Risk Factors

Anima is facing significant competition in each course offering and in each geographic market in which it operates. If it fails to effectively compete, it may lose market share and profitability.

Anima competes with public and private colleges, universities and university centers. According to the Higher Education Census carried out by the Ansio Teixeira National Institute for Educational Studies and Research ("INEP"), there were 2,416 private and public undergraduate institutions in Brazil on December 31, 2012. The competition, including public higher education institutions, may offer courses that are similar to or better than those offered by Anima, have more resources, have more prestige within the academic community, have units in more convenient locations and better infrastructure and/or charge monthly tuition fees that are lower or not charge tuition at all. Anima may be required to increase its operating expenses or reduce its monthly tuition fees in response to the competition, in order to retain or attract students or seek out new opportunities in the market. As such, any potential increases in monthly tuition fees caused by factors that are macroeconomic or specific to the business may impact our ability to attract and retain students. There is also competition from distance learning courses offered by our competitors, who have history and experience in this segment and also offer lower costs and greater flexibility for students when compared with classroom-based courses. Foreign groups in the educational sector where Anima operates or expects to operate may also prove to be competitors.

HSM also faces competition from events held by third parties targeting the same audience, including in relation to hiring speakers. It is impossible to guarantee that Anima will successfully compete with its current or future competitors, which may have a significant adverse impact on its business and results.

The difficulties in efficiently integrating and managing an increasing number of units or the expansion of Anima‘s business into educational segments where it does not yet operate may harm its business and results, as well as its business culture.

The Company’s strategy includes organic expansion through an increase in the availability of classes and courses at its existing units and the opening of new units, as well as through the acquisition of higher education institutions and their integration into the educational network. This expansion plan is based on the implementation and maintenance of an educational culture, focused on quality. Anima’s corporate and educational cultures are fundamental pillars in its business model. In the event that the Company is unable to maintain its current levels, it may lose market share and be negatively affected, which may have a material adverse effect on the Company’s business and results. In addition, the Company is constantly analyzing business opportunities that might expand its operations into other educational segments in which the Company does not currently operate and does not have history or experience, such as, for example, the creation of distance education programs. The Company may not achieve satisfactory operating results in these new segments over the short or even long term, which may have an adverse effect.

Part of the Company’s growth strategy is based on the acquisition of other companies, which may also require prior notification and may be contested by the CADE and the acquisition of maintenance rights must receive prior approval from the MEC. Acquisitions and corporate reorganizations present risks that may have an adverse effect on operations and revenue.

The Company’s growth strategy involves, in addition to organic growth, growth through the acquisition and integration of higher education institutions into the educational network, which are subject to risks.

The risks from the acquisition of Higher Education Institutions include, among others, the following:

  1. the inability to identify institutions that offer appropriate acquisition opportunities or favorable conditions when it comes time to do business;
  2. the due diligence process may not be able to identify all of the legal, technical or regulatory contingencies that are the responsibility of the institution to be acquired, of which the Company will become the legal successor;
  3. the acquisition may not contribute to the business strategy as expected, or we may pay more for the acquisition than the estimated fair price, mainly due to the current competitive scenario in relation to acquisition targets in the Company’s operating sector;
  4. our operating strategy is guided by the strengthening of the regional brands of the acquired institutions, which are subject to their own specific institutional risks;
  5. the acquisition process may be time consuming and the investments in acquisitions may not generate the expected returns;
  6. the acquisition may not contribute to Anima’s image and/or it may be subject to approval by the CADE, which may reject it or approve it with restrictions;
  7. the acquisition of maintenance rights must be submitted to MEC approval, which may not approve the acquisition;
  8. the acquisition process creates additional challenges in terms of maintaining the educational quality and culture and there is no guarantee that the Anima brand will not be harmed due to any decline, real or perceived, in the quality of education; and
  9. the acquisition process may suffer setbacks and divert greater attention and time from Management for issues related to the transition or integration in relation to initial forecasts.

The Company may also face significant risks during the integration and management of any acquired unit (including previous and future acquisitions) associated with managing a larger number of employees, geographic dispersion, the creation and implementation of controls and the adoption of effective and consistent procedures and policies, in addition to unforeseen integration costs, and the management and implementation of the acquired company’s business plan. For example, the Company acquired a 50% interest in HSM in March 2013 and the remaining 50% in 2014, and HSM’s negative financial results in recent years may adversely impact the Company’s results if the process of integrating and managing its operations is not successful.

The Company may also assume liabilities or contingencies from the acquired companies and/or corporate restructurings in relation to civil, regulatory, tax, labor, social security and environmental issues, or issues related to intellectual property, accounting practices, the disclosure of financial statements, or internal controls, which may not be sufficiently covered by the contractual guarantees provided by the sellers of the educational institutions, or that may not have been identified during the legal and business diligence process carried out in the institution. In this case, the Company may require additional resources to continue its growth strategy.

All acquisitions in which one of the related companies or group of companies recorded gross annual revenue in Brazil of at least R$750 million in the year prior to the operation and the other party reported gross revenue of at least R$75 million in the same period, must be submitted for approval by CADE, Brazil’s antitrust authority. In relation to the Company’s acquisitions, CADE must determine if the transaction in question negatively affects consumers or competitive conditions in the markets where the Company operates. In addition, the acquisition of maintenance rights must be submitted for approval by the MEC. The acquisition of a controlling interest in educational institutions’ supporting entities must be reported to the MEC, following the acquisition. If it is not reported, the Company may be subjected to one of the following penalties: temporary suspension of its entrance exam, removal of its authorization to operate or of its course recognition, intervention in the institution, suspension of its autonomy, or even disaccreditation, any one of which may have a significant impact on the Company’s business and results. In addition, CADE may not approve Anima’s future acquisitions of companies and/or maintenance rights, or may impose costly obligations on the Company in order to approve these acquisitions, such as selling part of its operations or the imposition of restrictions on how it operates and offers services. Similarly, the MEC may not approve Anima’s future acquisitions of maintenance rights.

The availability of funds in appropriate amounts and at an affordable cost is crucial for financing the Company’s growth plans; otherwise, its growth strategy may be jeopardized. In addition, adverse conditions may affect the Company’s ability to manage indebtedness arising from its growth strategy, resulting in excessive financial leverage and the risk that it may be unable to honor its financial liabilities.

Finally, if the above-mentioned risks from acquisitions and corporate restructurings materialize, the Company will be negatively affected and these variables may cause significant damage to its business and results.

Increased levels of tuition payment delinquency, dropping out or the lack of attendance at events may negatively affect the Company.

Any increase in the levels of tuition payment delinquency or in the student in-course dropout rate, as well as the potential lack of attendance at events promoted by the Company or its subsidiaries may negatively affect its cash flow and its ability to comply with its financial obligations and achieve its goals and objectives, which may negatively impact our business and results.

Dropping out during the course is related to students’ financial situation. If the dropout rate increases, the student base may fall to levels that may hamper the achievement of financial goals. Therefore, any increase in the dropout rate may have a significant negative impact on the Company’s operating results and business.

The loss or reduction of financing policies and/or tax benefits conferred by adherence to PROUNI and FIES may have an adverse effect on the Company’s results.

Anima has access to the FIES, a program created by the MEC and managed by the FNDE that is aimed at financing students who meet the program‘s requirements for undergraduate and associate classroom courses offered by private higher education institutions that have positive evaluations in the processes carried out by the MEC. Beginning in 2005, the Company (UniBH, Unimonte and UNA) also joined ProUni, which aims to grant full and partial scholarships to low-income students, in undergraduate and associate courses offered by private higher education institutions, and providing, in return, exemption from certain federal taxes for the institutions that adhere to PROUNI. If the Federal Government decides to terminate, reduce or change the format of the payments from PROUNI or FIES, or if the Company is unable to comply with the requirements for participating in PROUNI or FIES, or if the students are unable to comply with the requirements for their use, the operating results may be affected and taxes may need to be paid that, currently, the Company is exempt from paying due to PROUNI or which may be subject to compensation due to the FIES, which may in turn have a material adverse effect on our business and results.

On September 13, 2013, the Federal Revenue Office (RFB) issued Regulatory Instruction 1394 (IN 1394), which established new guidance regarding the application of PROUNI tax benefits, especially in relation to the method used to calculate these benefits. This guidance became effective as of January 1, 2014, replacing RFB Regulatory Instruction 456 of October 5, 2004, which regulated Law 11096/05. According to IN 1394, the tax benefits available under PROUNI will be directly linked to the number of places actually occupied by students receiving PROUNI scholarships, pursuant to Paragraph 3, Article 8 of Law 11096/05, as amended by Law 12431/11. In order to measure the effective occupation of the scholarships granted, private higher education institutions must calculate the ratio between the number of students actually receiving scholarships and the total number of scholarships due, in accordance with the guidelines set forth in said Regulatory Instruction. In order to determine exemption from Corporate Income Tax (IRPJ), IN 1394 established the exclusion of an additional ten percent (10%) from IRPJ.

On December 6, 2013, the RFB issued Regulatory Instruction 1417 ("IN 1417"), which altered Article 9, II of IN 1394, determining that the exemption would include the additional 10% IRPJ plus the social contribution on net income rate (CSLL). The amount arrived at in accordance with Article 9, II of IN 1394, as amended by IN 1417, comprises the total IRPJ and CSLL exemption, which may be deducted from the IRPJ and CSLL due, respectively.

Therefore the residual impact from the alteration determined by IN 1417, in relation to exemption for institutions that adhered to PROUNI, consists of only that exemption proportional to the effective occupation of the scholarships.

On December 26, 2014, the MEC, through Ordinance 21, changed the provisions concerning FIES set forth in Ordinances 2 of August 31, 2008; 1 of January 22, 2010; 10 of April 30, 2010; 15 of July 8, 2011; 23 of November 10, 2011; 25 of December 22, 2011; 16 of September 4, 2012; 19 of October 31, 2012; and 28 of December 28, 2012. According to this alteration, in order to be eligible for financial aid under FIES as of April 2015, students enrolling after 2010 must have a minimum score of 450 points in the ENEM, the National High School Examination, and obtain a score higher than zero in ENEM’s essay.

On December 29, 2014, the MEC issued Ordinance 23, which altered the provisions related to FIES of MEC Ordinances 1 of January 22, 2010, 15 of July 8, 2011, and 21 of December 26, 2014, establishing, among other matters, a longer term for higher education institutions to issue and repurchase CFT-Es (Treasury Financial Certificates - "E" series).

In the fiscal years ended December 31, 2014 and December 31, 2013, PROUNI discounts amounted to R$95.7 million and R$40.7 million, respectively, which the Company deducted from its gross revenues when presenting net revenues in its income statement.

If the guidelines applied to PROUNI are altered by the creation of new restrictions, the tax benefits the Company receives through PROUNI may be significantly reduced, which may have a material adverse impact on its business and operating results.

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