Notre Dame Intermédica Participações S.A. (Free translation from Portuguese into English)

Transcription

1 (Free translation from Portuguese into English) Separate and Financial Statements December 31, 2017 with Independent Auditor s Report

2 Separate and consolidated financial statements December 31, 2017 Contents Independent auditor s report on separate and consolidated financial statements...1 Audited financial statements Statements of financial position...9 Statement of income...11 Statement of comprehensive income...12 Statement of changes in equity...13 Statement of cash flows indirect method...14 Statement of value added...16 Notes to the financial statements...17

3 São Paulo Corporate Towers Av. Presidente Juscelino Kubitschek, Vila Nova Conceição São Paulo SP - Brasil Tel: ey.com.br A free translation from Portuguese into English of Independent Auditor s Report on separate and consolidated financial statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB). INDEPENDENT AUDITOR S REPORT ON SEPARATE AND CONSOLIDATED FINANCIAL STATEMENTS The Board of Directors and Shareholders of Notre Dame Intermédica Participações S.A. Opinion We have audited the separate and consolidated financial statements of Notre Dame Intermédica Participações S.A. ( Company ), identified as Separate and, respectively, which comprise the statement of financial position as at December 31, 2017 and the statement of income, of comprehensive income, of changes in equity and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the separate and consolidated financial position of Notre Dame Intermédica Participações S.A. as at December 31, 2017, and its separate and consolidated financial performance and cash flows for the year then ended in accordance with the accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Basis for opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor s responsibilities for the audit of the separate and consolidated financial statements section of our report. We are independent of the Company and its subsidiaries in accordance with the relevant ethical principles set forth in the Code of Professional Ethics for Accountants, the professional standards issued by the Brazil s National Association of State Boards of Accountancy (CFC) and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 1

4 Emphasis of matter Restatement of the financial statements On February 22, 2018, we issued an unqualified audit report on the separate and consolidated financial statements of Notre Dame Intermédica Participações S.A., which are currently being restated. As described in Note 3 (c), these separate and consolidated financial statements were changed and are being restated to reflect the disclosures about the related parties and a reverse stock split of the Company's shares, described in the aforementioned note. Our opinion remains unqualified. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current year. These matters were addressed in the context of our audit of the separate and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide an individual opinion on these matters. For each matter below, our description of how our audit addressed the matter, including any commentary on the findings or outcome of our procedures, is provided in that context. We have fulfilled the responsibilities described in the Auditor s responsibilities for the audit of the separate and consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements. 1. Contingencies As mentioned in Note 23, the Company and/or its subsidiaries are parties in several administrative and legal proceedings involving labor, tax and civil claims, arising from the normal course of their business. The evaluation of the chance of loss made by the Company s attorneys involves a high degree of subjectivity, which led us to identify this matter as a significant risk that requires special audit considerations. How our audit conducted this matter Our audit procedures included, among others: (a) the involvement of tax experts to assist us in the evaluation of the arguments and merits presented by the Company s attorneys in the classification of the lawsuits; (b) procedures of sending confirmation letter to the Company s attorneys; and (c) review of the disclosures included in Note 23 to the financial statements. As a result of these procedures, we identified audit adjustments that indicated that the provision for contingencies was overstated and, consequently, profit for the year was understated. In spite of the immateriality of the amounts in relation to the financial statements taken as a whole, the Company recognized the proper correction in its accounting books. 2

5 Based on the result of the audit procedures performed on the balance of the provision for contingencies, which is consistent with the Company s assessment, we considered that the criteria and assumptions of evaluation of loss estimates associated to the provision for contingencies recognized by the Management, as well as the respective disclosures in Note 23, are acceptable in the context of the financial statements taken as a whole. 2. Incurred but not reported reserve (IBNR) The subsidiary Notre Dame Intermédica Saúde SA has liabilities related to events incurred but not reported which, as mentioned in Note 21, require the recognition of a provision based on an actuarial technical note through a lag of analysis of events/claims that have already incurred but not reported by this subsidiary. The actuarial calculation is based on the history of notices received from the service providers, which announce the occurrence of the events covered by the plans received up to the reporting date regulated by the Brazilian Regulatory Agency for Private Health Plans - ANS according to Normative Resolution 393/2015. We consider it as a key audit matter due to the complexity of the actuarial model being used, which require the use of complex long-term and highly subjective assumptions. How our audit conducted this matter Among other procedures, we analyzed, with the support of our specialists, the methodology and the main assumptions used by Management in the evaluation of actuarial obligations from the IBNR, verifying the mathematical accuracy of the calculations and analyzing the consistency of the results considering the parameters used and prior evaluations. Additional audit procedures included testing the underlying claims data used in the actuarial projections and the sufficiency of the disclosures related to the IBNR. Based on the result of the audit procedures performed for IBNR, which is consistent with the Company s assessment, we considered that the criteria and assumptions of evaluation of actuarial obligations adopted by Management, as well as the respective disclosures in Note 21, are acceptable in the context of the financial statements taken as a whole. 3. Tax credits The subsidiaries have recognized deferred tax assets for temporary differences and tax losses carryforward, mainly arising from goodwill resulting from the acquisition of the Notre Dame Intermédica Group on May 21, 2014, as detailed in Note 13. The subsidiaries recognize these deferred taxes to the extent that there are future taxable income. As at December 31, 2017, the deferred tax asset was R$ 274,865 thousand in and, due to the significance of the amount recognized, we consider it a key audit matter, in addition to the fact that the assessment of realization of these assets involves a high degree of judgment in the determination of assumptions on the future performance of the subsidiaries. 3

6 How our audit conducted this matter Among other procedures, we analyzed the methodology and assumptions used by Management in assessing the realization of tax credits, including the projections of future taxable income. We verified the mathematical accuracy of the calculation and the consistency of data used and accounting balances, as well as the reasonableness of assumptions used. We also analyzed the sensitivity regarding such assumptions to assess the behavior of projections with their fluctuations and sufficiency of disclosures in accompanying notes. Based on the result of the audit procedures performed on tax credits, which is consistent with the Company s assessment, we considered that the criteria and assumptions related to the assessment of realization, including the projections of future taxable income prepared by the Company s management, as well as the related disclosures in Note 13, are acceptable in the context of the financial statements taken as a whole. 4. Impairment of goodwill recorded As described in Note 17, at December 31, 2017, the Company s assets included goodwill generated on acquisitions of R$ 1,072,613 thousand, mainly comprising goodwill that arose in the acquisition of control of Notre Dame Intermédica Group on May 21, The recoverable amount of the goodwill recorded is assessed annually according to the accounting practices adopted in Brazil and the international financial reporting standards (IFRS). The assessment and the necessity or not for impairment provision is supported by estimates of future profitability based on the business plan and budget prepared by the Company and approved by its governance levels. Due to the significance of the goodwill balance, the inherent uncertainties in the process of determination of future cash flows discounted at present value, and the impact that any changes in assumptions of discount rates and growth in sales in the projection period and perpetuity could generate on the amounts recorded in the financial statements, we considered this a key audit matter. How our audit conducted this matter As part of our auditing procedures, we involved our valuation specialists to assist us in the analysis of the projections and evaluation of the impairment test of the recorded goodwill. We also performed tests on these projections, which included, mainly: i) test of prospective financial information used; ii) comparison of the assumptions and methodologies used with the respective industry and Brazilian economic environment; and iii) analysis of the use of evaluation method and external information. Additionally, we evaluated the disclosures in the financial statements with regard to impairment of goodwill recorded. Based on the results of the audit procedures performed on the impairment assessment of goodwill recorded, which is consistent with Management's assessment, we considered that the criteria and assumptions for impairment assessment adopted by management, as well as the respective disclosures in Note 17, are acceptable in the context of the financial statements taken as a whole. 4

7 5. Technology environment The processing of transactions of the Company and its subsidiaries is dependent on their technological structure for the development of their operations and continuity of their business processes. The ineffectiveness of the IT general controls environment and its dependent controls could result in incorrect processing of critical information used in the preparation of the financial statements and, for this reason, we consider this area of significance to our audit. How our audit conducted this matter In the context of our audit, with the assistance of our specialists, we applied procedures regarding the evaluation of the Company s information technology environment, including the assessment of the implementation and effectiveness of automated system application controls, and deficiencies were identified related to the process of management of accesses and changes to related IT applications. The deficiencies in the design and operation of the internal controls related to general IT controls changed our evaluation regarding the nature, timing and extent of our substantive procedures planned to obtain sufficient and appropriate audit evidence. Our tests of the design and operation of general IT controls and the controls of applications considered relevant for the audit procedures performed provided a basis so that we could continue with the planned nature, timing and extent of our substantive audit procedures. Other matters Statements of value added The separate and consolidated statements of value added (SVA) for year ended December 31, 2017, prepared under the responsibility of Company management, and presented as supplementary information for purposes of IFRS, were submitted to audit procedures conducted together with the audit of the Company's financial statements. To form our opinion, we evaluated if these statements are reconciled to the financial statements and accounting records, as applicable, and if their form and content comply with the criteria defined by CPC 09 - Statement of Value Added. In our opinion, these statements of value added were prepared fairly, in all material respects, in accordance with the criteria defined in abovementioned accounting pronouncement, and are consistent in relation to the overall separate and consolidated financial statements. 5

8 Other information accompanying the separate and consolidated financial statements and the auditor s report Management is responsible for such other information, which comprise the Management Report. Our opinion on the separate and consolidated financial statements does not cover the Management Report and we do not express any form of assurance conclusion thereon. In connection with our audit of the separate and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether this report is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of the Management Report, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the separate and consolidated financial statements Management is responsible for the preparation and fair presentation of the separate and consolidated financial statements in accordance with the accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free of material misstatement, whether due to fraud or error. In preparing the separate and consolidated financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company and its subsidiaries or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s and its subsidiaries financial reporting process. Auditor s responsibilities for the audit of the separate and consolidated financial statements Our objectives are to obtain reasonable assurance about whether the separate and consolidated financial statements as a whole are free of material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. 6

9 As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the separate and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's and its subsidiaries internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s and its subsidiaries ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the separate and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company and its subsidiaries to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the separate and consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements, including applicable independence requirements, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 7

10 From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. São Paulo, March 28, ERNST & YOUNG Auditores Independentes S.S. CRC-2SP034519/O-6 Emerson Pompeu Bassetti Accountant CRC-1SP251558/O-0 8

11 Statements of financial position As of (In thousands of reais) Assets Separate Notes Current assets 43, ,873,761 1,048,544 Cash and cash equivalents ,822 30,651 Short-term investments 8 43,310-1,230, ,760 Trade receivables , ,957 Inventories ,762 27,514 Deferred selling expenses ,960 39,653 Tax and social security credits ,306 34,632 Other current assets , ,377 Noncurrent assets 1,674,881 1,412,196 2,948,031 2,371,075 Long-term investments ,271 24,771 Deferred tax assets , ,819 Deferred selling expenses ,885 58,001 Judicial and tax deposits , ,425 Other noncurrent assets ,424 27,974 Investments 15 1,674,881 1,412, Property, plant and equipment , ,809 Intangible assets ,533,401 1,275,276 Total assets 1,718,266 1,412,309 4,821,792 3,419,619 9

12 Liabilities and equity Separate Notes Current liabilities 11,987-1,556,215 1,048,102 Trade payables ,517 46,934 Salaries payable ,822 81,296 Taxes and social charges payable 18 11, , ,166 Loans and financing , Debentures , ,480 Provision for income tax and social contribution ,463 5,982 Reserve for incurred but not reported claims - (IBNR) , ,618 Other current liabilities ,415 70,675 Noncurrent liabilities 355, ,474 1,914,420 1,269,682 Taxes and social charges payable ,175 11,953 Loans and financing ,751 1,331 Debentures , ,746 Reserve for incurred but not reported claims (IBNR) ,979 10,937 Payable for acquisition of subsidiary , , , ,736 Deferred tax liabilities , ,164 Provision for lawsuits , ,883 Other noncurrent liabilities ,545 89, ,914 51,932 Equity 1,351,157 1,101,835 1,351,157 1,101,835 Issued capital 25.a 1,036, ,983 1,036, ,983 (-) Treasury shares 25.a (2,857) - (2,857) - Reserves: 317, , , ,852 Capital reserve and stock options granted 30 28,671 58,409 28,671 58,409 Earnings reserve 25.c 288,608 50, ,608 50,443 Total liabilities and equity 1,718,266 1,412,309 4,821,792 3,419,619 The accompanying notes are an integral part of the separate and consolidated financial statements. 10

13 Statements of income For the years ended Separate Notes Net operating revenue Cost of services rendered ( ) ( ) Gross profit Administrative expenses 28.a (18.941) (15.460) ( ) ( ) Selling expenses 28.b - - ( ) ( ) Allowance for doubtful accounts - - (56.362) (34.568) Share of profit of associates Other income, net 28.c Profit before finance income and costs Finance income Finance costs 29 (58.847) (36.575) ( ) ( ) Profit before income tax and social contribution Current income tax and social contribution ( ) (48.488) Deferred income tax and social contribution (51.252) (50.953) Profit for the year Earnings per share Basic - R$ Diluted - R$ The accompanying notes are an integral part of the separate and consolidated financial statements. 11

14 Statements of comprehensive income For the years ended Separate Profit for the year 238,165 85, ,165 85,736 Other comprehensive income Total comprehensive income for the year 238,165 85, ,165 85,736 The accompanying notes are an integral part of the separate and consolidated financial statements. 12

15 Statements of changes in equity For the years ended (In thousands of reais) Capital reserve Earnings reserve Notes Issued capital (-) Treasury shares Stock option reserve Other reserves Legal Statutory Accumulated losses Total Balances at December 31, ,873-17,499 11, (35,293) 986,187 Capital contribution Other reserves , ,347 Based compensation ,455 - S ,455 Profit for the year 25.c ,736 85,736 Appropriation: Legal reserve 25.c ,522 - (2,522) - Statutory reserve 25.c ,921 (47,921) - Balances at December 31, ,983-32,954 25,455 2,522 47,921-1,101,835 Capital contribution 25.a 43,752 - (17,745) (25,455) Based compensation , ,462 Profit for the year 25.c , ,165 (-) Treasury shares - (2,857) (2,857) Appropriation: Legal reserve 25.c ,908 - (11,908) - Statutory reserve 25.c ,257 (226,257) - Balances at December 31, ,036,735 (2,857) 28,671-14, ,178-1,351,157 The accompanying notes are an integral part of the separate and consolidated financial statements. 13

16 Statements of cash flows (indirect method) For the years ended (In thousands of reais) Cash flows from operating activities: Separate Notes Profit for the year 238,165 85, ,165 85,736 Depreciation and amortization 27 and , ,982 Share of profit of associates 15.a (315,935) (137,771) - - Inflation adjustment of contingencies and judicial deposits 14 e (1,209) (2,674) Fair value adjustment of financial investments 8.a Investment income 8.a (10) - (49,012) (80,319) Foreign exchange losses 8.a - - (4,298) 3,368 Current and deferred income tax and social contribution ,142 48,488 Changes in technical reserves 21.c ,245 16,120 Provision for lawsuits ,716 51,932 (Reversal of) additions to allowance for doubtful accounts ,932 (49,058) Receivables write-off ,815 87,785 Amortization of deferred selling expenses ,125 64,692 Present value adjustment - deferred portion 24 58,842 36,574 58,842 36,574 Interest on debentures and transaction cost , ,041 Interest on borrowings ,318 - Share based compensation expense 30 13,462 15,455 13,462 15,455 Residual value of property, plant and equipment written off - - 2,672 6,788 Others - - (3,716) 98 Income tax and social contribution paid - - (98,409) (44,248) (Increase) decrease in operating assets Trade receivables (117,448) (81,343) Inventories (4,337) Tax and social security credits - - (4,172) (8,377) Deferred selling expenses (203,316) (123,536) Deferred tax assets ,443 73,170 Judicial and tax deposits (2,978) (18,322) Other assets 7 - (77,360) (52,453) Increase (decrease) in operating liabilities Trade payables - - 3,210 (6,640) Salaries 29-3,878 (8,786) Taxes and social charges payable 11,958-62,886 31,879 Technical reserves for health care transactions 21.b and c , ,117 Deferred tax liabilities - - (16,527) (18,182) Provision for lawsuits (28,394) (29,923) Other liabilities 29,807 30,758 (19,086) 74,527 Deferred purchase price 24 (44,001) (30,758) (44,001) (30,758) Net cash generated by (used in) operating activities (7,676) (6) 310, ,098 14

17 Statements of cash flows (indirect method) For the years ended (In thousands of reais) Separate Notes Financial investments 8.a (43,300) - (2,833,690) (2,676,829) Redemption of financial investments 8.a - - 2,284,925 2,705,742 Acquisition business - - (344,750) 14,347 Purchases of property, plant and equipment - - (130,206) (166,428) Purchases of intangible assets - - (23,033) (95,205) Dividends received 53, Net cash flows used in investing activities 9,893 - (1,046,754) (218,373) Payment of interest on debentures (84,846) (115,858) Payment of debentures principal amount (98,541) (55,270) Capital contribution 25.a Repurchase of shares - stock option program (2,857) - (2,857) - Loans and borrowings raised ,838 - Debentures raised ,004 - Repayment of loans and borrowings (11,460) (3,348) Net cash flows generated by (used in) financing activities (2,305) ,690 (174,366) Increase (decrease) in cash and cash equivalents (88) 104 (2,829) 12,359 Cash and cash equivalents at the beginning of the year ,651 18,292 Cash and cash equivalents at the end of the year ,822 30,651 The accompanying notes are an integral part of the separate and consolidated financial statements. 15

18 Statements of value added For the years ended (In thousands of reais) Separate Revenues - - 5,436,499 4,320,031 Sale of goods, products and services - - 5,450,016 4,244,454 Other revenues ,746 25,462 Allowance for doubtful debts - reversal / (recognition) - - (51,263) 50,115 INPUTS PURCHASED FROM THIRD PARTIES (5,293) - (4,290,608) (3,340,290) Cost of sales and services - - (4,086,946) (2,800,800) Materials, electric power, outsourced services and others (5,293) - (203,488) (347,773) Others - - (174) (191,717) GROSS VALUE ADDED (5,293) - 1,145, ,741 DEPRECIATION AND AMORTIZATION - - (114,159) (133,982) NET VALUE ADDED GENERATED BY THE COMPANY (5,293) - 1,031, ,759 VALUE ADDED RECEIVED IN TRANSFER 315, , ,214 (28,033) Share of profit of associates 315, , Finance income ,214 (28,033) TOTAL VALUE ADDED FOR DISTRIBUTION 310, ,771 1,133, ,726 DISTRIBUTION OF VALUE ADDED (310,660) (137,771) (1,133,946) (817,726) Personnel (13,542) (15,460) (280,578) (470,085) Salaries and wages (13,542) (15,460) (241,534) (396,604) Benefits - - (21,272) (38,933) FGTS (Severance Pay Fund) - - (17,772) (34,548) Taxes, fees and contributions (102) - (389,666) (204,125) Federal (96) - (324,530) (157,741) Municipal (6) - (65,136) (46,384) - Value distributed to providers of capital (58,850) (36,575) (225,536) (57,780) Interest (58,847) (36,575) (202,784) (57,780) Rentals - - (22,636) - Others (3) - (116) - Value distributed to shareholders (238,166) (85,736) (238,166) (85,736) Retained earnings (accumulated losses) for the year (238,166) (85,736) (238,166) (85,736) The accompanying notes are an integral part of the separate and consolidated financial statements. 16

19 1. Operations Notre Dame Intermédica Participações S.A., formerly BCBH Participações S.A. (hereinafter Company ), is a holding company engaged in holding interests in other companies as partner or shareholder, headquartered in São Paulo at Avenida Paulista, 867, Bela Vista and was set up on February 18, The Company is the direct parent company of BCBF Participações S.A. ( BCBF ), a private holding company, and indirect parent company of the Notre Dame Intermédica Group, which includes Notre Dame Intermédica Saúde S.A. ( Intermédica ), Tijuca - Serv. de Assist. Médico-Cirurg. Infantil Ltda., Hospital São Bernardo, Med Vida Assistência Médica Hospitalar Ltda. and Hospital e Maternidade Nova Vida Ltda. The Company s directly and indirectly controlled subsidiaries are privately held entities, some of which are regulated by the Brazilian Regulatory Agency for Private Health Insurance and Plans ( ANS ) and are engaged in the sale of health and dental insurance to corporate clients and small and medium-sized enterprises as well as offering solutions in healthcare and dental care providing access to its own healthcare facilities, such as hospitals and clinics. 2. Acquisitions and corporate restructurings In 2017, the Notre Dame Intermédica Group, under its strategic plan of continuous growth and expansion through acquisitions and corporate restructurings, completed the following: a) Acquisition of Nova Vida Group On March 31, 2017, the subsidiary Notre Dame Intermédica S.A. in conjunction with its parent company BCBF Participações S.A. entered into a sale and purchase agreement ("Agreement") for the acquisition of 100% of the shares of Nova Vida Group. The Nova Vida Group is composed by Hospital e Maternidade Nova Vida, in Itapevi, and three Medical Centers, two located in Jandira and another in Cotia, in Greater São Paulo area. The Notre Dame Intermédica Group obtained the control of Nova Vida Group on July 3,

20 b) Acquisition of Hospital São Bernardo On February 23, 2017, Notre Dame Intermédica Saúde S.A. entered into a sale and purchase agreement for the acquisition of equity interests in Hospital São Bernardo S.A. and its affiliates Hospital Baeta Neves and Centro Clínico São Bernardo. Hospital São Bernardo is a general hospital with emergency rooms, located at Av. Lucas Nogueira Garcez, 400 in the city of São Bernardo do Campo, SP. These acquisitions are very strategic to the Notre Dame Group since they contribute to the consolidation not only in the ABCD Paulista region, but also keeps the Notre Dame Intermédica Group in the position of one of the countries largest companies of the supplementary health sector. The Notre Dame Intermédica Group obtained the control of Hospital São Bernardo and its affiliates on July 20, c) Acquisition of SAMCI and IBRAGE. On March 10, 2017, Notre Dame Intermédica Saúde S.A. completed the acquisition process and obtained the control of the companies Tijuca Serviço de assistência médica Cirurgia infantil Ltda. (Samci) and Ibrage Saúde Ltda., after the seller complied with all obligations and waivers established in the negotiation, according to the sale and purchase agreement signed on December 27, The objective of the acquisition is to improve the Notre Dame Intermédica Operator s market share in the city of Rio de Janeiro and increase the offer of vertically integrated services of its network of hospitals and care units. d) Mergers At the Extraordinary General Meeting (AGE) held on October 31, 2017, the Protocol of merger and justification was approved, for the merger of Ibrage Saúde Ltda. and Nova Vida Assistência Médica Hospitalar Ltda. into the subsidiary Notre Dame Intermédica Saúde S.A. The appraisal report on the accounting equity of Ibrage Saúde Ltda. and Nova Vida Assistência Médica Hospitalar Ltda. was based on the accounting books as of September 30, 2017 and was issued on October 27, 2017 by an independent company. Family Hospital S.S. Ltda was merged on January 2, The Appraisal report on the accounting equity of Family Hospital S.S. was based on the accounting books as of September 30, 2016 and was issued on January 2, 2017 by an independent company. 18

21 At the Extraordinary General Meeting (AGE) held on March 31, 2016, the Protocol of merger and justification was approved, for the merger of the companies listed below into the subsidiary Notre Dame Intermédica Saúde S.A.: o Interodonto Sistema de Saúde Odontológico Ltda. o Santamália Saúde S.A. o Hospital Bosque da Saúde S.A. o Hospital Montemagno S.A. The mergers occurred considering that the companies belong to the Notre Dame Intermédica Saúde Group and the purpose is to streamline and unify the administrative activities and achieve operational gains and synergy. e) The Company s ownership structure at December 31, 2017 is as follows: ALKES II - FIP % NOTRE DAME INTERMÉDICA PARTICIPAÇÕES S.A. 100% BCBF PARTICIPAÇÕES S.A. 100% NOTRE DAME INTERMÉDICA SAÚDE S.A. 100% TIJUCA SERV. DE ASSIST. MÉDICO CIRURG. INFANTIL LTDA. 100% HOSPITAL SÃO BERNARDO S.A % % HOSPITAL E MATERNIDADE NOVA VIDA LTDA. MED VIDA ASSISTÊNCIA MÉDICA HOSPITALAR LTDA % 0.003% 19

22 3. Preparation and presentation of the separate and consolidated financial statements a) Statement of compliance The separate and consolidated financial statements have been prepared in accordance with the accounting practices adopted in Brazil, which comprise the standards of the Brazilian Securities and Exchange Commission (CVM) and the pronouncements issued by the Brazilian Accounting Pronouncements Committee (CPC), which are in conformity with the International Financial Reporting Standards IFRS, issued by the International Accounting Standards Board (IASB) and present information comparable with the prior period. The Company, in preparing these financial statements, uses the following disclosure criteria: (i) regulatory requirements; (ii) relevance and specificity of information on the Company s operations to the users; and (iii) information needs of users of the financial statements. Therefore, Management confirms that relevant information specific to the financial statements, and solely this information, is being disclosed and corresponds to that used by Management in running the Company and its subsidiaries. The separate and consolidated financial statements were approved by Board of directors and authorized for issue on March 28, b) Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries and the information used was prepared as of the same year end date and consistent accounting practices. Control is achieved when the Company is exposed, or has rights, to variable returns based from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if, and only if, it has: Power over the investee (that is, existing rights that give it the current ability to direct the relevant activities of the investee); Exposure, or rights, to variable returns from its involvement with the investee; The ability to use its power over the investee to affect its returns. 20

23 Generally, there is a presumption that the majority of voting rights results in control. When the Company has less than the majority of the voting or similar rights of an investee, the Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual agreement with other vote holders of the investee; Rights arising from contractual agreements; The Company s voting rights and potential voting rights. The Company re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when it no longer has the aforementioned control. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Company gains control until the date the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the Company s controlling and non-controlling shareholders, even if this results in loss to noncontrolling shareholders. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Company s accounting policies. All intra-group assets and liabilities, income, expenses and cash flows relating to transactions between members of the Company, are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resultant gain or loss is recognized in profit or loss. Any investment retained is recognized at fair value. 21

24 The subsidiaries included in the consolidation are the following: c) Restatement of the separate and consolidated financial statements According to the CVM letter nº15/2018/cvm/dre/sep, the Company is restating the financial statements from December 31st 2017 that were published in February 22, The restatement was requested to improve the following financial statement notes: Note 6.e Interest rate risk of financial instruments Qualitative improvement in the Sensitivity analysis of interest rate variations ; Note 33 Related Parties It was included the information of Advisory Agreement with Bain Capital and the Company. Additionally, in March , it was approved in an extraordinary general meeting, the reverse stock split of 1,003,534,757 common shares, nominatives and with no nominative value in the proportion of common shares to one common share, resulting into an equity based on 467,591,549 common shares, with no nominative value and with no modification in the issued capital. Based on that, the Company has modified the following financial statements notes: Statement of income Earnings per share Equity interests Direct Indirect Direct Indirect BCBF Participações S.A % % - Notre Dame Intermédica Saúde S.A % % Family Hospital S.S. Ltda % Acqua Blue Transporte de Água Ltda. ¹ % Tijuca - Serv. de Assist. Médico-Cirurg. Infantil Ltda % - - Hospital São Bernardo S.A % - - Hospital e Maternidade Nova Vida Ltda % - - Med Vida Assistência Médica Hospitalar Ltda % - - ¹ Company discontinued on November 30, 2017 Note25.a Equity Information about the reverse stock split and modification in number of shares according to the reverse stock split; Note 30 Share-based payment plan Modification in number of shares according to the reverse stock split Note 31 Earnings per share - Modification in number of shares according to the reverse stock split 22

25 d) Statement of value added (DVA) The statement of value added is not required by the IFRS, and is presented as supplementary information in compliance with accounting practices adopted in Brazil. e) Functional and presentation currency The separate and consolidated financial statements are presented in Reais (R$), which is the functional currency of the Company and its subsidiaries. f) Significant accounting judgments, estimates and assumptions The preparation of the separate and consolidated financial statements requires management to record certain amounts of assets, liabilities, revenues, and expenses based on estimates, which are established as of judgments and assumptions for the determination of the adequate amount to be recorded in the financial statements. The actual amounts of settlement of operations may significantly differ from those recorded in the financial statements due to the subjectivity inherent to the process of their determination. The assumptions and estimates are continuously revised. Revisions to accounting estimates are recognized in the period in which estimates are revised and in any future periods affected. Information on critical judgments relating to the accounting policies adopted that have significant effects on the amounts recognized in the separate and consolidated financial statements are included in the following explanatory notes: o Measurement of financial assets at fair value and under the present value adjustment method; o Allowance for doubtful debts; o Recoverability of deferred income tax and social contribution; o Impairment of assets; o Share-based payment transactions; o Technical reserves; o Provision for lawsuits; and o Liability Adequacy Test (LAT). g) Classification between current and noncurrent The Company classifies assets and liabilities in the statement of financial position into current and noncurrent. Assets and liabilities are classified as current when they meet the following assumptions: o Expected to be realized or settled, or intended to be sold or used in the Company s normal operating cycle of 12 months after the balance sheet date; and o Are held primarily for the purpose of trading. 23

26 All other assets and liabilities are classified as noncurrent. h) Standards, amendments to and interpretations of existing standards that are not effective on December 31, 2017 and were not early adopted by the Company The standards and interpretations that are issued, but not yet adopted, are disclosed below: IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for the financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. Except for hedge accounting, retroactive application is necessary, however, the presentation of comparative information is not mandatory. For hedge accounting, the requirements are generally applied prospectively with some limited exceptions. During 2017, the Company has performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses or additional reasonable and supportable information being made available to the Company in the future. In general, the Company does not estimate any significant impact on the statement of financial position and on the statement of changes in equity, except for the effect of the application of the classification and measurement requirements and impairment of IFRS 9. I. Classification and measurement The Company performed an analysis and concluded that there is no significant impact on its statement of financial position or equity when applying the classification and measurement requirements of IFRS 9. The Company expects to continue measuring at fair value all financial assets currently held at fair value. Loans as well as trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. Therefore, the Company expects that these will continue to be measured at amortized cost under IFRS 9. II. Impairment IFRS 9 requires the Company to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12 months or lifetime basis. The Company expects to apply the simplified approach and record lifetime expected losses on all trade receivables. 24

27 The Company does not expect material impacts on its equity due to the nature of its loans and receivables. The balance of receivables from health operation transactions is within the scope of IFRS 4, which will be superseded by IFRS 17. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014, amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring of goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after January 1, 2018 and early adoption is permitted. The Company did not early adopt the new standard, which was adopted on the date in which it became effective using the full retrospective adoption method. During 2016 and 2017, the Company performed a preliminary assessment of IFRS 15, which is subject to changes arising from a more detailed ongoing analysis. The Company operates in the segment of health and dental care. These services are sold individually in separate contracts, identified with the customer, or grouped as a package of services. The Company expects the following probable areas of impact: I. Services rendered The Company renders health and dental care plan services through its hospitals. These services are sold separately under contracts with customers. The Company preliminarily evaluated that the services are provided over time since the customer receives and consumes simultaneously the benefits provided. The Company identified and analyzed the differences according to the new pronouncement, as described below Variable consideration The Company has two types of disallowances: a) internal, which are performed by auditors of the operators who inspect the reports prior to invoicing inside the hospitals; and b) external, disallowances of invoices that go to the operators and due to several reasons may be approved or not. 25

28 The Company considers that the disallowances are variable considerations, in accordance with IFRS 15: If the consideration promised in the contract includes a variable amount, the entity must estimate the amount of the consideration to which the entity will be entitled in exchange for the transfer of the promised goods or services to the customer. The variability related to the consideration promised to the customer may be expressly stated in the contract. The amount of the variable consideration must be estimated using any of the methods below, depending on which method the entity expects to best estimate the amount of the consideration to which it is entitled: (a) expected amount: is the sum of amounts weighted by the probability of a range of possible amounts of consideration. The expected amount may be an appropriate estimate of the amount of the variable consideration, if the entity has a great number of contracts with similar characteristics; (b) the most probable amount is the only most probable amount in a range of possible amounts of consideration (that is, the single most probable result of the contract). The most probable amount may be an appropriate estimate of the amount of the variable consideration, if the contract has only two possible results (for example, the entity reaches a performance bonus or not). The company evaluated and identified that the amendment in the recognition of disallowances will not generate significant financial impacts, since the amount will not be changed, but the timing of its recognition. II. Presentation and disclosure requirements IFRS 15 provides presentation and disclosure requirements, which are more detailed than under current IFRS. The presentation requirements represent a significant change from current practice and significantly, increases the volume of disclosures required in the Company s financial statements. Many of the disclosure requirements in IFRS 15 are completely new. The Company evaluated and does not expect significant changes in disclosure once its operation is primarily based on its operations of health plan, which is similar to insurance, and not on services provided by hospitals. In 2017, the Company developed and started testing of appropriate systems, internal controls, policies and procedures necessary to collect and disclose the required information. 26