Odontoprev S.A. (Convenience Translation into English from the Original Previously Issued in Portuguese)

Transcription

1 (Convenience Translation into English from the Original Previously Issued in Portuguese) Odontoprev S.A. Financial Statements for the Years Ended December 31, 2009 and 2008 And Independent Auditors Report Deloitte Touche Tohmatsu Auditores Independentes

2 (Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT AUDITORS REPORT To the Shareholders and Management of OdontoPrev S.A. Barueri, SP 1. We have audited the accompanying individual (Company) and consolidated balance sheets of OdontoPrev S.A. (Company) and subsidiaries as of December 31, 2009 and 2008, and the related statements of income, changes in shareholders equity (Company), cash flows, and value added for the years then ended, all expressed in Brazilian reais and prepared under the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements. The financial statements of the subsidiary Bradesco Dental S.A., in which the Company has investments in the amount of R$313,752 thousand as of December 31, 2009, representing 29.85% of total assets as of that date, have been audited by other independent auditors. Our opinion regarding these investments recorded in the Company and corresponding asset and liability amounts representing 34.28% of total consolidated assets is based solely on the opinion of such other independent auditors. 2. Our audits were conducted in accordance with auditing standards in Brazil and comprised: (a) planning of the work, taking into consideration the significance of the balances, volume of transactions, and the accounting and internal control systems of the Company and its subsidiaries; (b) checking, on a test basis, the evidence and records that support the amounts and accounting information disclosed; and (c) evaluating the significant accounting practices and estimates adopted by the Company s and its subsidiaries Management, as well as the presentation of the financial statements taken as a whole. 3. In our opinion, based on our audit and on the opinion of other independent auditors, the financial statements above referred present fairly, in all material respects, the individual and consolidated financial position of Odontoprev S.A. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations, the changes in its shareholders' equity (Company), their cash flows, and the values added in operations for the years then ended, in conformity with Brazilian accounting practices. 4. Accounting practices adopted in Brazil vary in certain significant respects from the International Financial Reporting Standards ( IFRS ). Information relating to the nature and effect of such differences is presented in Note 30 to the financial statements. As described in the referred note, the reconciliations of net income and shareholders equity for the years ended December 31, 2009 and 2008 between accounting practices adopted in Brazil and IFRS does not represent a first-time adoption of IFRS since the Company has not presented a full set of financial statements prepared in accordance with IFRS and has not disclosed an explicit and unreserved statement of compliance with IFRS; accordingly, in the event the Company fully adopts IFRS in the future, the opening shareholders equity balance presented in such reconciliation may be different from that presented in Note 30.

3 5. The accompanying financial statements have been translated into English for the convenience of readers outside Brazil. São Paulo, February 23, 2010 (April 12, 2010, for Note 30) DELOITTE TOUCHE TOHMATSU Auditores Independentes Gilberto Bizerra de Souza Engagement Partner 2

4 (Convenience Translation into English from the Original Previously Issued in Portuguese) ODONTOPREV S.A. NOTES TO THE FINANCIAL STATEMENTS (COMPANY AND CONSOLIDATED) FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. OPERATIONS Odontoprev S.A. (the Company or OdontoPrev ) started its operations on August 28, 1987 and is engaged in the operation of dental care plans, and management, sale or provision of said plans to legal entities and/or individuals, as well as in holding equity interests, as partner or shareholder, in other companies and business enterprises of any nature, in Brazil and/or abroad, and management of own and/or third-party assets. On October 18, 2009, the Company made an association agreement with Bradesco Dental S.A. ( Bradesco Dental ) to merge the two companies operations, as their commercial platforms are similar and, once combined, would better position the companies to compete in the dental care industry. After obtaining the approval of the National Supplementary Health Agency (ANS), through Official Letter 250/2009/DIRAD/ANS and the Annual Shareholders Meeting held on December 23, 2009, OdontoPrev merged all the shares issued by its now wholly-owned subsidiary Bradesco Dental S.A., which were valued by an independent appraiser at R$675,000, as follows: Ownership interest (a) 313,752 Goodwill on acquisition of investments (b) 361,248 Total 675,000 (a) See note 10. (b) See note 12. In its turn, as mentioned in note 17.a, Bradesco Saúde S.A., the former controller of Bradesco Dental, increased Odontoprev s capital stock, resulting in share premium being recorded, as shown below: Capital increase 208,965 Share premium 466,035 Total 675,000 3

5 The Company has interests in the following direct and indirect subsidiaries: Ow nership interest - % Direct Indirect Direct Indirect Clidec - Clinica Dentária Especializada Cura D'ars Ltda. (Clidec) Odontoprev Serviços Ltda. (OdontoPrev Serviços) Garcia Pedrosa Ltda. (Rede Dental) Easy Softw are Ltda. (Easy) Adcon Administradora de Convênios Odontológicos Ltda. (Adcon) Dental Partner Comércio de Produtos e Equipamentos Odontológicos Ltda. (Dental Partner) Bradesco Dental S.A. (Bradesco Dental) Sepao Assistência Odontológica Empresarial Ltda. (Sepao) * Dentalcorp Assistência Odontológica Internacional Ltda. (Dentalcorp) * S.R.J.S.P.E. Empreendimentos e Participações Ltda. (SRJSPE) * Care Plus Dental Ltda. (Care Plus) * Biodent Assistência Odontógica S.A. (Biodent) * Odontoserv Ltda. (OdontoServ)* Prontodente Odontologia Integral Ltda. (Prontodente) * (*) Companies whose direct or indirect ownership interests totaled 100% and that were merged during 2009 and 2008, as mentioned in note 2. a) Clidec - company established on July 2, 1970 to operate dental care plans through its own and accredited networks and act as a dental care service provider. b) Odontoprev Serviços - company established on December 3, 1999, engaged in providing sales assistance, consulting and business management services to companies in general and holding equity interests in other companies as partner or shareholder. c) Rede Dental - company established on August 31, 1990 to operate private dental care plans and manage, sell or provide said plans to legal entities and/or individuals. d) Easy - company established on November 3, 1993, engaged in developing and licensing computer software, and holding equity interests in other companies as partner or shareholder. e) Adcon - the company was established on April 14, 1997 and is engaged in the management and sale of dental care plans, acting as group dental plan operator. f) Dental Partner company established on November 14, 2008, subsidiary of Clidec, which holds 99.9% of a total of 1,400,000 shares, engaged in wholesale and retail sale of dental products and equipment, sanitizing products, drugs, medicines, pharmaceutical inputs and related products. g) Bradesco Dental company established on May 2, 2008 as a result of the transfer of the dental segment insurance portfolio of Bradesco Seguros S.A.. It is engaged in the sale and management of dental insurance portfolio. The Company and its subsidiaries Rede Dental and Adcon are operators in the third-party dental care plan segment, and its subsidiary Clidec is an operator in the own dental care plan segment, as established by Joint Board Resolution 39, of October 27, 2000, of the National Supplementary Health Agency (ANS). 4

6 Odontored CV On August 13, 2009, Odontored CV Sociedad Anônima de Capital Variable was established in Mexico City to develop dental care plans, including their operation, management and sale, as well as the provision of dental care services, either directly or indirectly through third parties. The Company s capital is comprised of $50,000 Mexican pesos, of which 40% is held by OdontoPrev and 60% by IKE Grupo Empresarial, a company domiciled in Mexico City. The portion of capital held by the Company shall be paid up at the beginning of 2010, when operations are scheduled to start. 2. MERGERS The Extraordinary Shareholders' Meeting approved the mergers of its subsidiaries by Odontoprev, as shown below: March 3, DentalCorp; December 1, Care Plus, SRJSPE and Biodent; and December 1, Sepao, OdontoServ and Prontodente. Under the merger agreement, the integration of the activities developed by the Company and the merged companies will permit streamline the operations for efficiency and synergy, generating commercial and financial benefits. The main facts and events associated to these transactions were as follows: Company s capital was not increased, as the merged companies total capital was fully held, directly or indirectly, by the Company. The balances of assets, liabilities and shareholders' equity used for the merger, according to the accounting appraisal report, were recorded based on the balance sheets as of dates up to 60 days prior to the merger date. Changes in the equity after the balance sheets dates used for appraisal purposes were properly recorded in their accounting books and the related balances are reflected in the Company s balance sheet after shareholders approved the merger of the companies. Goodwill on acquisitions of the merged companies are classified as Intangible assets in Permanent assets (see note 12a). 5

7 Merged net assets are as follows: Companies merged in 2009 Companies merged in

8 3. PRESENTATION OF FINANCIAL STATEMENTS The financial statements have been prepared and are presented in accordance with the Chart of Accounts of the ANS established by Regulatory Resolution 184, of December 19, 2008, and regulated by Regulatory Instruction 24, of December 22, The main accounting practices are described in note 4. On December 28, 2007, Law 11,638 was enacted, altering the Brazilian Corporate Law (Law 6,404, of December 15, 1976), especially with respect to chapter XV, Fiscal Year and Financial Statements. This Law is effective for fiscal years beginning on or after January 1, 2008 and was designed primarily to update the Brazilian Corporate Law, so as to enable the convergence of Brazilian accounting practices with international accounting standards (IFRS) and allow the Brazilian Securities and Exchange Commission (CVM) to issue new accounting standards and procedures, in conformity with such international accounting standards. In preparing the 2008 individual and consolidated financial statements, the Company fully adopted for the first time the changes in corporate legislation introduced by Law 11,638/07 and Provisional Act 449/08, subsequently converted into Law 11,941, of May 25, 2009, which established the Transitional Tax Regime (RTT) for calculating taxable income, which deals with tax adjustments arising from new accounting methods and criteria introduced by this Law. Changes introduced by Law 11,638/07 and Provisional Act 449/08 (current Law 11,941/09) were made to accounting practices and, as provided for Pronouncement CPC 13 - First-time adoption of Law 11,638/07 and Provisional Act 449/08 (current Law 11,941/09), approved by the Brazilian Securities and Exchange Commission (CVM) Resolution 565 of December 17, 2008, all adjustments impacting prior year s results were made to the accumulated earnings account as of the transition date, when applicable, charged to the retained earnings account in the financial statements for the year ended (January 1 st, 2007). The statements of cash flows have been prepared under the direct method in compliance with ANS Regulatory Instruction 24, of December 22, The statements of cash flows under the indirect method are presented in note 29 as supplemental information. Investments in subsidiaries, equity in subsidiaries, and intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries, according to the ownership structure table in note 10. Finally, as the transaction with Bradesco Saúde S.A. was completed at the end of December 2009, the only impact on 2009 consolidated financial statements is in the balance sheet as of that date, which includes Bradesco Dental balances. The statements of income, cash flows and value added did not impact Bradesco Dental operations in

9 Considering that we conduct a regulated activity in the dental care segment, we are required to present our financial statements based on the ANS chart of accounts, which contains captions different from those commonly used by companies from other segments. Thus, to facilitate the reading of the financial statements, we present below a reconciliation of the captions used by Brazilian corporate law to those adopted by the ANS chart of accounts: Company Consolidated CORPORATE LAW ANS (+) Net revenues 346, , , ,220 (-) Change in technical reserves (1,817) (530) (1,917) (543) Gross operating revenue Health care payments 344, , , ,677 (-) Taxes (-) Taxes on health care plan operations. (12,764) (10,856) (15,737) (12,472) Net operating revenue 331, , , ,205 (-) Cost of services (-) Cost of services (151,876) (124,846) (172,113) (141,076) Indemnifiable claims, net (127,651) (106,418) (144,688) (118,012) Charges on services (10,603) (9,526) (11,712) (9,950) Dental materials (5,895) (5,674) (5,107) (5,738) Other operating expenses (7,727) (3,228) (10,606) (7,376) Gross profit 179, , , ,129 (-) Selling expenses (-) Selling expenses (40,171) (36,431) (42,815) (37,777) (-) Administrative expenses (-) Administrative expenses (78,790) (71,534) (91,958) (79,672) (+) Financial income (+) Financial, net (expenses), net (5,320) (4,886) 6,311 10,074 (+) Financial income (+) Financial income 6,680 11,031 19,545 27,116 (-) Financial expenses (-) Financial expenses (12,000) (15,917) (13,234) (17,042) (+) Equity in subsidiaries (+) Equity in subsidiaries 16,590 14, (5) (-) Stock option plan (-) Stock option plan (2,030) (1,720) (2,030) (1,720) Income before taxation and profit sharing Income before taxation and profit sharing 69,876 62,205 76,863 68,029 (-) Income tax (-) Income tax (14,356) (13,634) (19,210) (17,510) (-) Deferred income tax (-) Deferred Income tax (-) Social contribution (-) Social contribution (5,294) (5,087) (7,172) (6,554) (-) Deferred social contribution (-) Profit sharing (-) Profit sharing (1,644) (2,380) (1,864) (2,863) Net income before minority Net income before minority interest interest 48,970 41,104 49,122 41,102 (+) Reversal of interest on capital (+) Reversal of interest on capital 10,006 14,049 10,006 14,049 (+) Minority interest (+) Minority interest - - (152) 2 Net income Net income 58,976 55,153 58,976 55,153 8

10 4. SIGNIFICANT ACCOUNTING PRACTICES The significant accounting practices adopted by the Company and its subsidiaries to record their transactions are as follows: a) Adjustment to present value Asset and liability elements resulting from long- or short-term transactions, if relevant, are adjusted to present value based on the original date of the transaction. No adjustments were made as of the balance sheet date as a result of the implementation of this accounting practice. b) Cash and cash equivalents (Statements of cash flows) Securities immediately convertible into a known cash amount are classified as cash and cash equivalents. As of December 31, 2009 and 2008, cash and cash equivalents include cash, banks and short-term investments. c) Short-term investments Short-term investments classified into the trading securities are recorded at the original amounts invested, plus income earned through the balance sheet date, adjusted to fair value, and unrealized gains and losses are recorded in income for the year. d) Healthcare receivables (customers) Recorded in the balance sheet at their nominal value as a contra entry to health care payments or advance billings, according to the coverage period of contracts effective at the balance sheet date and receivables related to reimbursement of claims. The allowance for doubtful receivables is recognized based on an analysis of probable losses on receivables over 90 days past due for corporate customers and, over 60 days past due for individuals. e) Investments Represented by investments in subsidiaries accounted for under the equity method, based on the balance sheets as of December 31, 2009 and 2008, as mentioned in note 10. f) Property and equipment Stated at acquisition cost, less accumulated depreciation calculated under the straight-line method at the annual rates mentioned in note 11. 9

11 g) Intangible assets Represented by goodwill paid on the acquisition of investment (interest in subsidiaries), expenses with the development of systems and software licensing. Goodwill was amortized up to December 31, 2008, over the period mentioned in note 12. Notwithstanding, amortization of the portion of intangible assets with indefinite useful lives is no longer permitted beginning 2009 and their balances are tested for impairment instead. Other intangibles with useful lives are amortized under the straight-line method over a period of 60 months, according to note 12. h) Impairment of assets CVM Resolution 565/2008, requires that Companies and their subsidiaries begin to carry out periodic impairment tests of amounts recorded in property and equipment and intangible assets for the purposes of reviewing and adjusting criteria utilized to determine estimated useful lives and calculate depreciation and amortization. The Company reviewed property, plant and equipment items and did not identify any circumstances that could require adjustments to their economic useful lives. Assets are tested for impairment in order to (i) establish whether there was an impairment loss for any assets, and (ii) measure any possible impairment of existing assets to increase or reverse the allowance for losses, when applicable. Within this context, property and equipment and other noncurrent assets, including goodwill and intangible assets, were reviewed to identify evidence of impairment. The Company and its subsidiaries did not identify a need to recognize an allowance for losses on its assets. i) Other current and long-term assets Stated at cost, plus income earned and allowances for losses, when applicable. j) Technical reserves The performance bond reserve, classified in the group Technical reserves, was calculated according to the requirements of the ANS Regulatory Resolution 160, of July 3, For providing full guarantee to members, a 100% reserve was recognized, as mentioned in note 13c. k) Healthcare claims payable (suppliers) The costs of services provided are recorded based on claims reported by accredited service providers when claims covered by the plans are incurred, as a contra entry to the statement of income account indemnifiable claims, net. l) Other current liabilities Stated at known or estimated amounts, plus charges and inflation adjustments incurred, when applicable. 10

12 m) Recognition of operating revenues Revenues from dental care plan payments are recognized on the accrual basis, over the contractual coverage period. When invoices are issued before the coverage period, the corresponding amount is recorded in the advance billing account, as a contra account to current assets, when applicable. Revenues from dental care services provided are recognized on the accrual basis. n) Recognition of costs of services provided Costs of services provided by accredited professionals and clinics are recognized on the accrual basis, when claims covered by the plans are reported. Costs for operating company-owned dental care network are recognized as incurred. Costs and expenses related to dental care services provided are recognized on the accrual basis. o) Income tax and social contribution Calculated based on criteria established by prevailing legislation. Income tax is calculated at the rate of 15% on taxable income, plus a 10% surtax on taxable income exceeding R$240 per year, and includes the tax incentive portion. Social contribution is calculated at the rate of 9% on adjusted net income, as established by prevailing legislation. Deferred taxes attributable to temporary differences are recorded in assets and liabilities based on the expected realization period. p) Contingent liabilities and legal obligations The Company assesses its contingent liabilities based on the requirements of the Accounting Standard and Procedure 22 (NPC 22), issued by the Brazilian Institute of Independent Auditors (IBRACON) and approved by ANS. i. Contingent liabilities: are recorded considering the opinion of the legal counsel; cause of action; similarity with previous lawsuits; complexity of the cause; and the courts position, whenever the loss may result in outflows of funds to settle the obligations and the amounts involved can be reliably measured. ii. Legal, tax and social security obligations: arise from lawsuits related to tax obligations, whose legality or constitutionality is being challenged, which, regardless of the assessment of the likelihood of a favorable outcome, have their amounts fully recognized in the financial statements and are adjusted for inflation as established by tax legislation (SELIC interest rate). q) Estimates and critical accounting judgments The preparation of financial statements in conformity with Brazilian accounting practices requires Management to use judgment to determine and record accounting estimates. Material assets and liabilities subject to these estimates and assumptions include, among others, adjustments to the allowance for doubtful receivable, deferred income tax and social contribution, technical reserves and reserve for contingent liabilities. Actual results could differ from these estimates. The Company and its subsidiaries periodically review these estimates and assumptions. 11

13 r) Stock-based compensation Employee and management profit sharing, even in the form of financial instruments, that is not characterized as expenses is classified as profit sharing, after the income tax line. Management and employee compensation that is not defined directly and proportionally based on the Company s profit is classified as operating cost or expense. The Company and its subsidiaries, based on these requirements, adopt the following procedures: (i) they classify employee profit sharing expenses as profit sharing, after the income tax line; and (ii) they calculate and recognize under operating expenses all estimated costs for stock options granted under share-based payment contracts existing after the year ended December 31, 2008, as prescribed by Accounting Pronouncements Committee Guidance (OCPC) 02 published by the Accounting Pronouncement Committee. (See note 17.f). These operating expenses are carried as a contra entry to Capital reserve - options granted and recognized. s) Earnings per share Calculated based on the number of shares outstanding at the balance sheet date. 5. FINANCIAL INSTRUMENTS - RISK MANAGEMENT The Company is a dental care plan operator and develops customized dental care plans, intended for a large range of corporate customers and associations. The main risks arising from the business of the Company and its subsidiaries are the market and competition, dental cost fluctuation, credit, interest rates and liquidity risks. The management of these risks involves different departments and comprises a series of fund allocation strategies and policies funds considered appropriate by Management. a) Market and competition risk: The Company operates in a competitive market and competes with other companies offering dental care plans with similar benefits, including health care companies, mainly health care insurance and medical and hospital operators, dental care cooperatives, charitable entities and exclusive dental care operators. b) Dental cost fluctuation risk - claims rate: The Company s contracts are effective for 36 months on average, and include a termination clause requiring a 90-day prior notice and fines for terminations requested before such period is completed. Most of the contracts also have an annual adjustment clause for the fees rates charged based on the claims ratio, which is obtained by dividing costs incurred in the past twelve months by net payments (net revenue). The Company s system allows an individual to evaluate all treatments provided through radiographic imaging and analysis of a member s electronic records, and thus monitor dental costs by customer. 12

14 c) Credit risk: The credit risk arises from the possibility of the Company and its direct and indirect subsidiaries not receiving the amounts of past-due payments. The credit policy takes into account the peculiarity of dental care operations and is focused on maintaining the flexibility required by the market and customer needs. The Company has an approval plan for risk acceptance transactions and issuance of the related invoices, which also includes analysis of customer credit history and risk exposure of each transaction. The Company permanently monitors its accounts receivable through appropriate internal controls in place. The method adopted to calculate the allowance for doubtful receivables is described in Note 4.d. d) Financial instruments interest rate risk: The interest rate risk arises from the possibility of the Company and its subsidiaries being subject to interest rate fluctuations that may impact the present value of the short-term investments portfolio. The Company and its subsidiaries adopt the policy of investing in highly-liquid bank certificates of deposit (CDBs and Debentures), mainly in large financial institutions, and short-term funds, under the internal assessment criteria and limits established based on qualitative and quantitative information, and includes the need of allocating funds under ANS Regulatory Resolution 159, of July 3, 2007, to guarantee technical reserves. Almost the entire the short-term investment portfolio of the Company and its subsidiaries is exposed to interest rate fluctuations in the domestic market. As the Company does not have contracts indexed to other currencies/rates, it does not carry out derivative transactions. Short-term investments are stated in note 6. e) Liquidity risk The main objective of liquidity risk management is to monitor the terms for settling the Company and its subsidiaries receivables and payables, as well as the liquidity of their financial instruments. The Company and its subsidiaries prepare projected cash flow analyses and periodically review liabilities assumed and financial instruments used, principally related to assets held in guarantee of technical reserves. 6. SHORT-TERM INVESTMENTS Short-term investments, classified into the category trading securities, are highly liquid and consist of: Company Consolidated Bank certificates of deposit (CDBs) (i) 82,669 76, , ,963 Investment of funds in government and private securities (ii) 6,466 4, ,311 5,431 Debentures (iii) ,172 - Total 89,135 80, , ,394 13

15 (i) Refer to floating rate securities indexed to the daily interest rates of interbank certificates of deposits. (ii) The value of investment fund shares was calculated based on the share values disclosed by the managers of the investment funds in which the Company invests. (iii) Refers to repurchase agreements involving floating rate debentures indexed to daily interest rates applicable to debentures under repurchase agreements with Banco Itaú BBA S.A. Due to the nature of short-term investments, their cost is equal to their fair value as of December 31, 2009 and As of December 31, 2009 and 2008, private securities in the portfolio were under the custody of the Clearinghouse for the Custody and Financial Settlement of Securities (CETIP S.A.). The custody of shares and related investment fund bonds are directly held by the managers of these funds. Breakdown of the investment portfolio by maturity Company Without Maturity to 180 days 181 to 360 days Over 360 days Total CDB's - 2,383 31,730 48,556 82,669 Investment Funds 6, ,466 Total 6,466 2,383 31,730 48,556 89,135 Consolidated Without Maturity to 180 days 181 to 360 days Over 360 days Total CDB's - 41,770 61,608 72, ,274 Investment Funds 337, ,311 Debentures - 21, ,172 Total 337,311 62,942 61,608 72, ,757 Investments in CDB are classified in current assets, regardless of their maturities, because of the guarantee of full daily liquidity offered by the certificates issuing banks. A portion of the short-term investments balance, in the amount of R$68,529, is linked to the ANS to guarantee the risk technical reserve, pursuant to Regulatory Resolution

16 7. HEALTHCARE RECEIVABLES (CUSTOMERS) Refer to receivables from legal entities, as follows: Company Cons olidated Invoices receivable 47,955 16,036 50,890 18,150 Premium receivable ,871 - Debit notes (-) A dvance billing (*) (21,876) (4,092) (23,567) (4,177) A llow anc e f or doubtf ull rec eiv ables (8,593) (1,735) (9,173) (2,293) Total 17,955 10,934 43,490 12,415 (*) Refers to invoices issued, whose effective period began in the month subsequent to the issuance month. As of December and 2008, health care receivables - Company, by maturity are as follows: Current 2009 Past-due Up to 30 days Up to 30 days From 31 to 90 days Over 90 days Total Invoices and debit notes recivable, net 3,945 7,914 9,314 5,375 26,548 Allow ance for doubtful receivables - - (3,218) (5,375) (8,593) Total 3,945 7,914 6, ,955 Current 2008 Past-due Up to 30 days Up to 30 days From 31 to 90 days Over 90 days Total Invoices and debit notes recivable, net 5,639 4, ,735 12,669 Allow ance for doubtful receivables (1,735) (1,735) Total 5,639 4, ,934 15

17 8. PREPAID TAXES Represented by: Company Consolidated Business income tax (IRPJ) (a) 17,387 17,955 24,375 23,786 Social contribution (CSLL) (a) 6,188 6,164 8,463 7,501 Tax on revenue (PIS) (b) Other Total 23,852 24,189 34,377 32,473 (a) Refers to estimated IRPJ and CSLL amounts and prior-year s credit balances. Amounts paid on an estimate basis in 2009 will be offset against the balance payable when filing the corporate income tax return, on a date to be set by the Federal Revenue Service for companies under the taxable income regime. Management considers that these credits, after utilization against income tax and social contribution for the year, will be realized in the subsequent year. (b) Refer mainly to recoverable PIS on billings resulting from a lawsuit in which the subsidiary Clidec obtained a favorable outcome in As of December 31, 2009, the subsidiary Clidec has tax loss carryforwards from prior years in the amount of R$ 785 (R$ 3,490 as of 2008), for which no deferred income tax (25%) and social contribution (9%) in the amounts of R$ 196 and R$71, respectively, were recorded. The management of the subsidiary estimates that these credits will be fully realized in 2010, within the annual 30% limit for utilization against tax loss carryforwards set forth by prevailing legislation. 9. LONG-TERM ASSETS a) Escrow deposits Refers basically to deposits for lawsuits related to the INSS (National Institute of Social Security) levied on self-employed service providers of subsidiary Bradesco Dental and the increase in COFINS (tax on revenue) rate, as shown in the chart below. Company COFINS - - 2,040 2,040 INSS ,482 Consolidated Other Total ,432 2,814 16

18 b) Other receivables - consolidated. Company Consolidated DentalCorp 5,628 8,317 5,628 8,317 Rede Dental 2,839 2,779 2,839 2,779 Care Plus/Biodent 1,395 1,700 1,395 1,700 Sepao Prontodente OdontoServ Other Total 11,155 12,796 11,155 13,596 As mentioned in note 10, ANS approved the acquisition of the shareholding control of the companies listed above. Accordingly, the accounting, tax and labor procedures used by these companies were reviewed, and cases involving potential risks were identified. The total amount identified above is similar to the amount recorded under Reserve for contingent liabilities in long-term liabilities. As set forth in the Stock Option Agreement and Other Covenants entered into between the former shareholders of these companies and the Company, in certain circumstances, these former shareholders guarantee the reimbursement of any payments the Company is required to make. The amounts recorded in other receivables are deposited in an investment fund and CDBs in the name of the former shareholders, who can only make invest or redeem funds with the Company s authorization, thus avoiding any credit risk related to the acquisition of ownership interest of the companies mentioned above. 10. INVESTMENTS Investments are classified as follows: Company Consolidated Subsidiaries 333, , Other 1 1, ,020 Total 333, , ,020 17

19 Subsidiaries The net book value was recorded under investments and the excess net book value was transferred to intangible assets. This additional value refers mainly to the goodwill based on generation of future earnings. Subsidiaries Acquisition and/or ANS approval date Total Acquisition Value Net Book Value Goodwill Bradesco Dental 12/04/ , , ,248 DentalCorp 02/09/ , ,858 Rede Dental 10/08/2007 7,584 (119) 7,703 Sepao 10/24/2008 9, ,104 SRJSPE 06/26/ ,721 (130) 13,850 Care Plus 06/19/ ,113 (283) 13,396 Biodent 06/19/2008 2, ,739 Prontodente 12/22/2008 5,517 (72) 5,445 OdontoServ 02/27/ , ,353 EASY 07/08/2008 3, ,644 Total Consolidated 466,340 Goodwill amounts were amortized through December 31, 2008 and, beginning as of this date, these amounts are subject to impairment tests, as explained in note

20 11. PROPERTY AND EQUIPMENT Annual depreciation rate - % Purchase cost Company Accumulated depreciation Consolidated Net book value Net book value Chattels: Computer equipment 20 4,015 2,864 1, , Vehicles Software 20 2,513 1,495 1,018 1,028 1,923 2,004 Facilities Machinery and equipment Furniture and fixture 10 2, , ,387 1,199 Communication equipment Dental equipment Total chattels 12,150 7,366 4,784 4,397 6,713 6,129 Other property and equipment: Leasehold improvements 20 2,930 2, ,990 1,311 2,327 Other Total property and equipment 2,945 2, ,992 1,367 2,343 Total property and equipment 15,095 9,448 5,647 6,389 8,080 8, INTANGIBLE ASSETS a. Goodwill on acquisition of investments Relates to goodwill based on expected future earnings, paid on acquisition of the investment mentioned in note 10. Until December 31, 2008, these amounts were amortized under the straight-line method over 5 years. After said date, they were no longer amortized, being tested for impairment only. 19

21 Adjusted cost Accumulated amortization Total Total DentaCorp 24,858 (9,529) 15,329 15,329 Rede Dental 7,703 (1,544) 6,159 6,159 Care Plus 13,396 (1,563) 11,833 11,833 Biodent 2,739 (319) 2,420 2,419 SRJSPE 13,850 (1,616) 12,234 12,235 Sepao 9,104 (303) 8,801 8,801 Prontodente 5,445-5,445 - Odontoserv 25,353-25,353 - Bradesco Dental 361, ,248 Outros 15 (8) 7 5 Total Company 463,711 (14,882) 448,829 56,781 Easy 2,644 (265) 2,379 2,379 Total Consolidated 466,355 (15,147) 451,208 59,160 b. Systems development and software licensing Company Consolidated System development 5,281 4,640 5,679 4,640 Software licenses (-) Accumulated amortization (1,615) (1,151) (2,016) (1,154) Total 3,821 3,595 3,908 3, MINIMUM CAPITAL, OPERATIONAL DEPENDENCE AND TECHNICAL RESERVES - COMPANY The National Supplementary Health Agency (ANS) published, on July 3, 2007, Regulatory Resolution 160, which establishes new rules for recognition of technical reserves, minimum capital requirements, and operational dependence. The main definitions applicable to dental care operators are as follows: a. Adjusted minimum capital represents the minimum amount of shareholders equity or net assets, calculated by multiplying the K factor by capital base of R$4,500. The compliance deadline is as follows: immediately use capital base of R$3,100, use capital base of R$3,600 by July 2008, use capital base of R$4,000 by January 2009, and use capital base of R$4,500 by July Under this rule, the required minimum capital is R$145, whereas the Company shareholders equity as of December 31, 2009 R$ 780,022 (R$244,414 as of December 31, 2008). 20

22 b. The solvency margin corresponds to the amount of adjusted capital sufficient to cover the higher of 0.20 times the sum of the last twelve-month payments, or 0.33 times the annual average of the last 36-month net claims. As of December 31, 2009, the solvency margin calculated is R$ 68,342 (R$59,797 as of December 31, 2008) based on payments, and adjusted capital in December 31, 2009 is R$ 399,772 (R$ 66,402 as of December 31, 2008). c. The risk reserve guaranteeing the payments whose risk has not yet ended is equivalent to 0.50 times the monthly average of healthcare plan premiums for the last three months. The amount of this reserve as of December 31, 2009 is R$16,504 (R$13,083 as of December 31, 2008) in the Company and R$17,460 (R$14,233 in 2008) in consolidated financial statements. In addition, in consolidated financial statements as of December 31, 2009, its subsidiary Bradesco Dental recorded the following reserves: a) Unearned premium reserve (R$16,441), b) Reserve for claims and claim adjustment expenses (R$204) and c) Reserve for claims incurred but not reported (R$13,502). d. Operational dependence is the amount calculated based on the difference, counted in days, between the average period for payment of claims and the average period for receipt of payments resulting from the operation s financial cycle. Should the result obtained be positive, restricted short-term investments must be recognized. Based on the established calculation, as of December 31, 2009, the Company is not required to maintain restricted short-term investments. 14. HEALTH CARE CLAIMS PAYABLE AND HEALTH CARE COSTS PAYABLE (SUPPLIERS) Commitments related to service providers at the balance sheet date are as follows: 21

23 15. TAXES PAYABLE Taxes payable are as follows: Company Consolidated IRPJ 14,944 13,767 27,267 16,763 CSLL 5,571 5,137 13,510 6,277 COFINS PIS Other 1, , Total 23,251 20,421 45,384 24, RESERVE FOR CONTINGENT LIABILITIES - CONSOLIDATED a. The Company and its subsidiaries are parties to lawsuits involving mainly tax, civil and labor contingencies: (*) Refer to possible risks identified in a due diligence, guaranteed by deposits in restricted accounts, as mentioned in note 9.b. Changes in contingent liabilities are shown below: Opening balance 17,014 16,374 Recognition 2,707 3,184 Write-offs (1,725) (2,981) Inflation adjustment (3,042) 437 Recognition - Bradesco 20,106 - Closing balance 35,060 17,014 Number of law suits

24 b. Tax contingencies Contingent liabilities relating to ongoing tax lawsuits remain recorded until a final and unappealable decision is rendered. COFINS The Company and its subsidiary Clidec filed a lawsuit to pay COFINS as established by Supplementary Law 7/70 rather than under Law 9718/98, and to offset the difference in amounts paid at the 3% tax rate against social contribution. Regarding the Company, the request was partially granted and the increase in COFINS tax basis was declared unconstitutional. Regarding Clidec, the request was also partially granted, with verification of the escrow deposits made while the lawsuit was under discussion. Depending on a court order for the survey of court amounts and offset of the remaining amount directly with the Federal Revenue Service. INSS: Subsidiary Bradesco Dental is challenging in court the levy of social security contribution on compensations paid to insurance brokers and dentists, initially established by LC 84/1996 and, subsequently, by Law 9876/1999 (new wording of article 22, item I of Law 8212/1991), at the rate of 20% with additional 2.5%, under the argument that services are not rendered to insurance companies, but to the insured and, therefore, should not subject to said tax. These payables are fully recorded in the amount of R$19,482 as of December 31, 2009, and an escrow deposit of R$19,482 was made. c. Civil contingencies: The Company and its subsidiaries are parties to lawsuits claiming compensation for pain and suffering and property damages related to their main activities, in the aggregate amount of, as of December 31, 2009 R$ 417 (R$ 623 as of December 31, 2008). d. Labor contingencies: The Company and its subsidiaries are parties to labor lawsuits mainly related to salary increase claims, as provided for in a collective labor agreement that the Union to which the Company and its subsidiaries are associated has not adhered to. The amount of this reserve as of December 31, 2009 is R$424 (R$638 as of December 31, 2008). Based on the opinion of its legal counsel, Management considers the amounts accrued under the caption Reserve for contingent liabilities, in long-term liabilities, sufficient to cover potential losses resulting from court decisions. 23

25 17. SHAREHOLDERS' EQUITY a) Capital Subscribed and paid-up capital as of December 31, 2009 is R$284,611 (R$190,125 as of December 31, 2008), represented by 44,274,566 (25,500,230 as of 2008) without par value. The majority of shareholders in the Extraordinary Shareholders Meeting held on December 23, 2009 approved the Executive Committee s proposal, with the favorable opinion of the Supervisory Board and the Board of Directors, of reducing the Company s capital from R$190,125 to R$75,646, a reduction of R$114,479, without the cancellation of shares, because capital is excessive for the activities developed by the Company, pursuant to the terms of article 173 of Law 6404/76, with the resulting refund to shareholders in the amount of R$ per share. This amount is recorded under dividends and refunds in current liabilities. The same Extraordinary Shareholders' Meeting approved the merger of Bradesco Dental shares, with the resulting conversion of this company into a wholly-owned subsidiary of the Company. With the approval of the merger of shares, Bradesco Saúde S.A., the only shareholder of Bradesco Dental, received 19,259,436 new shares issued by the Company, that is, common shares for each common share issued by the merged Bradesco Dental, representing a capital increase of R$208,965 in the Company. The closing price of the Company s shares (ODPV3 -BM&FBovespa), as of December 31, 2009 was R$63.99 (R$23.00 as of December 31, 2008) per share, whereas the book value per share as of December 31, 2009 is R$17.62 (R$9.71 as of December 31, 2008). b) Capital reserves The Company s capital reserves amount to R$474,129 (R$ 6,064 in 2008) and comprise: - The Company s share premium in 2009, in the amount of R$466,035, corresponding to the difference between the acquisition cost of 43.5% of the Company s capital, in the amount of R$675,000, and its net book value of R$208,965; - The Company s share premium in 1998 in the amount of R$3,911; - Stock option plan of R$4,054; - Tax incentive reserve of R$129. c) Legal reserve This reserve must be recognized by the Company through the allocation of 5% of the net income for the year until it reaches 20% of the capital. 24

26 d) Allocation of net income Pursuant to the Company s bylaws, amended at the Extraordinary Shareholders' Meeting held on December 23, 2009, net income is allocated as follows: i) deduction of losses, if any, ii) 5% for recognition of the legal reserve until it reaches 20% of the subscribed capital, iii) mandatory dividend of 50% (25% in 2008) of the net income, iv) interest on capital, and v) recognition of the bylaws reserve, referring to the remaining balance. Interest on capital In 2009, the Company opted for the payment of interest on capital, calculated based on the long term interest rate (TJLP), applied monthly to shareholders equity. Interest on capital totaled R$10,006 (R$14,049 as of December 31, 2008), resulting in an income tax and social contribution benefit of R$3,402 (R$4,777 as of December 31, 2008). Dividends The majority of shareholders at the Extraordinary Shareholders Meeting held on December 23, 2009 approved the Executive Board s proposal, with the favorable opinion of the Supervisory Board and the Board of Directors, of distributing interim dividends in the amount of R$ per share, totaling R$72,422 (of which R$34,439 refer to retained earnings and R$37,983 refer to the bylaws reserve), recorded under net income and earnings reserve in the balance sheet as of September 30, This amount is recorded under dividends and refunds in current liabilities. e) Treasury shares The Extraordinary Shareholders' Meeting held on December 23, 2009 approved the cancellation of 485,100 treasury shares in the Company without reducing the capital approved at the Board of Directors Meeting held on October 18, The Company had 335,100 treasury shares as of December 31, 2008 and acquired 150,000 shares in 2009 for R$3,475 (R$11,565 in 2008). 25

27 f) Stock option plan The Extraordinary Shareholders Meeting held on April 19, 2007 approved the creation of the stock option plan (the Plan ) pursuant to article 19 - XVIII of the Bylaws, designated for the employees and officers of the Company and its subsidiaries. The Plan is managed by the Board of Directors, which has powers to take the required actions for its maintenance, according to the approved guidelines. Options granted under the Plan are limited to 5% of capital. On August 2, 2007, the Board of Directors approved, as recommended by the Company s CEO, who is voluntarily a non-beneficiary, the first grant of the stock option program, which represented 221,859 shares, at the price of R$44.85 per share. At the meeting held on February 28, 2008, the Board of Directors approved, as recommended by the Company s CEO, who is voluntarily a non-beneficiary, the second grant of the stock option program, which represented 353,494 shares, at the price of R$32.42 per share. At the meeting held on March 25, 2009, the Board of Directors approved, as recommended by the Company's CEO, who is voluntarily a non-beneficiary, the third grant of the program, which represented 255,002 shares, at the price of R$ per share. The exercise price will be adjusted for inflation at IGP-M, price index disclosed by Fundação Getúlio Vargas, over the period between the date in which option agreements were signed and the date of respective exercises, less compensations to shareholders made in the period. The options vesting period is three years from the Stock Option Agreement date. Beneficiaries may exercise options totally or partially provided that they inform the Company in writing, within the six-year exercise deadline and each vesting period. The exercise notice shall only be valid and effective if submitted to the Company s Management one (1) month before each Annual Meeting of the Company s Board of Directors, disclosed in the corporate events calendar, unless another term is set by the Board of Directors and communicated in advance to the beneficiary. During a period of three years from the option exercise date, beneficiaries cannot sell and/or offer a number of shares calculated based on the following formula: N = 0.5 x Q x (1 Ep/Mp) Where: N = number of share retained for sale after three years from exercise date Q = number of vested options/shares Mp = market price of share on exercise date (closing price on the prior day) Ep = exercise price of the option 26

28 The fair value of the stock option plan benefit was estimated based on the Black-Scholes stock option valuation model, considering the following weighed average assumptions: Grant year Risk-free rate 9.25% 11.40% 11.30% Program period Expected annualized volatility 40.60% 24.20% 33.94% Yield and dividends 2.00% 2.00% 2.00% Fair value of the benefit on grant date (per share) Option value adjusted based on IGPM - R$ The total compensation cost arising from these stock option plans was R$15,123, as follows: Grant date Number of shares Option value Total 08/02/ , ,477 2/28/ , ,032 3/25/ , , ,355 15,123 In compliance with CPC 10 Share-based Payment - and based on the vesting period of the plans, the amount of R$2,030 was recognized as stock option plan expenses based on the percentage of vesting period elapsed, with a contra entry in a separate capital account in shareholders' equity, for the year ended December 31, 2009 (R$1,720 in 2008). Stock option plans as of December 31, 2009 are summarized as follows: Beginning of period Cancellations End of period Eligible Terminated Cancelled Eligible Existing Year beneficiaries Options eligible beneficiaries options beneficiaries options , , , , , , , , , , , ,303 The first, second and third grants of the stock option plan represent 1.48% of the Company s capital. Exercise prices established in the first, second and third grants exceed above share market price as of December 31,

29 18. HEALTH CARE PAYMENTS (GROSS REVENUE FROM SALES AND/OR SERVICES) Health care payments consist of net payments, less the change in technical reserve, according to the ANS chart of accounts, and are equivalent to the gross operating revenue established by Brazilian Corporate Law. The contra entry to these payments is health care receivables, in current assets. 19. INDEMNIFIABLE CLAIMS, NET Refer to costs of dental services, according to the contractual terms with our network of dentists and the compensation established in the prevailing table. It also includes reimbursements made to members for the use of dental benefits outside the accredited network of dentists. The amounts are recorded as a contra entry to the caption health care claims payable, in current liabilities. 20. SELLING EXPENSES Selling expenses refer to commissions of the network of independent brokers and other distribution channels. 21. ADMINISTRATIVE EXPENSES Company Consolidated Personnel and outside services 37,234 33,194 51,229 38,078 Public offering of shares Acquisition expenses 6,045 1,958 3,864 1,958 Location and operation 13,221 10,024 16,192 11,781 Fees and taxes 2,295 1,219 2,516 1,352 Publicity and advertising 6,156 6,053 6,770 6,337 Tax on banking transactions (CPMF) PIS/COFINS on financial income Travel, printed materials and subscriptions 2,782 2,711 3,602 3,086 Depreciation and amortization 2,481 11,720 2,992 12,435 Joint Venture Mexico Other 7,905 4,026 4,081 3,687 Total 78,790 71,534 91,958 79, FINANCIAL INCOME (EXPENSES) Consists of financial income generated by investments and adjustments of escrow deposits, less financial expenses generated by adjustment of reserve for legal contingencies and expenses on bank charges. 28

30 Financial income: Company Consolidated Fixed-income securities 6,269 9,571 18,349 23,679 Adjustment of escrow deposits - 1,183-1,505 Other ,196 1,932 Total 6,680 11,031 19,545 27,116 Financial expenses: Company Consolidated Bank fees Adjustment of reserve for contingent liabilities Interest on capital 10,006 14,049 10,006 14,049 Other 1,308 1,089 2,441 1,916 Total 12,000 15,917 13,234 17, CALCULATION OF INCOME TAX AND SOCIAL CONTRIBUTION Income tax and social contribution are reconciled to the amounts recorded as expense for the year, as follows: Company Consolidated Income before income tax, social contribution and profit sharing 69,876 62,205 76,863 68,029 Statutory rate 34% 34% 34% 34% Expected income tax and social contribution expense at statutory rate 23,758 21,150 26,133 23,130 a) Effect of income tax and social contribution on permanent differences: Equity in subsidiaries (5,640) (4,769) - - b) Effect of income and social contribution taxes on temporary differences and tax loss carryforwards for which tax credits were not recognized Tax loss carryforwards (388) - (770) (1,158) Temporary differences - reserve for contingent 1, , Temporary differences - allowance for doubtfull receivables 2,330 2,314 Temporary differences - goodwill (3,951) 1,848 (3,951) 1,938 Temporary differences - other 1, (232) Income tax and social contribution 19,262 18,721 25,877 24,064 Current income tax and social contribution 19,650 18,721 26,382 24,064 Deferred income tax and social contribution (388) - (505) - 29

31 24. RELATED PARTIES Transactions between the Company and its subsidiaries consist of agreements for provision of administrative services and accreditation as service providers, as follows: OdontoPrev Serviços EASY Dental Partner Rede Dental Clidec Odontoprev Serviços Clidec Accounts receivable Accounts payable Restituição de Capital , , Indemnifiable events, net ,434-3,291 Service provision expenses 3, ,508 - Dentistry material - - 2,192 Service provision revenues *Refers to amounts receivable from subsidiaries as a result of their capital reduction, as approved at the Extraordinary Shareholders' Meeting held on October 27, These amounts are recorded under other receivables in current assets and will be received by the Company beginning February The Company and its subsidiaries pay profit sharing to their employees and officers, subject to the achievement of operational goals and specific objectives, established and approved at the beginning of each year. As of December 31, 2009, the amounts of R$1,644 (R$2,380 as of December 31, 2008) Company, and R$1,864 (R$2,863 as of December 31, 2008) - consolidated, were recorded under Profit sharing in the statements of income for the period. Total direct compensation to the management of the Company and its subsidiaries is as follows: Compensation Board of Directors Supervisory Board Officers Compensation ,018 3,330 3,630 3,930 Dividends and interest on capital Total ,018 3,700 3,630 4,311 Board of Directors do not have any variable compensation and the Company is not sponsor of any pension plan. Total 25. INSURANCE The Company maintains insurance coverage in an amount considered sufficient to cover involved risks. As of December 31, 2009, insurance refers to property damages of R$9,092 (R$8,290 in December 2008) and sundry risks of R$4,283 (R$2,936 in December 31, 2008). 30

32 26. DERIVATIVES The Company does not enter into derivative transactions for speculative purposes. As of December 31, 2009, the Company and its subsidiaries do not have asset or liability positions related to derivative transactions. 27. SUBSEQUENT EVENTS On December 2, 2009, ANS published RN 206/2009, applicable as of 2010, which changes method used to account for net payments and premiums of health care plans with preestablished prices and amends RNs 159 and 160, both of The main factors impacting the Company s operations are as follows: a) Payments and premiums from health care plans with preestablished prices shall be mandatorily recognized at the value corresponding to the daily apportionment pro rata dia of the individual coverage period of each agreement, beginning as of the first day of coverage. b) Balances recorded in current liabilities referring to the Risk Reserve or the Unearned Premium Reserve, provided for in current regulation, shall be fully reversed in 2010 and credited to changes in technical reserves in the statement of income. c) Securities held as guarantee assets of the Risk Reserve will automatically back up to 72/72 of the Reserve for incurred but not reported claims (IBNR), and the possible amount remaining in the balance of health care claims payable, provided for in the ANS Standard Chart of Accounts. The Company is conducting technical studies to recognize the IBNR. Preliminary evaluations made by Management indicate that the combined result of the effects above are not material. 28. ACCOUNTING PRONOUNCEMENTS ISSUED IN 2009 AND EFFECTIVE BEGINNING 2010 With the enactment of Law 11638/07, which introduced changes in Brazilian Corporate Law to enable convergence of Brazilian accounting practices with the International Financial Reporting Standards (IFRS), new accounting standards and technical pronouncements have been issued in conformity with IFRS by the Accounting Pronouncements Committee (CPC). Through the reporting date, new technical pronouncements had been issued by CPC and approved by CVM Resolutions for mandatory adoption beginning The CPCs applicable to the Company, considering its operations, are the following: 11 Insurance 15 Business Combinations 16 Inventories 20 Borrowing Costs 21 Interim Financial Reporting 22 Segment Reporting 23 Accounting Policies, Changes in Accounting Estimates and Errors 24 Events after the Balance Sheet Date 25 Provisions, Contingent Liabilities and Contingent Assets 26 Presentation of Financial Statements 27 Property, Plant and Equipment 31

33 28 Investment Property 30 Revenues 31 Noncurrent Assets Held for Sale and Discontinued Operations 32 Taxes on Income 33 Employee Benefits. The Company s management is evaluating the impact of the changes introduced by these new pronouncements. For adjustments from adopting new accounting practices beginning January 1, 2010, the Company should assess the need to remeasure the effects thereof on its financial statements for 2009, for comparative purposes, as if these new procedures would be effective since the beginning of the year ending December 31,

34 29. SUPPLEMENTAL INFORMATION STATEMENT OF CASH FLOWS INDIRECT METHOD STATEMENTS OF CASH FLOWS (INDIRECT METHOD) FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (In thousands of Brazilian reais - R$) Company Consolidated CASH FLOWS FROM OPERATING ACTIVITIES Net income 58,976 55,153 58,976 55,153 Adjustments to reconcile net income to cash provided by operating activities: Stock option plan 2,030 1,720 2,030 1,720 Minority interest in subsidiary (2) Depreciation and amortization 2,481 1,816 2,992 2,191 Goodwill amortization - 9,904-10,168 Inflation adjustment, net (110) (945) 54 (984) Increase in technical reserves 1, , Reserve for contingent liabilities 3, , Gain (loss) on sale of property and equipment and investments 61 9 (105) 9 Equity in subsidiaries (16,590) (14,026) (14) 5 Allowance for doubtful receivables 6, , Adjusted net income 58,557 55,371 75,779 69,693 Decrease (increase) in operating assets Health care receivables (13,879) 509 (13,222) 1,037 Deferred selling expenses (9) - (8) 0 Notes receivable (107,308) 1,090 (3,961) (974) Other assets in long-term assets (2,054) (3,572) (1,341) (5,720) Inventories - - (742) - Increase (decrease) in operating liabilities Health care claims payable 2,110 1,371 1, Health care costs payable 3, ,343 (30) Payroll, vacation and fees Taxes payable 3,123 1,219 4,442 (474) Suppliers and other 1,820 (355) 2,990 (2,124) Reserve for contingent liabilities - merger 4,094 9, ,716 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: (49,601) 65,066 69,711 65,441 CASH FLOWS FROM INVESTING ACTIVITIES Write-off of investments due to merger 4, ,365 - Acquisition of investments, including goodwill (net of cash acquired) 75,429 (37,014) - (39,939) Acquisition of property and equipment (1,007) (1,204) (1,466) (1,394) Systems development and software licenses (638) (2,902) (639) (2,971) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 78,302 (41,120) 297,260 (44,304) CASH FLOWS FROM FINANCING ACTIVITIES Dividends and interest on capital paid (14,167) (18,871) (25,629) (18,871) Share buyback - in treasury (3,475) (11,565) (3,475) (11,565) Capital increase - minority interest NET CASH USED IN FINANCING ACTIVITIES (17,642) (30,436) (29,104) (30,318) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT 11,059 (6,490) 337,867 (9,181) CASH AND CASH EQUIVALENT Balance at beginning of year 80,850 87, , ,017 Balance at end of year 91,909 80, , ,836 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT 11,059 (6,490) 337,867 (9,181) 33

35 30. RECONCILIATION OF SHAREHOLDERS' EQUITY AND NET INCOME PREPARED UNDER THE BRAZILIAN ACCOUNTING PRACTICES ( BRGAAP ) AND THE INTERNATIONAL FINANCIAL REPORTING STANDARDS ( IFRS ) Basis for preparation of the reconciliation The BR GAAP differs significantly from the IFRS in certain respects. In the preparation of the reconciliation presented below, Management used its best knowledge of the expected standards and interpretations, events and circumstances, and accounting policies, which will be applied when the Company prepares its first full annual IFRS financial statements. The note on reconciliation of shareholders equity and net income prepared under the BR GAAP and the IFRS presented for compliance with the differentiated corporate governance rules for the New Market issued by BM&F BOVESPA does not represent a complete set of financial statements, including the balance sheet, statement of income, changes in shareholders equity and cash flows, presented in a comparative manner and with the respective notes, as required by IFRS. In addition, the Company considered IFRS 1, Firsttime Adoption of International Financial Reporting Standards, for the purposes of measurement of adjustments in the reconciliation of shareholders equity at January 1, 2007, as mentioned below. The identification and measurement of the differences between the BR GAAP and the IFRS accounting principle and practices will not be considered completed until the transition date is determined and the first full IFRS financial statements are prepared. Changes in standards or additional standards and interpretations may be issued by the International Accounting Standard Board (IASB), the International Financial Reporting Interpretations Committee (IFRIC), or regulatory agencies, and thus, existing accounting standards and interpretations may be changed. Therefore, when the Company s full consolidated financial statements are prepared and the effective transition date is determined (as established by IFRS 1), other differences between the BR GAAP and the IFRS accounting principle and practices may be identified. The reporting date of the reconciliation between the BR GAAP and the IFRS is December 31, 2009, together with the related comparative information for the year ended December 31, Exemptions used and exceptions applied by Management when preparing the reconciliation between the BR GAAP and the IFRS under IFRS 1 IFRS 1 should be applied upon the first-time adoption of IFRS in the preparation of financial statements. In general, IFRS 1 requires an entity to comply with each IFRS effective at the reporting date for its first IFRS financial statements. Although the disclosure of a reconciliation note may not necessarily be considered as a first-time adoption of IFRS, the Company considered IFRS 1 in preparing the reconciliation between standards. 34

36 IFRS 1 grants limited exemptions from these requirements in specified areas where the cost of complying with them would be likely to exceed the benefits to users of financial statements. IFRS 1 also established exceptions prohibiting retrospective application of certain IFRS accounting standards in some areas, particularly where retrospective application would require judgments by Management about past conditions after the outcome of a particular transaction is already known. January 1, 2007 was defined as the IFRS transition date for preparation of this reconciliation note. Below is a summary of the applicable exemption chosen by Management under IFRS 1 in preparation of the reconciliation. Business combination IFRS 1 allows that business combinations that occurred before the opening balance sheet (January 1, 2007) are not accounted for retroactively in conformity with IFRS 3 (Business Combinations). According to this exemption, companies adopting the IFRS for the first time are not required to raise financial information which was not collected on the dates of business combinations prior to the transition date, basically maintaining the accounting treatment used under the prior accounting practices, i.e. BR GAAP. The Company used such exemption on January 1, 2007, and consequently did not apply IFRS 3 retroactively for the acquisition of the subsidiary, Clidec. In accordance with the exemption allowed by IFRS 1, the accounting policies applied for initial recognition of acquisitions prior to the transition date under BR GAAP were used. Other intangible assets resulting from acquisitions prior to the same date of the opening balance for reconciliation purposes were not recognized under BR GAAP, and therefore adjustments for intangible assets recorded in BR GAAP, which did not qualify as intangible assets under IFRS were not necessary. Additionally, the acquisitions of Dentalcorp, Garcia Pedrosa ( Rede Dental ), Care Plus, Biodent, S.R.J.S.P.E., SEPAO, Prontodente, Odontoserv e Bradesco Dental, occurred in the period from the date of the acquisition balances for reconciliation purposes to the date of presentation of the reconciliation, were assessed under IFRS Reconciliation of shareholders equity and net income prepared under the BRGAAP and the IFRS The reconciliation of shareholders equity and net income, consolidated, prepared under the BRGAAP and the IFRS on December 31, 2009 and 2008, is as follows: 35

37 Description of the differences between the BR GAAP and the IFRS accounting practices i) IPO expenses IPO expenses described in note 21 were recorded in the statement of income for the year ended December 31, 2007, in accordance with CVM/SNC/SEP Official Letter 01/2007 and accounting practices in effect on that date. In accordance with IFRS, these expenses and the related tax benefits were reclassified to shareholders' equity. ii) Business combination Under BR GAAP, the acquirer recognizes only the assets and liabilities recorded in the acquiree s opening balance, and the goodwill or negative goodwill computed, corresponding to the difference between the amount paid by the acquirer and the carrying amount of assets and liabilities recorded by the acquiree. The goodwill is being amortized over 5 year until December 31, After said date, they were no longer amortized, being tested for impairment only. The Company accounted for the business combinations in compliance with IFRS 3, under the purchase method. The date when the acquiree s interest was obtained was established as the business combination date. Under the IFRS, the acquisition cost is defined as the amount of assets provided or liabilities incurred or assumed and equity instruments issued by the acquirer in exchange for the control, plus any cost directly attributable to the business combination. IFRS requires that identifiable assets and liabilities on the acquisition date be recorded by the acquirer in a separate account, at the fair value on that date. Intangible assets were recognized separately from goodwill, for cases when intangible assets represented legal or contract rights and it was possible to separate them from the acquiree, so that they could be sold, transferred, rented or exchanged. The acquiree s contingent liabilities should be 36