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RISK FACTORS

Description of risk factors

a. the issuer

The spread of copyright infringement may adversely affect our performance.

The Saraiva Group is subject to certain copyright infringement practices by third parties, such as unauthorized photocopies of books, the illegal copying of DVDs and CDs, as well as the spread of digital libraries that illegally market the Saraiva publishing house’s proprietary content. An increase in the spread of these practices could adversely affect our results.

Our books may be rejected by the National Basic Education Textbook Program (PNLD) for Elementary and Secondary Education, as well as other official book purchasing programs.

To supply Textbooks through the PNLD (Elementary and Secondary Education), publishers must submit the contents of their books in advance for educational evaluation by the Basic Education Secretariat of the Ministry of Education and Culture (MEC), in accordance with the criteria included in the bid notice. The books approved by this evaluation process are registered in the Textbook Guide and submitted for selection by the teachers at the public schools participating in these programs for use in the classroom. The rejection of our Textbooks by the MEC may adversely affect the Saraiva publishing house’s results.

Our relationship with our authors and the market in general may be negatively affected should certain alterations to the Copyright Law be approved.

In Brazil, intellectual property is primarily governed by Law no. 9,610/98 ("Copyright Law"), as well as a few other laws and regulations. Bills are routinely introduced in the Brazilian Congress that seek to amend important sections of the current Copyright Law. In addition, the Ministry of Culture held a public hearing on June 14, 2010 in which it presented Draft Reform of the Copyright Law ("Draft Legislation"), which will be sent to the Brazilian Congress for analysis. This Draft Legislation includes significant changes to the legal framework covering intellectual property in Brazil.

There may delays in our production processes and updates, with negative effects for our sales.

The Textbook publishing market requires publishers to plan in advance.
The works must be ready in time for registration in the PNLD (Elementary and Secondary Education) and prior to the "back to school" period. Likewise, Legal Books, particularly those whose contents deal with legislation, must be produced and updated within reasonable timeframes so that they are able to find a receptive audience when launched. Failure or delays in the editorial production and update timelines for the lines in which the Saraiva publishing house operates would therefore impair its performance in these markets.

The temporary irregularity of our registration with the Unified Supplier Registration
System ("SICAF") may prevent our participation in government programs and the signing of contracts with public agencies, or delay the receipt of amounts due to us under these programs and contracts.

The SICAR is an electronic system that registers and centralizes the key federal tax clearance certificates expedited by certain public agencies (INSS, Federal Revenue Service of Brazil and the Attorney for the National Treasury, among others). The lack of these certificates implies irregularity before the SICAF and prevents the participation of the respective interested party in government programs and the signing of contracts with public agencies, which may delay or prevent the receipt of the amounts owed under these programs and contracts. If any of Saraiva’s certificates expire, without the ability to obtain new certificates in a timely manner, it may be unable to take part in government programs, sign contracts with public agencies or receive the amounts to which it is entitled through these programs and contracts, which may adversely affect the Company’s results.

Important authors who provide content for Saraiva’s publishing and marketing activities may terminate their Publishing Contracts, negatively affecting our sales.

The publishing contracts with important authors may be terminated at any time. The Company may be unable to substitute these authors or offer alternative works, decreasing its competitiveness and significantly impacting its profitability.

Increased competition.

We may be subject to an increase in competition in the segments in which we operate, due to the following factors: (i) an increase in the number of companies; and (ii) acquisition of operations in Brazil by capitalized companies, be they foreign or domestic. The increase in competition may adversely affect our results.

The seasonality of our editorial segment may lead to excess inventory and losses.

The Saraiva publishing house operates in Brazilian editorial market segments marked by seasonality (approximately 78% of the Saraiva publishing house’s sales are concentrated in the first and fourth quarters of the fiscal year, which concentrate the sale of Textbooks, Educational Materials and Legal Texts). To deliver large volumes of books during specific times of the year, the Saraiva publishing house anticipates its production throughout the year, forming a significant inventory, which increases the need for working capital. Upon the occurrence of events that may negatively impact the purchasing ability of the Saraiva publishing house’s clients, the Company may be unable to carry out the planned sale of its previously formed inventory, resulting in the need for higher provisions for inventory losses, which may adversely affect the results of its operations.

The Saraiva publishing house may not be able to produce content using the new technology
that is adopted by those who purchase and consume such content.

The transformation introduced in the market through digital platforms may require traditional publishers to master new technologies and/or develop expertise that is different than the expertise needed to publish printed materials. The Saraiva publishing house may not be able to compete in a market that is based on the mastery of such technology. Likewise, the introduction of proprietary technology may eventually lead to significant changes in the current business model, including the economic model for the publishing segment, which may diminish the Company’s competitiveness.

We may be unable to execute our business strategy.

Our ability to implement the Saraiva publishing house’s business strategy depends on a series of factors, including our ability to (i) attract new authors, (ii) acquire new publishing houses and catalogues; (iii) optimize our distribution network; (iv) develop new media; (v) strengthen our relationships with teachers; (vi) increase operational efficiency; and (vii) publish relevant and technically appropriate content for the consumer audience.

IT-related Risks.

The Company has large and complex projects in the Information Technology area that demand significant investments and skilled labor. Such projects may not be effective after implementation, which may decrease our ability to compete in the market.

b. its direct or indirect controlling shareholder or controlling group:

We continue to be controlled by our Controlling Shareholder, whose interests may differ from the interests of the other shareholders.

As long as shareholder Jorge Eduardo Saraiva directly or indirectly controls the Company, he will have, without the need for consent from other shareholders, the right to:
• elect the majority of the Board of Directors and dismiss Board Members;
• control the Company’s management and policies;
• determine the outcome of a large portion of our corporate operations and other matters submitted for consideration by shareholders, including mergers, consolidations and the sale of all or a substantial part of our assets; or
• determine dividend distribution policies, respecting the mandatory minimum dividend required by law.
The interests of shareholder Jorge Eduardo Saraiva may differ from those of the Company’s other shareholders.

c. its shareholders:

The relative volatility and lack of liquidity in the Brazilian real estate market, together with the reduced marketability of our shares on the market, may substantially limit the ability of investors in the Company’s shares to sell them at the desired price and time.

Investment in securities traded in emerging markets, such as Brazil, frequently involve greater risk when compared to other world markets, and are generally deemed more speculative. The Brazilian securities market is substantially smaller, less liquid and more concentrated, capable being more volatile than the major securities markets worldwide.

In addition, the Company’s outstanding shares are held by approximately 1,500 shareholders and have a low level of marketability.

As such, we cannot ensure that there will be a significant increase in the liquidity of our shares, which may considerably limit the ability of the purchasers of our shares to sell them at the desired price and time.

We may not pay dividends to our shareholders.

According to our Bylaws, we must pay shareholders at least 25% of our adjusted annual net income in the form of dividends. Net income may be capitalized, used to offset losses or retained pursuant to Brazilian Corporate Law and may not available for the payment of dividends. We may not pay dividends to our shareholders during a fiscal year if our Board of Directors decides that payment would be inadvisable in light of our financial condition.

We may need additional funds in the future, which may be obtained by increasing our capital. Obtaining additional funds in this way may dilute shareholder participation in our capital stock.

We may need additional capital and should public or private financing not be available by taking on debt, or if shareholders so decide, additional funds may be obtained through an increase in our capital stock. Any additional funding obtained through an increase in our capital stock may dilute the investor’s stake.

d. its subsidiaries and affiliates:

Our potential inability to implement actions related to the Internet business
may affect our results.

The success of Internet companies is linked to, among other factors, their ability to (i) attract and retain a large number of users on their websites, (ii) expand the content and services of their websites, (iii) increase the recognition off its brand and continue to win over the loyalty of its users, (iv) maintain and increase the number of customers, (v) increase its e-commerce businesses, and (vi) respond effectively to competitive pressures. If we do not succeed in implementing any of the factors above, our results may be adversely affected.

The expansion of the retail network of Physical Stores may not be successful.

The growth strategy for the network of Physical Stores is currently based on the implementation of Mega Stores and Traditional Stores and stores under the Apple Premium Reseller model, with the use of the in-house iTown brand. The Saraiva retail bookstore chain’s results may be adversely affected if (i) their initiatives do not achieve the expected profitability; (ii) cannot meet the schedule for opening stores; (iii) Apple opens its own stores in the markets in which the iTown stores have been opened, which will affect our ability to profitably compete in this computing and electronics segment.

We may be unable to execute our business strategy.

Our ability to implement the Saraiva retail bookstore chain’s business strategy depends on a series of factors, including (i) expanding our network of Physical stores; (ii) increasing the activities of Saraiva.com; (iii) introducing new product categories; (iv) carrying out strategic acquisitions; (v) optimizing working capital; (vi) strengthening the Saraiva brand; (vii) meeting the demand for digital products.

We cannot guarantee that any of these objectives will be fully achieved. One critical element of this strategy is our ability to identify Physical Stores with significant growth potential for sales and to develop e-commerce activities in a competitive scenario.

We cannot guarantee the maintenance of our leadership position among the
companies that operate in the e-commerce segment.

The maintenance of our e-commerce position requires investments and the adoption of specific strategies to gain more space in this market. We cannot guarantee that Saraiva will, whenever necessary, have the conditions to guarantee its market position and continue presenting growth in its e-commerce operations, which may negatively affect the Company’s results.

Increased competition (retail).

We may be subject to an increase in competition in the segments in which we operate, due to the following factors: (i) an increase in the number of companies; (ii) acquisition of operations in Brazil by capitalized companies, be they Brazilian or foreign; and (iii) consolidation in the online retail segment. This increase in competition may adversely affect our results.

We may be required to vacate some of the Physical Stores that we lease from third parties, thereby losing some commercial sites.

Under the law that governs urban leases (Law no. 8,245/91), in the case of the sale of a property leased to third parties, wherein the tenant does not exercise their preemptive rights, it is up to the third party purchaser, who has 90 days from the registration of the acquisition document in the Real Estate Registry, to maintain the lease or cancel it, without the tenant receiving any right to compensation. The third party purchaser will only be obligated to honor the lease if the contract includes (i) a fixed term, (ii) a clause that guarantees validity in the event of a sale, and (iii) is duly registered with the competent Real Estate Registry.

Most of the properties in which our Physical Stores are installed are leased from third parties and a significant number of the respective lease contracts do not meet the requirements for maintaining their validity in the case of the sale of the leased properties. As a result, we may be forced to vacate the leased properties. In addition, some of our Physical Store lease contracts are short term, or based on subsequent terms that do not exceed five years, without the right to compulsory renewal, which could mean that at the end of the respective leases we may be unable to renew them or be forced to vacate the respective Physical Stores, without any compensation.

The spread of the sale of music, films, books and periodicals through new media, particularly digital media, may negatively affect the Company’s sales.

Digital music sales account for a significant portion of the music industry‘s revenues, which has been experiencing a decline in CD sales for some time. This paradigm shift is being driven by sales of portable digital devices and by Internet music downloads. The Internet, together with search engines, allows free access to content that is often made available in book form. The dissemination of these tools may have an increasing impact on book sales. Digital convergence and other technological innovations may also produce significant changes in the marketing of books, periodicals and movies, with impacts along their supply chains.

We cannot anticipate the impact of technologies that allow access to content on electronic devices, nor make reliable predictions about how such a change to other media will affect the publishing, bookselling, music, film and gaming markets in Brazil and, consequently, our results.

The economic downturn and decline in consumer confidence may adversely affect the performance of our retail activities.

We cannot anticipate the impact of the economic slowdown and the resulting decline in consumer confidence, nor can we make reliable predictions about how the evolution of these indicators will affect the market for products that do not serve basic needs in Brazil and, consequently, our results.

Inclusion of products marketed by subsidiaries in the Tax Substitution Regime in the State of São Paulo

The Tax Substitution Regime requires advance payment of the Value Added Tax on Merchandise and Services (ICMS), which is due upon the acquisition of merchandise on the assumption that the sales will take place within São Paulo state. The transactions to transfer the merchandise acquired by the Distribution Center located in the State of São Paulo for the company’s establishments located in other Brazilian states generate credit for the tax paid in advance that will be refunded through compliance with legal provisions set forth in the ICMS regulations for the state of São Paulo.

The calculation of the credit requires the adoption of highly complex operational procedures and their utilization requires a potentially lengthy and rigorous approval process conducted by the tax authorities.

e. its suppliers:

The cyclical nature and concentration of suppliers in the paper industry may significantly affect our costs.

Given that its main activity is the publication of books, paper is the most important raw material for the Saraiva publishing house. The paper industry is cyclical by nature, with its production and pricing sensitive to changes in supply and demand, which are affected by global and domestic economic conditions. The price of the products manufactured by the Company‘s paper suppliers normally accompanies the prevailing global paper prices. In the event of an increase in the price of paper worldwide, and/or the devaluation of the Brazilian real, the Company’s book production costs will also increase significantly, which may adversely affect the Company‘s profit margins and/or its total sales value.

The Brazilian market may experience a consolidation of paper suppliers, which may result in pricing practices that increase our book production costs.

f. its customers:

The discontinuation of government book buying programs may have an adverse impact on our results.

In 2012, approximately 7.1% of gross consolidated revenue came from the sale of Textbooks to the Federal Government under the PNLD.
The possible discontinuation of the PNLD or a reduction in the volume of books purchased by the Federal Government could have a negative impact on the Saraiva publishing house.

Lines of Credit to our customers.

The concession of extended payment terms for some product lines sold through our retail operation may require greater investments from our
working capital and compromise our cash flow.

g. the sectors of the economy in which the issuer operates:

The education level of the population limits demand in the publishing and bookstore markets.

The sale of a portion of our products is connected to the education level of the Brazilian population, which, in turn, depends on public and private investments in the education sector. The interruption or significant reduction of these investments may adversely affect the Saraiva Group’s results.

h. the regulation of the industries in which the Company operates:

Changes in the taxation of the book supply chain may significantly increase
our costs.

The Federal Government, through Law no. 11,033, of December 21, 2004, reduced the PIS and COFINS rates on the revenue from the sale of books in Brazil beginning in December 2004. This tax reduction aims to stimulate the book supply and marketing chains in Brazil. However, we cannot guarantee the continuation of this exemption, nor predict changes in the taxation of the book supply chain in the future. Should this exemption be revoked or the PIS and COFINS be increased, the Saraiva Group’s results may be adversely affected.

i. the foreign countries where the Company operates. The Company does not operate in foreign countries.

Comments about expected changes to risk factor exposure

If certain bills that are currently pending before the Brazilian Congress are approved, or in the event that the text of the Draft Legislation is approved in its current form, the legislation regarding intellectual property in Brazil may be altered, which may negatively affect the Company’s relationship with its authors and the market in general.

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