enrollment in intensive courses did not offset the higher average ticket of extensive courses. ph Group: in 2012, net revenue totaled R$107.5 million, up 79% from 2011, due to higher enrollment in the ph schools (+10%), whose average ticket is higher than that of the ph preparatory course. It is worth mentioning that the ph Group was acquired in April 2011, so the comparisons between periods are significantly affected by having full accounting in the 2012 periods and partial accounting in ETB Escolas Técnicas do Brasil: net revenue totaled R$6.0 million in 2012, up 67% from R$3.6 million in It is worth noting that ETB was acquired in April 2011; therefore, on an comparable basis, net revenue was up by 19%, from R$3.6 million in 2011 to R$4.3 million in Annual revenue includes R$0.6 million from the Technical Learning System. Cost of Goods Sold (COGS) and Gross Profit Abril Educação recorded consolidated COGS of R$316.6 million in 2012, up 6% over 2011, but lower than the annual revenue upturn of 14%. This figure excludes the non-recurring R$20.3 million inventories write-off from previous years in 2Q12, as explained in our Earnings Release. Excluding this amount, COGS dropped by 1% in 2012, leading to a gross margin improvement of 5 p.p., from 61% to 66%. The Publishers recorded a gross margin expansion from 58% to 60% in 2012 and a R$10.2 million increase in gross profit. The Learning Systems jointly posted gross profit of R$162.1 million, R$45.6 million more than in 2011, including the additional contributions of the acquisitions of Maxi and GEO in 2012 (+R$18.9 million). Thus Learning Systems gross margin stood at 76.5% in Finally, in 2012, the Schools and Preparatory Courses business recorded gross profit of R$98.0 million, up 51% from 2011, with a gross margin of 59.7%. Selling, General and Administrative Expenses SG&A expenses increased by 18%, or R$57.3 million over 2011, from R$323.3 million to R$380.6 million, broken down as follows: (a) an improvement of R$4.3 million related to the stock option plan linked to the IPO; (b) R$1.9 million from the amortization of goodwill, with no cash impact; (c) R$26.3 million from the pro-forma impact of the acquired businesses (ph, ETB, Maxi, Escola Satélite, Alfacon and Red Balloon); (d) R$14.3 million (+5%) from organic growth (Publishers, Anglo Learning System and Preparatory Course-, SER, Maxi, ph and ETB); (e) R$4.8 million from expenses with the new business fronts, which had not yet generated revenue; (f) R$14.3 million from increased expenses with corporate management, related to the expenses of the Abril Educação holding company and expenses incurred by the Publishers and Learning Systems related to typical holding services but allocated to the units. 7

10 EBITDA* and Net Income Adjusted consolidated EBITDA stood at R$254.3 million in 2012, up 17% from 2011 (R$218.2 million), despite the non-recurring R$20.3 million COGS adjustment in 2Q12. Excluding this impact, EBITDA totaled R$274.6 million, up 26% from 2011, accompanied by a margin of 31%, 3 p.p. higher than the 28% reported in Organic EBITDA of the various business lines totaled R$296.5 million in 2012, up R$46.3 million, or 18% upturn, from the R$250.2 million registered in This increase mainly reflects the contributions from Publishers (+R$ 25.5 million); Anglo, SER and Maxi (+R$21.2 million); and ph (+R$0.5 million), which more than offsetting ETB's decline (-R$0.9 million). It is worth noting that this figure excludes expenses from the construction of the holding company and from the new business initiatives, as well as the non-recurring events in The contribution of the acquired businesses to 2012 EBITDA (pro-forma effect of Maxi, ETB, ph, GEO, Escola Satélite Alfacon and Red Balloon) was R$22.3 million. The Company ended 2012 with net income, after minority interest, of R$100.1 million, up R$51.8 million from the R$48.3 million reported in The posted net income considers the impact of the write-off of inventories from previous years amounting to R$13.4 million. If this is excluded, net income in 2012 would have reached R$113.5 million, up 135% over Net income attributed to minority shareholders totaled R$98.1 million, up 106% from R$47.7 million in This performance may be attributed to improvements in: (i) operating income, which increased from R$150.8 million in 2011 to R$186.3 million in 2012; and (ii) the financial result, which went from -R$61.5 million to -R$ 33.6 million in Dividends Board of Directors showed favorable to the distribution of R$ 23.8 million in dividends, equivalent to 25% of the year-end net income, after a 5% legal reserve constitution. The proposed distribution of the 2012 profit will be submitted to the shareholder s approval at the Annual General Meeting to be held in April Investments Based on the cash flow statement, Abril Educação s consolidated investments for the full year 2012 were related to the: Acquisition of Escola Satélite, GEO Learning System, Alfacon and Red Balloon, net of cash acquired (R$53.2 million); Annual principal debt payment of R$85.5 million, associated with the financed parts of the recent acquisitions; and Acquisitions of fixed assets (vehicles and computer equipment) and intangibles (computer systems and software), which totaled R$21.6 million or 2.4% of 2012 net revenue. Cash Flow Operating cash flow totaled R$231.1 million in 2012, versus R$187.4 million in 2011, thanks to better working capital management and higher margins from existing businesses. 8

11 Share price - R$ R$ million (A free translation of the original in Portuguese) Capital Structure Abril Educação closed December 2012 with consolidated net debt of R$231.6 million, equivalent to gross debt of R$537.5 million, net of cash and cash equivalents of R$305.9 million. Long-term debt accounted for 75% of the total. On the same date, shareholders equity stood at R$1,045.7 million. Subsequent Event On February 8, 2013, we entered into a letter of intent to acquire 100% of Wise Up, which is currently one of the leaders in English teaching in Brazil, through its proprietary teaching method and franchise system, associated with the licensing of its own brands and the production, edition, distribution and sale of teaching materials. Wise Up has 76,000 students and 338 schools covering 89 Brazilian cities, 36 of which in Brazilian oil platforms and 21 in four cities abroad. Its pioneering English learning system is strengthened by renowned relationship and support to franchisees and high-quality textbooks and audiovisual teaching materials. The acquisition is subject to approval by Brazil's Anti-Trust authority (CADE) under the applicable legislation, and other precedent conditions. Stock Performance and Corporate Governance On July 27, 2011, Abril Educação conducted its successful Initial Public Offering (IPO), and its UNITS are now listed in the Level 2 Corporate Governance trading segment of the BMF&BOVESPA. The Company adopted most Novo Mercado practices in its structure of governance and relations with non-controlling shareholders, including, for instance, 100% tag along right for its UNITS, in case of sale of the Company s control. Each UNIT of Abril Educação corresponds to one common share (ON) and two preferred shares (PN). Between the IPO and March 8, 2013, Abril Educação s UNITS appreciated by 142% over the IPO closing price, versus the Bovespa Index s decline of 1.5% in the same period. Price (R$) vs. Volume (R$ mm) (07/26/2011 to 03/08/2013) * Jul 13-Sep 31-Oct 19-Dec 6-Feb 26-Mar 14-May 29-Jun 16-Aug 3-Oct 23-Nov 15-Jan 6-Mar Volume (R$) Price *IPO price. Based on the closing price. The Board of Directors of Abril Educação is composed of nine members, two of whom appointed by the minority shareholders and two independent. The experience and market knowledge of our main shareholders, with whom we frequently interact, are an important support for management. On April 30, 2012, we instated our Fiscal Council composed of five effective members, two of whom appointed by non-controlling shareholders. 9

12 Adherence to the Market Arbitration Chamber The Company adhered to the Market Arbitration Chamber, pursuant to the arbitration clause in its Bylaws. This body, instituted by the Stock Exchange, adjudicates disputes and controversies that may arise between Level 2 companies controlling shareholders, shareholders in general, Management, members of the Fiscal Council and the Stock Exchange itself. Relations with the Independent Auditors The Company s policy is to respect the independence of the external auditors, restricting the services contracted from its auditors to those related to the external audit. Consequently, in 2012, Pricewaterhouse Coopers (PwC) did not provide the Company with any services other than those related to the Company s audit, thereby ensuring the objectivity and independence of said services. In 2012, additional services (due diligence) from independent auditors represented 9% of the total services rendered. Declaration of the Board of Executive Officers Pursuant to CVM Instruction 480/09, Abril Educação s executive officers hereby declare that they have discussed, reviewed and are in full agreement with the financial statements for the fiscal year ended December 31, 2012 and the opinions expressed in the Independent Auditors Report. Acknowledgments We would like to thank and acknowledge the efforts of our employees, clients, shareholders, partners and government bodies for their support and trust in our mission of building a Company capable of improving the quality of primary and secondary education in Brazil, while engaged in the constant pursuit of value creation. Management São Paulo, March 11,

13 BALANCE SHEETS As at December 31 (All amounts in thousands of Reais) ASSETS Parent Consolidated CURRENT ASSETS Cash and cash equivalents (note 7) 181, , , ,647 Trade receivables (note 9) 3,530 1, , ,414 Inventory (note 10) , ,461 Taxes recoverable (note 11) 11,381 7,792 21,057 38,562 Dividends receivable (note 34) 17,142 13, Interest on capital (note 34) - 6, Advances and prepaid expenses (note 12) 2,139 1,640 14,632 8, , , , ,489 NON-CURRENT ASSETS Loans and other credits with related parties (note 34) 45,360 37, Financial assets (note 8) 4,043 3,752 4,043 3,752 Taxes recoverable (note 11) - - 4,112 4,094 Deferred income tax and social contribution (note 20) ,617 11,434 Judicial deposits (note 19) - - 6,129 5,664 Advances and prepaid expenses (note 12) - 3,083 1,022 3,832 Investments (note 13) 814, , Intangible assetsi(note 14) , ,175 Property and equipment (note 15) ,304 65, , ,301 1,114,244 1,020,496 Total assets 1,080, ,513 1,856,749 1,751,985 The accompanying notes are an integral part of these financial statements. 11

14 BALANCE SHEETS As at December 31 (All amounts in thousands of Reais) LIABILITIES AND EQUITY Parent Consolidated CURRENT LIABILITIES Trade and other payables (note 16) 11,221 5, , ,686 Loans and financing (note 17) ,109 70,944 Taxes and contributions payable (note 18) ,759 7,940 Income tax and social contributions payable 546-7,948 12,853 Dividends payable 23,783 11,475 23,783 11,475 Payables for acquisition of equity - interests (note 32) - 110,530 93,099 35,557 18, , ,997 NON-CURRENT LIABILITIES Trade and other payables (note 16) - 1, ,018 Loans and other credits with related parties (note 34) Payables for acquisition of equity interests (note 32) , ,280 Loans and financing (note 17) , ,142 Taxes and contributions payable (note 18) - - 2,790 6,306 Provision for contingencies (note 19) - - 9,991 11,337 Deferred income tax and social contributions (note 20) 4,631 4,631 43,849 4,887 4,631 5, , ,970 Total liabilities 40,188 23, , ,967 EQUITY Attributable to owners of the parent Share capital (note 23) 463, , , ,946 Capital reserves (note 24) 411, , , ,475 Revenue reserves (note 24) 164,752 88, ,752 88,396 1,040, ,817 1,040, ,817 Non-controlling interests - - 5, Total equity 1,040, ,817 1,045, ,018 Total liabilities and equity 1,080, ,513 1,856,749 1,751,985 The accompanying notes are an integral part of these financial statements. 12

15 STATEMENTS OF OPERATIONS Years Ended December 31 (All amounts in thousands of Reais, except earnings per share) Parent Consolidated Net revenue (note 26) 1, , ,108 Cost of sales and services (note 27) (272) - (316,572) (297,973) Gross profit , ,135 Selling expenses (note 27) (243) (142) (218,079) (203,586) General and administrative expenses (note 27) (24,739) (27,723) (163,988) (127,359) Other income (expenses), net (note 28) (32) 1 1,446 7,654 Operating profit (loss) (24,216) (27,864) 186, ,844 Finance income (note 29) 22,505 23,360 33,094 34,119 Finance costs (note 29) (1,980) (1,380) (67,111) (94,967) Foreign exchange variations, net (note 29) (622) Profit (loss) before equity in the results of subsidiaries (3,403) (5,266) 152,720 89,374 Equity in the results of subsidiaries (note 13) 105,586 53, Profit before income tax and social contribution 102,183 48, ,720 89,374 Income tax and social contributions (note 30) (2,044) (54,597) (41,672) Profit for the year 100,139 48,316 98,123 47,702 Profit attributable to: Owners of the Company 100,139 48,316 Non-controlling interests (2,016) (614) 98,123 47,702 Basic earnings per share - R$ (note 24) Diluted earnings per share - R$ (note 24) There was no comprehensive income to be disclosed. Accordingly, the Company is not presenting the statement of comprehensive income. The accompanying notes are an integral part of these financial statements 13

16 STATEMENTS OF CHANGES IN EQUITY (All amounts in thousands of Reais) Capital reserves Revenue reserves Stock Additional Attributable to Share Capital options Legal Profit dividend Retained owners of the Non-controlling capital reserve granted reserve retention proposed earnings parent interests Total equity BALANCES AS AT DECEMBER 31, , ,482-5,512 46,043 10, , ,707 Stock option plan (note 22) , ,542-10,542 Payment of additional dividend proposed (10,272) - (10,272) - (10,272) Capital increase in accordance with EGM* of 05/02/2011 (note 23) 25, ,000-25,000 Capital increase in accordance with EGM* of 05/24/2011 (note 23) Capital increase with issue of shares in accordance with BDM** of 7/21/2011 (note 23) 93, , , ,135 Share issue costs (note 23) - (23,158) (23,158) - (23,158) Profit for the year ,316 48,316 (614) 47,702 Other movements in non-controlling interests Allocation of profit for the year - Legal reserve , (2,416) Mandatory minimum dividend proposed (11,475) (11,475) - (11,475) - Profit retention ,425 - (34,425) BALANCES AS AT DECEMBER 31, , ,933 10,542 7,928 80, , ,018 Stock option plan (note 22) - - 5, ,289-5,289 Capital increase in accordance with BDM** of 12/19/2012 (note 23) Profit for the year , ,139 (2,016) 98,123 Other movements in non-controlling interests ,060 7,060 Allocation of profit for the year Legal reserve , (5,007) Mandatory minimum dividend proposed (23,783) (23,783) - (23,783) - Profit retention ,349 - (71,349) BALANCES AS AT DECEMBER 31, , ,933 15,831 12, , ,040,468 5,245 1,045,713 * EGM - Extraordinary General Meeting ** BDM - Board of Directors' Meeting The accompanying notes are an integral part of these financial statements. 14

17 STATEMENTS OF CASH FLOW Years Ended December 31 (All amounts in thousands of Reais) Parent Consolidated CASH FLOW FROM OPERATING ACTIVITIES Cash generated from (used in) operations (note 31) 4,037 (1,163) 235, ,383 Interest paid - - (47,502) (57,611) Income tax and social contributions paid (3,329) (1,663) (26,027) (27,272) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 708 (2,826) 162, ,500 CASH FLOW FROM INVESTMENT ACTIVITIES Purchases of: Property and equipment (940) (456) (10,990) (8,901) Intangible assets - - (10,632) (2,821) Financial assets - (3,132) - (3,132) Acquisition of subsidiary in the year, net of cash acquired (note 33) - - (53,177) (191,177) Payment for acquisition of subsidiaries of prior years - - (85,536) (62,563) Capital increase in subsidiaries (44,100) (266,082) - - Payment of purchase price adjustment (1,005) (1,005) Dividends received 13,880 4, Interest on capital received 6, Loans granted to related parties (144,731) (152,699) (114) (515) Loans received from related parties 102, ,890 1, Interest received 1,096 2,308-3,560 Other - 3 (230) 3 NET CASH USED IN INVESTING ACTIVITIES (66,803) (255,749) (160,588) (265,520) CASH FLOW FROM FINANCING ACTIVITIES New loans and financing ,727 3,468 Repayment of loans and financing - - (225,739) (104,723) Payment of PAES and taxes in instalments - - (3,815) (1,953) Capital increase 6 372, ,999 Capital increase in subsidiaries ,402 Dividends paid (11,475) (13,696) (11,475) (13,696) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (11,469) 359,303 (1,296) 257,497 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (77,564) 100, ,477 Cash and cash equivalents at the beginning of the year 259, , , ,170 Cash and cash equivalents at the end of the year 181, , , ,647 NET CHANGE IN CASH AND CASH EQUIVALENTS (77,564) 100, ,477 The accompanying notes are an integral part of these financial statements. 15

18 STATEMENTS OF VALUE ADDED Years Ended December 31 (All amounts in thousands of Reais) Parent Consolidated REVENUE 1, , ,969 Sales of goods and services (note 26) 1, , ,690 Other revenue - - 4,246 8,662 Provision for impairment of trade receivables - - (1,298) 1,617 INPUTS ACQUIRED FROM THIRD PARTIES 7,882 7, , ,720 Raw materials consumed - - 1,455 1,825 Cost of sales and services , ,778 Materials, energy, outsourced services and other 7,610 7, , ,117 GROSS VALUE ADDED (6,812) (7,552) 525, ,249 RETENTIONS ,330 31,406 Depreciation and amortization (notes 14 and 15) ,330 31,406 NET VALUE ADDED GENERATED (7,067) (7,612) 487, ,843 VALUE ADDED RECEIVED THROUGH TRANSFER 128,489 77,561 34,046 34,745 Equity in the results of subsidiaries (note 13) 105,586 53, Finance income (note 29) 22,505 23,360 33,094 34,119 Foreign exchange gains (note 29) TOTAL VALUE ADDED TO DISTRIBUTE 121,422 69, , ,588 DISTRIBUTION OF VALUE ADDED Personnel and payroll charges 13,763 17, , ,088 Salaries 13,278 16, , ,479 Benefíts ,666 12,729 Government Severance Indemnity Fund for Employees (FGTS) ,484 8,880 Taxes and contributions 5,360 3, ,475 91,454 Federal 5,345 3, ,465 83,186 State Municipal ,262 7,653 Remuneration of third parties' capital 2,160 1, , ,344 Interest (note 29) 1,980 1,380 67,111 94,967 Foreign exchange losses (note 29) ,248 Rentals ,569 12,098 Copyright 70-52,517 51,053 Other Remuneration of own capital 100,139 48,316 98,123 47,702 Interest on capital ,031 Dividends 23,783 11,475 40,925 25,355 Retained earnings 76,356 36,841 59,214 14,930 Non-controlling interests - - (2,016) (614) TOTAL VALUE ADDED DISTRIBUTED 121,422 69, , ,588 The accompanying notes are an integral part of these financial statements. 16

19 1. GENERAL INFORMATION NOTES to the Financial Statements at December 31, 2012 (All amounts in thousands of Reais unless otherwise stated) Abril Educação S.A. (the "Company") is a corporation headquartered in São Paulo, State of São Paulo. The Company and its subsidiaries (the "Group") operate in the segment of primary and pre-university education, with the following business lines: Editoras Ática and Scipione - Book publishing houses and SER teaching system; Sistema de Ensino Abril Educação - English teaching system and pre-university entrance courses; PH Group - Basic schools teaching and pre-university entrance courses; ETB Group - Technical and professional teaching schools; Maxiprint Gráfica e Editora - Maxi teaching system; Escola Satélite S.A. - Onsite courses; Edumobi - Digital content distribution technology; SGE - GEO teaching system; Jafar - Preparatory courses for civil service exams; Red Balloon - English language teaching schools for children and adolescents; and EiVocê - E-professional training, E-learning and free courses. The Company's activities include the editing, printing, publication, advertising and sale, in the wholesale and retail markets, of books, textbooks and publications for basic education and pre-college admission courses, and it may also provide specialized training services for teachers and school managers, including offering meetings, lectures and workshop activities relating to education, and pedagogical activities relating to its basic and professional teaching courses through its own schools or teaching systems. The issue of these financial statements was authorized by the Company's Board of Directors on March 11, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied to the preparation of these financial statements are set out below. These policies have been consistently applied to the years presented. 2.1 Basis of presentation The financial statements have been prepared on a historical cost basis, as modified by available-forsale financial assets measured at fair value. The preparation of financial statements requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying the Group's accounting policies. Those areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3. (a) Consolidated financial statements The consolidated financial statements have been prepared and are being presented in accordance with the accounting practices adopted in Brazil, including the pronouncements 17

20 issued by the Brazilian Accounting Pronouncements Committee ("CPC"), as well as according to the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB"). (b) Parent company financial statements The parent company financial statements have been prepared in accordance with the accounting practices adopted in Brazil issued by the CPC, and are disclosed together with the consolidated financial statements. In the parent company financial statements, subsidiaries are recorded based on the equity accounting method. The same adjustments are made to the parent company and consolidated financial statements in order to reach the same profit or loss and equity attributable to the owners of the parent entity. In the case of Abril Educação S.A., the accounting practices adopted in Brazil applicable to the parent company financial statements differ from the IFRS applicable to separate financial statements only in relation to the evaluation of investments in subsidiaries based on the equity accounting method, instead of at cost or fair value in accordance with IFRS. (c) Changes in accounting policies and disclosures 2.2 Consolidation There are no new CPCs/IFRS pronouncements or interpretations effective for years beginning after from 2012 that would be expected to have a material impact on the Company's financial statements. The following accounting policies are applied to the preparation of the consolidated financial statements. Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date on which that control ceases. The Company applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary represents the fair value of the assets transferred, the liabilities incurred and the equity instruments issued by the Company. The consideration transferred includes the fair value of assets or liabilities resulting from a contingent consideration arrangement, when applicable. Acquisition-related costs are 18

21 expensed as incurred. The identifiable assets acquired and the liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values as at the acquisition date. The difference between the fair value of the purchase and the fair value of the Company's previous equity interest plus the identifiable net assets acquired is recorded as goodwill. The excess of the consideration transferred plus the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Company's share of the identifiable net assets acquired is recorded as goodwill. Transactions, balances and unrealized gains on transactions between Company entities are eliminated. Unrealized losses are also eliminated, unless the transaction provides evidence of impairment of the asset transferred. The accounting policies of subsidiaries are changed when necessary to ensure consistency with the policies adopted by the Company. 2.3 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker responsible for allocating resources and assessing performance of the operating segments has been identified as the Board of Directors which makes the Company's strategic decisions. These decision-makers may also receive detailed information on the Group's products, brands and other divisions, but these will not therefore quality as operating segments for reporting purposes. 2.4 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Company's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The consolidated financial statements are presented in Brazilian Reais (R$), which is the Company's functional currency, and also the Group's presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or the dates of valuation when items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income within "foreign exchange variations, net". 19

22 Changes in the fair values of monetary securities denominated in foreign currency classified as available for sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences relating to changes in the amortized cost are recognized in profit or loss, and other changes in the carrying amounts are recognized in equity. 2.5 Standards, amendments and interpretations to existing standards that are not yet effective The following new standards, amendments and interpretations to existing standards were issued by IASB but are not effective for The early adoption of these standards,although encouraged by the IASB, has not been implemented in Brazil by the Brazilian Accounting Pronouncements Committee ("CPC").. IAS 1 - "Presentation of financial statements" - the main change is a requirement for entities to group items presented in "other comprehensive income" on the basis of whether they will be reclassified to profit or loss or remain in equity. The amendment to the standard is applicable from January 1, The Company expects that the adoption of this amendment will only give rise to impacts on disclosure.. IAS 19 - "Employee benefits" was amended in June 2011, and this amendment was included in the text of CPC 33 (R1) - "Employee benefits". The standard is applicable from January 1, The Company does not expect impacts on its current healthcare and post-employment benefits granted to employees.. IFRS 9 - "Financial instruments" addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The determination is made upon initial recognition. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial instruments. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than in the statement of income, unless this creates an accounting mismatch. The Company has yet to assess IFRS 9's full impact. The standard is applicable from January 1, IFRS 10 - "Consolidated financial statements" was included as an amendment to CPC 36(R3), "Consolidated financial statements". This standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist with the determination of control. The standard is applicable from January 1, The Company has yet to assess the impact of IFRS 10.. IFRS 11 - "Joint arrangements" was issued in May 2011 and was included as an amendment to CPC 19(R2), "Joint ventures". The standard provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. 20

23 There are two types of joint arrangements: (i) joint operations, which arise where a joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets, liabilities, revenue and expenses, and (ii) joint ventures, which arise where the joint operator has rights to the net assets of the arrangement and hence accounts for its interest. The proportional consolidation method will no longer be permitted in joint ventures. The Company has yet to assess the impact of IFRS 11. The standard is applicable from January 1, IFRS 12 - "Disclosures of interests in other entities", included in the new pronouncement CPC 45 - "Disclosures of interests in other entities". IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The standard is applicable from January 1, The impact of this standard will basically be additional disclosures.. IFRS 13 - "Fair value measurement" was issued in May 2011 and disclosed in the new pronouncement CPC 46 - "Fair value measurement". IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRS and US GAAP, do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is required or permitted by other standards under IFRS or US GAAP. The standard is applicable from January 1, The impact of this standard will basically be additional disclosure. There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. 2.6 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less, with an immaterial risk of change in value. 2.7 Financial assets Classification The Company classifies its financial assets either as loans and receivables or as available for sale. The classification depends on the purpose for which the financial assets were acquired, and is determined by management upon initial recognition. The Company has investments in bank deposits that qualify as cash and cash equivalents and, therefore, does not have financial instruments measured at fair value through profit or loss. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period, which are classified as 21