community hospitals of central california and affiliated corporations dba community ... ·...

Report of Independent Auditorsand Consolidated Financial Statements

Community Hospitals of Central California and Affiliated Corporations

dba Community Medical Centers

August 31, 2012 and 2011

CONTENTS

PAGEREPORTOFINDEPENDENTAUDITORS 1CONSOLIDATEDFINANCIALSTATEMENTS Consolidatedbalancesheets 2 Consolidatedstatementsofoperations 3 Consolidatedstatementsofchangesinnetassets 4 Consolidatedstatementsofcashflows 5 Notestoconsolidatedfinancialstatements 631SINGLEAUDIT Scheduleofexpendituresoffederalawards 33 Notestoscheduleofexpendituresoffederalawards 34 Reportofindependentauditorsoninternalcontroloverfinancialreportingand oncomplianceandothermattersbasedonanauditoffinancialstatements performedinaccordancewithGovernmentAuditingStandards 3536 Reportofindependentauditorsoncompliancewithrequirementsthatcould haveadirectandmaterialeffectoneachmajorprogramandoninternal controlovercomplianceinaccordancewithOMBCircularA‐133 3738 Scheduleoffindingsandquestionedcosts 39 Summaryscheduleofpriorauditfindings 40

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REPORTOFINDEPENDENTAUDITORS

TotheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersWehave audited the accompanying consolidated balance sheets of CommunityHospitals of Central California andAffiliated Corporations dba Community Medical Centers (CMC) as of August 31, 2012 and 2011, and the relatedconsolidated statements of operations, changes in net assets, and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of CMC’smanagement. Our responsibility is to express anopinionontheseconsolidatedfinancialstatementsbasedonouraudits.

Weconductedouraudits inaccordancewithauditingstandardsgenerallyaccepted intheUnitedStatesofAmericaand the standards applicable to financial audits contained in Government Auditing Standards, issued by theComptroller General of the United States. Those standards require thatwe plan and perform the audits to obtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreeofmaterialmisstatement.Anauditincludesconsiderationofinternalcontroloverfinancialreportingasabasisfordesigningauditproceduresthatareappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of CMC’sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.Anauditincludesexamining,onatestbasis, evidencesupporting theamountsanddisclosures in theconsolidated financial statements, assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallconsolidatedfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.

In our opinion, the consolidated financial statements referred to above present fairly, in allmaterial respects, theconsolidatedfinancialpositionofCMCasofAugust31,2012and2011,andtheresultsofitsconsolidatedoperations,changes in its net assets, and its cash flows for the years then ended in conformity with accounting principlesgenerallyacceptedintheUnitedStatesofAmerica.

InaccordancewithGovernmentAuditingStandards,wehavealso issuedareportdatedNovember21,2012,onourconsiderationofCMC’sinternalcontroloverfinancialreportingandourtestsofitscompliancewithcertainprovisionsoflaws,regulations,contractsandgrantagreements,andothermatters.Thepurposeofthatreportistodescribethescopeofourtestingofinternalcontroloverfinancialreportingandcomplianceandtheresultsofthattesting,andnottoprovideanopinionontheinternalcontroloverfinancialreportingoroncompliance.ThatreportisanintegralpartofanauditperformedinaccordancewithGovernmentAuditingStandardsandshouldbeconsideredinassessingtheresultsofouraudit.

Ourauditwasconductedforthepurposeofforminganopinionontheconsolidatedfinancialstatementsasawhole.The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis asrequiredbyU.S.OfficeofManagementandBudgetCircularA‐133,AuditsofStates,LocalGovernments,andNon‐ProfitOrganizations, and is not a required part of the consolidated financial statements. Such information is theresponsibility of management and was derived from and relates directly to the underlying accounting and otherrecordsused toprepare the consolidated financial statements.The informationhasbeen subjected to theauditingproceduresappliedintheauditoftheconsolidatedfinancialstatementsandcertainadditionalprocedures,includingcomparingandreconcilingsuchinformationdirectlytotheunderlyingaccountingandotherrecordsusedtopreparethe consolidated financial statements or to the consolidated financial statements themselves, and other additionalproceduresinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Inouropinion,thescheduleofexpendituresoffederalawardsisfairlystatedinallmaterialrespectsinrelationtotheconsolidatedfinancialstatementsasawhole.

Stockton,CaliforniaNovember21,2012(exceptforthescheduleofexpendituresoffederalawardswhichisdatedMay30,2013)

CONSOLIDATEDBALANCESHEETS

COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDBALANCESHEETS(Inthousands)

2 Seeaccompanyingnotes

2012 2011Currentassets:

Cashandequivalents 70,300$ 96,528$Short‐terminvestments 14,283 39,816Patientaccountsreceivable(lessallowancefordoubtful

accountsof$102,547in2012and$108,440in2011) 149,831 135,668DuefromStateofCaliforniaforsupplementalfunding 13,722 9,947Otherreceivables 79,948 3,157Inventories 11,636 11,236Prepaidexpensesandother 14,496 31,492

354,216 327,844Assetslimitedastouse:

Board‐designatedassets 267,343 219,886Assetsheldbytrusteefor:

Debtservice 35,571 40,846Self‐insuranceincaptiveinsurancecompany 12,764 13,427Projectfunds ‐ 23,413

Donor‐restrictedassets 13,110 12,443328,788 310,015

Property,plant,andequipment,net 496,967 457,859Constructioninprogress 254,182 208,781Otherassets 61,303 61,004

1,495,456$ 1,365,503$

Currentliabilities:Accountspayable 64,289$ 52,192$Accruedcompensationandemployeebenefits 61,872 67,851Estimatedthird‐partysettlements 16,005 23,985Otheraccruedliabilitiesanddeferredrevenue 50,233 52,070Currentmaturitiesoflong‐termdebt 11,542 10,951

203,941 207,049Long‐termdebt,lesscurrentmaturities 525,944 537,668Pensionbenefitobligation 78,261 63,607Otherlong‐termobligations 52,168 43,490

860,314 851,814Netassets:

Unrestricted 622,032 501,246Temporarilyandpermanentlyrestricted 13,110 12,443

635,142 513,6891,495,456$ 1,365,503$

AUGUST31,

ASSETS

LIABILITIESANDNETASSETS

COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONS

dbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFOPERATIONS(Inthousands)

Seeaccompanyingnotes 3

2012 2011Unrestrictedrevenues,gains,andothersupport:

Netpatientservicerevenues 1,246,644$ 1,175,931$Less:Provisionforbaddebts (113,946) (105,782)

1,132,698 1,070,149Premiumrevenue 1,345 1,327Investmentincome 15,970 8,659Otherrevenue 34,696 32,541

1,184,709 1,112,676Expenses:

Salaries,wages,andbenefits 527,255 503,502Supplies 183,283 177,256Outsideservices 166,868 151,893Insurance 5,187 5,472Depreciationandamortization 46,350 41,358Rentalandlease 10,257 11,537Interest 15,738 15,961Utilities 10,592 10,183Other 86,713 77,791Gainonearlyextinguishmentofdebt ‐ (1,683)

1,052,243 993,270Excessofrevenues,gainsandothersupportoverexpenses 132,466 119,406

Netchangeinunrealizedgainsandlossesoninvestments 1,013 562

Netassetsreleasedfromrestrictionsforequipmentacquisition 2,538 4,484

Changeinunfundedaccumulatedpensionbenefitobligation (15,230) 14,682

Other (1) ‐Changeinunrestrictednetassets 120,786$ 139,134$

YEARSENDEDAUGUST31,

COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFCHANGESINNETASSETS(Inthousands)

4 Seeaccompanyingnotes

Temporarilyand

permanentlyUnrestricted restricted Total

BalanceatAugust31,2010 362,112$ 14,318$ 376,430$Excessofrevenues,gains,andother

supportoverexpenses 119,406 ‐ 119,406Netchangeinunrealizedgainsand

lossesoninvestments 562 ‐ 562Donor‐restrictedcontributions ‐ 4,458 4,458Netassetsreleasedfromrestrictionsand

usedforoperations ‐ (1,849) (1,849)Netassetsreleasedfromrestrictionsfor

equipmentacquisition 4,484 (4,484) ‐Changeinunfundedaccumulatedpension

benefitobligation 14,682 ‐ 14,682139,134 (1,875) 137,259

BalanceatAugust31,2011 501,246 12,443 513,689Excessofrevenues,gains,andother

supportoverexpenses 132,466 ‐ 132,466Netchangeinunrealizedgainsand

lossesoninvestments 1,013 ‐ 1,013Donor‐restrictedcontributions ‐ 5,114 5,114Netassetsreleasedfromrestrictionsand

usedforoperations ‐ (1,909) (1,909)Netassetsreleasedfromrestrictionsfor

equipmentacquisition 2,538 (2,538) ‐Changeinunfundedaccumulatedpension

benefitobligation (15,230) ‐ (15,230)Other (1) ‐ (1)

120,786 667 121,453BalanceatAugust31,2012 622,032$ 13,110$ 635,142$


dbaCOMMUNITYMEDICALCENTERSCONSOLIDATEDSTATEMENTSOFCASHFLOWS(Inthousands)


2012 2011Cashflowsfromoperatingactivities:

Changeinnetassets 121,453$ 137,259$

Adjustmentstoreconcilechangeinnetassetstonetcash

providedbyoperatingactivities:

Netunrealizedgainsoninvestments (1,013) (562)

Donor‐restrictedcontributions (4,986) (4,211)

Provisionforbaddebts 113,946 105,782

Depreciationandamortization 46,350 41,358

Amortizationofbonddiscount/premium (178) 120

Netchangesinoperatingassetsandliabilities:

Patientaccountsreceivableandotherreceivables (204,900) (121,245)

DuefromStateofCaliforniaforsupplementalfunding (3,775) (220)

Inventories,prepaidexpenses,andother 14,732 (32,682)

Accountspayableandotheraccruedliabilities 22,595 44,150

Accruedcompensationandemployeebenefits (5,979) 4

Pensionbenefitobligation 14,654 (11,183)

Estimatedthird‐partysettlements (7,980) 25,728

104,919 184,298

Cashflowsfrominvestingactivities:

Purchasesofproperty,plant,andequipment (132,952) (155,739)

Purchaseofinvestments (191,365) (219,417)

Proceedsfromsalesofinvestments 175,498 129,239

Cashandcashequivalentsmovementsinassetslimitedastouse (4,476) 81,609

Changeinassetsunderbondindentureagreements 28,116 11,003

Proceedsfromsaleofinterestinsubsidiary ‐ 2,480

Other 1 ‐

(125,178) (150,825)

Cashflowsfromfinancingactivities:

Repaymentsoflong‐termdebt (11,260) (33,752)

Proceedsfromlong‐termdebt 305 ‐

Proceedsfromrestrictedcontributions 4,986 4,211

(5,969) (29,541)

(26,228) 3,932

Cashandequivalents,beginningofyear 96,528 92,596Cashandequivalents,endofyear 70,300$ 96,528$

Supplementaldisclosureofcashflowinformation:

Interestpaid 27,153$ 26,519$

YEARSENDEDAUGUST31,

COMMUNITYHOSPITALSOFCENTRALCALIFORNIAANDAFFILIATEDCORPORATIONSdbaCOMMUNITYMEDICALCENTERSNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS

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NOTE1–ORGANIZATIONCommunityHospitalsofCentralCaliforniaandAffiliatedCorporations,dbaCommunityMedicalCenters(CMC),isanot‐for‐profitmultifacilityintegratedhealthcareorganizationlocatedinFresno,California.CMChasestablishedanObligatedGrouptoaccesscapitalmarkets.ObligatedGroupmembersarejointlyandseverallyliableforthelong‐termdebtoutstandingundertheObligatedGroup’smastertrustindenture.TheObligatedGroupmembers are denotedwith an asterisk (*). CMC includes the following consolidatedentities:Acutecareservices–Acutecareservicesconsistofasinglecorporateentity,FresnoCommunityHospitalandMedicalCenter*,whichoperatesastwogeneralacutecarehospitalsthatprovideafullrangeofmedical,surgical,intensivecare,emergencyroom,burnandtrauma,andobstetricservices.Thesefacilitiesalsoofferhomehealth,psychiatric,rehabilitation,andavarietyofotherservices.Theacutecarehospitalsare:

CommunityRegionalMedicalCenter(CRMC) ClovisCommunityMedicalCenter(CCMC)

EffectiveOctober1,2009,FresnoCommunityHospitalandMedicalCenterexchangedits80.9%interestinAdvancedMedicalImaging(AMI)andits19.1%interestinCaliforniaImagingInstitute(CII)fora50%interestinanewmedicalimagingcompanyformedfromthemergerofAMIandCII.Thenewlyformedcompany, CII LLC, operates two freestanding outpatient imaging centers that provide comprehensiveimagingservices.Itisownedinpartnershipwithcertainradiologyphysicians.FresnoCommunityHospitalandMedicalCenteraccountsforthisinvestmentusingtheequitymethod.

Corporateactivities–Corporateactivitiesconsistofcentralizedsharedservices,realestateactivities,andretailpharmacyoperations.

CommunityHospitalsofCentralCalifornia*(CHCC) CommunityHealthEnterprises(CHE)

FresnoHeartandSurgicalHospital*–TheFresnoHeartandSurgicalHospitalprovidescardiac‐relatedservicesandbariatricandotherminimallyinvasivesurgeries.

DeranKoligianAmbulatoryCareCenter–DeranKoligianAmbulatoryCareCenter,LLC(DKACC)isanonprofitsinglememberLLC,whosesolemember isFresnoCommunityHospitalandMedicalCenter.DKACCcompletedconstructionofanambulatorycareclinicbuildingontheCRMCcampusduring2010,whichisleasedtoCRMC. Community Insurance Services Company – Effective September 1, 2009, CMC formed CommunityInsuranceServicesCompany(CISC),whichisawhollyownedcaptiveinsurancecompanythatmaintainsprofessionalandgeneralliabilitycoverage.


dbaCOMMUNITYMEDICALCENTERSNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS

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NOTE1–ORGANIZATION(CONTINUED)Physicianmanagementservices–PhysicianmanagementservicesconsistofSantéHealthSystem(Santé),which is amanagement service organization (MSO) providing independent physician association andphysicianpracticemanagementservices.InOctober2010,CHCCsold50%ofitsinterestinSantétotwophysiciangroupsfor$2,480,000.Priortothesale,Santédistributed$10,000,000toCHCC.Thedistributiondecreased Santé’s net assets from$15,167,000 to $5,167,000.CMC recognized a $103,000 loss in theconsolidatedfinancialstatementsfromthistransactionin2011.CMCaccountsfortheinvestmentinSantéusingtheequitymethod.Developmentactivities–Developmentactivitiesconsistofasinglecorporateentity,CommunityHospitalsofCentralCaliforniaFoundation,whichconductsfund‐raisingactivitiesforthenot‐for‐profitorganizationswithinthehealthsystem.Obligatedgroupmembers–ObligatedGroupmembersaretheparentcorporationsofcertainconsolidatedentitiesthatarenotObligatedGroupmembers.AccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(U.S.GAAP)requireconsolidationofallcontrolledsubordinatecorporations.Accordingly,theconsolidatedfinancialstatementsofCMCarethesameastheObligatedGroupfinancialstatementsunderU.S.GAAP.NOTE2–AGREEMENTWITHTHECOUNTYOFFRESNO

EffectiveOctober7, 1996,CMC, throughoneof its affiliates (FresnoCommunityHospital andMedicalCenter), entered into a series of agreements (theTransactionAgreements)with theCountyofFresno(theCounty).TheTransactionAgreementswereamendedin1998andagainin2003relatedtoaUniversityMedicalCenter(UMC)lease.TheprincipalongoingprovisionsoftheTransactionAgreementsareasfollows:

CMCisrequiredtoprovidecomprehensivemedicalcaretocertainclassesofindigentpersonsand inmates within the County for a period of 30years in return for certain payments.Paymentsreceivedunderthisagreementtotaledapproximately$20,724,000and$20,143,000fortheyearsendedAugust31,2012and2011,respectively.

AssecurityforCMC’sperformanceunderthetermsoftheTransactionAgreements,theCountywasgrantedafirst‐prioritylienonCCMCandanadjoiningmedicalofficebuilding.Inaddition,duringthe30‐yearperiodcommencingOctober7,1996,(a)theCountyisentitledtonominate27%ofthemembersofCMC’s(andcertainof itsaffiliates’)boardoftrusteesandrelatedsubcommitteesand(b)CMCanditsaffiliatesareprecluded,withcertainspecifiedexceptions,frommakinganynetassettransfersoutsideofCMC.Basisofconsolidation–TheconsolidatedfinancialstatementsincludetheaccountsofCMCandaffiliatesaslistedunderOrganization inNote1.All significant intercompanyaccountsandtransactionshavebeeneliminatedinconsolidation.


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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIESUseofestimates–ThepreparationofconsolidatedfinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateoftheconsolidatedfinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.

Cash and equivalents –Cash and equivalents include all highly liquid investmentswith an originalmaturityofthreemonthsorlesswhenpurchased.CashandequivalentspurchasedbyCMC’sinvestmentmanagersaspartoftheirinvestmentstrategiesareincludedinassetslimitedastouseandshort‐terminvestments.CMCregularlymaintainsbalancesindepositoryaccountsinexcessoftheFDICinsurancelimit.

Accountsreceivable–CMC’sprimaryconcentrationofcreditriskispatientaccountsreceivableandSB855and SB1255 disproportionate share funds receivable, which consist of amounts owed by variousgovernmentagencies,insurancecompanies,andprivatepatients.CMCmanagesthereceivablesbyregularlyreviewingitsaccountsandcontractsandbyprovidingappropriateallowancesforuncollectibleamounts.CMCprovidesforestimatedlossesonpatientaccountsreceivablebasedonpriorbaddebtexperience.Uncollectiblereceivablesarecharged‐offwhendeemeduncollectible.Recoveriesfrompreviouslycharged‐offaccountsarerecordedwhenreceived.Themixofreceivablesfromthird‐partypayorsandpatientsatAugust31,2012and2011,isasfollows:

2012 2011

Medicare 17% 15%Medi‐CalandmanagedMedi‐Cal 29% 28%Contractedratepayors 44% 49%Commercialinsuranceandotherpayors 10% 8%

Total 100% 100%

Allowancefordoubtfulaccounts–Accountsreceivablearereducedbyanallowancefordoubtfulaccounts.Inevaluatingthecollectibilityofaccountsreceivable,CMCanalyzesitspasthistoryandidentifiestrendsforeachofitsmajorpayorsourcesofrevenuetoestimatetheappropriateallowancefordoubtfulaccountsandprovisionforbaddebts.Managementregularlyreviewsdataaboutthesemajorpayorsourcesofrevenueinevaluatingthesufficiencyoftheallowancefordoubtfulaccounts.Forreceivablesassociatedwithservicesprovidedtopatientswhohavethird‐partycoverage,CMCanalyzescontractuallydueamountsandprovidesanallowancefordoubtfulaccountsandaprovisionforbaddebts,ifnecessary(forexample,forexpecteduncollectibledeductiblesandcopaymentsonaccountsforwhichthethird‐partypayorhasnotyetpaid,orforpayorswhoareknowntobehaving financialdifficultiesthatmaketherealizationofamountsdueunlikely).Forreceivablesassociatedwithself‐paypatientsandnon‐contractedinsurance(whichincludesbothpatientswithoutinsuranceandpatientswithdeductibleandcopaymentbalancesdueforwhichthird‐partycoverageexistsforpartofthebill),CMCrecordsasignificantprovisionforbaddebtsintheperiodofserviceonthebasisofitspastexperience,whichindicatesthatmanypatientsareunableorunwillingtopaytheportionoftheirbillforwhichtheyarefinanciallyresponsible.Thedifferencebetweenthestandardrates(orthediscountedratesifnegotiated)andtheamountsactuallycollectedafterallreasonablecollectioneffortshavebeenexhaustedischargedoffagainsttheallowancefordoubtfulaccounts.



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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Allowance fordoubtfulaccounts (continued) – CMC’s allowance fordoubtful accounts for self‐paypatientsdecreasedfrom83.7percentofself‐payaccountsreceivableatAugust31,2011,to82.7percentofself‐payaccountsreceivableatAugust31,2012.Inaddition,CMC’sself‐paywrite‐offsincreased$8,100,000from$105,800,000forfiscalyear2011to$113,900,000forfiscalyear2012.Increasedwrite‐offsweretheresultofincreasedgrossrevenueof6.2percentinfiscalyear2012.CMChasnotchangeditscharitycareoruninsureddiscountpoliciesduringfiscalyears2011or2012.CMCmaintainedallowancesfordoubtfulaccountsfromthird‐partypayorsof$8,300,000infiscalyear2011and$9,200,000infiscalyear2012.Inventories–Inventoriesarestatedatthelowerofcost,determinedbythefirst‐in,first‐outmethod,ormarket.

Assetslimitedastouseandshort‐terminvestments–Assetslimitedastouseconsistprincipallyofcorporatedebtsecurities,equitysecurities,andU.S.governmentandagencysecurities,allofwhichareavailableforsaleandcarriedatfairmarketvalue.Thefairvaluesfortheseinvestmentsarebasedonquotedmarket prices. Investments also include repurchase agreements. Certain marketable securities aredesignatedasassetsheldintrust.Theseincludeassetsheldbytrusteesinaccordancewiththeindenturesrelatingtolong‐termdebt.Inaddition,certaininvestmentsaresetasidebytheboardoftrusteesforfuturecapitalimprovements.

Investmentincomeisincludedintheexcessofrevenues,gains,andothersupportoverexpensesunlesstheincomeisrestrictedbydonororlaw.ForinvestmentspurchasedpriortoSeptember1,2008,unrealizedgainsandlossesoninvestmentsareexcludedfromtheexcessofrevenues,gains,andothersupportoverexpensesunlesstheinvestmentsaretradingsecurities,oranunrealizedlossisdeterminedtobeotherthantemporaryforanysecuritythatisavailableforsale.Managementroutinelyevaluatesitsinvestmentsinmarketablesecuritiesforotherthantemporaryimpairment.

CMChaselectedtoreportinvestmentsindebtandequitysecuritiespurchasedonorafterSeptember1,2008underAccountingStandardsCodification(ASC)825,FinancialInstruments,suchthatunrealizedgainsandlossesonsuchsecuritiesareincludedintheexcessofrevenues,gains,andothersupportoverexpensesunlesstheincomeisrestrictedbydonororlaw.

CMChasdiscretiontoestablishpoliciesregardingwhichportionofassetslimitedastouseisclassifiedasshort‐terminvestments.Theamountclassifiedasshort‐terminvestmentsconsistsofavailablecashheldininvestmentaccounts,moneymarketsbalances,andhighlyliquidinvestmentsecuritieswithanoriginalmaturityofthreemonthsorless.


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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Property,plant,andequipment–Property,plant,andequipmentarestatedatcost,orinthecaseofdonateditems,atfairmarketvalueatthedateofdonation.Routinemaintenanceandrepairsarechargedtoexpense as incurred. Expenditures that increase values, change capacities, or extend useful lives arecapitalized, as is interest for significant construction projects. In 2012 and 2011, $11,440,000 and$10,783,000,respectively,ofnetinterestexpensewascapitalizedforconstructionprojects. Depreciationiscomputedbythestraight‐linemethodovertheestimatedusefullivesoftheassets,whichrangefrom10to25yearsforlandimprovements,5to40yearsforbuildingsandimprovementsandanaverageof8yearsforequipment.CMC’smanagementregularlyreviewslong‐livedassetsforindicationsofimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverable.Managementestimatesthefairvalueoflegalassetretirementobligationsthatareconditionalonafutureeventiftheamountcanbereasonablyestimated,inaccordancewithFinancialAccountingStandardsBoard(FASB).Estimatesaredevelopedthroughtheidentificationofapplicablelegalrequirements,identificationofspecificconditionsrequiringincrementalcostattimeofassetdisposal,estimationofcoststoremediateconditions,andestimationofremainingusefullivesordateofassetdisposal.Self‐insuranceandotherbenefitplans–CMC isself‐insured forworkers’compensationclaimsandmaintainsaself‐insuredmedical,dental,andvisioncareplanasanoptionforitsemployees.Claimsareaccruedundertheseplansastheincidentsthatgiverisetothemoccur.Unpaidclaimaccrualsarebasedonthe actuarially estimated ultimate cost of settlement, including claim settlement expenses. CMC hasreinsurancearrangementswithinsurancecompaniestolimititslossesonclaimsformedicalandworkers’compensationexpenses.Theportionnotexpectedtobepaidwithinoneyearisincludedwithinotherlong‐termobligations.AsofAugust31,2012,CMChasaclaimsliabilityof$55,033,000andacorrespondinginsurancerecoveryreceivableof$3,648,000formedicalandworkerscompensationclaimsthatareinsuredbyathirdpartyexcesslosspolicy.Theclaimsliabilityisclassifiedinotheraccruedliabilitiesandlong‐termobligationsandtheinsurancerecoveryreceivableisclassifiedinprepaidsandotherassets,respectively,intheaccompanyingbalancesheet.



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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED) Professionalliabilityinsurance–AsofSeptember1,2009,CMCformedawhollyownedcaptiveinsurancecompanycalledCommunityInsuranceServicesCompany(CISC).CISChasissuedclaims‐madepoliciestoinsurethemedicalandgeneralliabilityrisksofCMC’saffiliates.CISCretains$2,000,000foreachandeverylossandreinsures$118,000,000withthird‐partyreinsurers.AsofAugust31,2012and2011,CMChadrecordedestimatedliabilitiesforclaimsincurredandreportedof$7,041,000and$6,596,000,respectively.Theseamountsareincludedwithincurrentliabilitiesintheaccompanyingconsolidatedbalancesheets.Shouldthereinsurancepoliciesnotberenewedorreplacedwithequivalentinsurance,claimsrelatedtooccurrencesduringthetermoftheclaims‐madepolicybutreportedsubsequenttoitsterminationmaybeuninsured. Liabilities of $3,049,000 and $2,997,000 have been recorded for the actuarially estimatedincurredbutnotreportedliabilitythatisnotcoveredbythird‐partyinsuranceatAugust31,2012and2011,respectively. These liabilities are included within other long‐term obligations in the accompanyingconsolidatedbalancesheets.Incometaxes–MostentitiesincludedinCMCareexemptfromtaxationunderSection501(c)(3)oftheInternalRevenueCodeandSection23701doftheCaliforniaRevenueandTaxationCodeandaregenerallynotsubjecttofederalorstateincometaxes.However,theexemptorganizationsaresubjecttoincometaxesonanynetincomethatisderivedfromatradeorbusiness,regularlycarriedon,andnotinfurtheranceofthepurposesforwhichitwasgrantedexemption.Noincometaxprovisionhasbeenrecordedasthenetincome,ifany,fromanyunrelatedtradeorbusiness,intheopinionofmanagement,isnotmaterialtothebasicfinancialstatementstakenasawhole.CMCincludesentitiesthataresubjecttoincometaxes;however,suchincometaxactivitiesarenotsignificanttotheconsolidatedfinancialstatements. Donorgifts–UnconditionalpromisestogivecashandotherassetstoCMCarereportedatfairmarketvalueatthedatethepromiseisreceived.Conditionalpromisestogiveandindicationsofintentionstogivearereportedatfairmarketvalueatthedatethegiftisreceivedandanyconditionsaresubstantiallymet.Thegiftsarereportedaseithertemporarilyorpermanentlyrestrictedsupportiftheyarereceivedwithdonorstipulations that limit theuseof thedonatedassets.Whenadonorrestrictionexpires, that is,whenastipulatedtimerestrictionendsorpurposerestrictionisaccomplished,restrictednetassetsarereclassifiedasunrestrictednetassets. Fairvalueoffinancialinstruments–Unlessotherwiseindicated,thefairvalueofallreportedassetsandliabilities,whichrepresent financial instruments,approximatetheircarryingvalues.CMC’spolicy istorecognizetransfersinandtransfersoutofLevels1and2asoftheendofthereportingperiod. Excessofrevenues,gainsandothersupportoverexpenses–Excessofrevenues,gains,andothersupportoverexpensesreflectedintheaccompanyingconsolidatedstatementsofoperationsincludesallchangesinunrestrictednetassetsotherthanchangesinunrealizedgainsoncertainmarketablesecurities,netassetsreleasedfromrestrictionsforequipmentacquisition,andchangesinpensionbenefitobligation.


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NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Newaccountingpronouncements–InApril2009,theFASBissuedSFASNo.164,Not‐for‐ProfitEntities:MergersandAcquisitions,includinganamendmentofFASBStatementNo.142,ascodifiedbyAccountingStandardsUpdate(ASU)2010‐07.Thisstatementprovidesguidanceonaccountingforacombinationofnot‐for‐profitentitiesandappliestoacombinationthatmeetsthedefinitionofeitheramergerofnot‐for‐profitentitiesoranacquisitionbyanot‐for‐profitentity.Theprovisionestablishesprinciplesandrequirementsforhowanot‐for‐profitentity(a)determineswhetheracombinationisamergeroranacquisition,(b)appliesthecarryovermethodinaccountingforamerger,(c)appliestheacquisitionmethodinaccountingforanacquisition,and(d)determineswhatinformationtodisclosewithrespecttothenatureandfinancialeffectsofamergeroracquisition.

ThisstatementalsoamendsbothASC350,Intangibles‐GoodwillandOther,andASC810,NoncontrollingInterest.TheprovisionsofASU2010‐07aretobeappliedprospectivelyandareeffectiveforCMCinthefiscal year ended August 31, 2011 formergers and acquisitions. Pursuant to ASU 2010‐07, CMC hasdiscontinuedtheamortizationofgoodwillduringthefiscalyearendedAugust31,2011.

InJanuary2010,theFASBissuedASU2010‐06,ImprovingDisclosuresaboutFairValueMeasurements(ASU2010‐06),whichamendedASC820,FairValueMeasurementsandDisclosures(ASC820),torequirenewdisclosuresrelatedtotransfersinandoutofLevel1andLevel2fairvaluemeasurements,includingthereasons for the transfers and to require new disclosures related to activity in Level 3 fair valuemeasurements.Inaddition,ASU2010‐06clarifiesexistingdisclosurerelatedtothelevelofdisaggregationofclassesofassetsandliabilitiesandprovidesfurtherdetailaboutinputsandvaluationtechniquesusedforfairvaluemeasurement.CMCadoptedASU2010‐06inthefiscalyearendedAugust31,2011(Note5).

InAugust2010,theFASBissuedASU2010‐23,HealthCareEntities(Topic954),MeasuringCharityCareforDisclosure(ASU2010‐23),whichrequiresthatcostbeusedasameasurementforcharitycaredisclosurepurposesandthatcostbeidentifiedasthedirectandindirectcostsofprovidingcharitycare.Italsorequiresdisclosureofthemethodusedtoidentifyordeterminesuchcosts.CMCisrequiredtoadoptASU2010‐23inthefiscalyearendedAugust31,2012.TheadoptionofASU2010‐23didnothaveamaterialimpactonitsconsolidatedfinancialstatements.

InAugust2010,theFASBissuedASU2010‐24,HealthCareEntities(Topic954),PresentationofInsuranceClaimsandRelatedInsuranceRecoveries(ASU2010‐24),whichclarifiesthatahealthcareentityshouldnotnetinsurancerecoveriesagainstarelatedclaimliability.Additionally,theamountoftheclaimliabilityshouldbedeterminedwithoutconsiderationofinsurancerecoveries.CMChasadoptedASU2010‐24inthefiscalyearendedAugust31,2012.

InJuly2011,theFASBissued2011‐07,HealthCareEntities(Topic954),PresentationandDisclosureofPatientServiceRevenue,ProvisionforBadDebts,andtheAllowanceforDoubtfulAccountsforCertainHealthCareEntities(ASU2011‐07),whichrequireshealthcareentities that recognizesignificantamountsofpatientservicerevenueatthetimetheservicesarerenderedeventhoughtheydonotassessthepatient’sabilitytopaytopresenttheprovisionforbaddebtsrelatedtopatientservicerevenueasadeductionfrompatientservicerevenue(netofcontractualallowancesanddiscounts)ontheirstatementofoperations.CMCadoptedASU2011‐07inthefiscalyearendedAugust31,2012.



13

NOTE3–SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(CONTINUED)Reclassifications–Certainamountsinthe2011financialstatementshavebeenreclassifiedtoconformtothe2012presentation.Subsequentevents–Subsequenteventsareeventsortransactionsthatoccurafterthebalancesheetdatebutbeforefinancialstatementsareissued.CMCrecognizesintheconsolidatedfinancialstatementstheeffectsofallsubsequenteventsthatprovideadditionalevidenceaboutconditionsthatexistedatthedateoftheconsolidatedbalancesheet,includingtheestimatesinherentintheprocessofpreparingtheconsolidatedfinancialstatements.CMC’sconsolidatedfinancialstatementsdonotrecognizesubsequenteventsthatprovideevidenceaboutconditionsthatdidnotexistatthedateoftheconsolidatedbalancesheetbutaroseafterthebalancesheetdateandbeforetheconsolidatedfinancialstatementsareissued.CMChasevaluatedsubsequenteventsthroughNovember21,2012,whichisthedatetheconsolidatedfinancialstatementsareissued.NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUESNetpatientservicerevenues–Netpatientservicerevenuesarereportedattheestimatednetrealizableamountsfrompatients,third‐partypayors,andothersforservicesrendered,includingestimatedretroactiveadjustmentsunderreimbursementagreementswiththird‐partypayors.Estimatedsettlementsunderthird‐partyreimbursementagreementsareaccruedintheperiodinwhichtherelatedservicesarerenderedandadjustedinfutureperiods,basedonupdatedinformationandasaresultoffinalsettlements.Grosspatientchargescompriseusualandcustomarychargesforservicesprovidedtoallpatients.ThecompositionofconsolidatedgrosspatientchargesbymajorpayorgroupasoftheyearsendedAugust31,2012and2011,isasfollows:

2012 2011

Medicare 29% 26%Medi‐CalandmanagedMedi‐Cal 33% 33%Contractedratepayors 26% 30%Commercialinsuranceandotherpayors 5% 5%MedicallyIndigentServicesProgram(MISP) 7% 6%

Total 100% 100%


14

NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUES(CONTINUED)CMChasagreementswiththird‐partypayorsthatprovideforpaymentstoCMCatamountsdifferentfromitsestablishedrates.Asummaryofthepaymentarrangementswithmajorthird‐partypayorsisasfollows:Medicare– Inpatient acute care services, skillednursing services, rehabilitation services, and certainoutpatientservicesrenderedtoMedicareprogrambeneficiariesarepaidatprospectivelydeterminedratesper diagnosis. These rates vary according to a patient classification system that is based on clinical,diagnostic,andotherfactors.CertaininpatientnonacuteservicesandmedicaleducationcostsrelatedtoMedicarebeneficiariesarepaidbasedonacost‐basedreimbursementmethodology.Professionalservicesarereimbursedbasedonafeeschedule.Medi‐Cal–InpatientandoutpatientservicesrenderedtoMedi‐Calprogrambeneficiariesarereimbursedprimarilyundercontractedrates.Additionally,CMCisallocatedcertainfundsavailablefromapoolofStateofCalifornia funds fordisproportionate sharehospital servicesunder the SB855andSB1255/PrivateHospitalFundprogramsbaseduponanannualdeterminationforeligibility.RevenuesundertheSB855programandSB1255/PrivateHospitalFundtotaled$32,357,000and$10,667,000,respectively,fortheyearendedAugust31,2012and$37,085,000and$9,333,000,respectively,fortheyearendedAugust31,2011.AsofAugust31,2012and2011,CMCrecordedreceivablesof$13,722,000and$9,947,000,respectively,foramountsduefromtheStateofCaliforniaforSB855,SB1255,andotherprograms.

CostreportsfiledundertheMedicareandMedi‐Calprogramsforservicesbasedoncostreimbursementaresubjecttoaudit.Theestimatedamountsduetoorfromtheprogramsarereviewedandadjustedannuallybasedonthestatusofsuchauditsandanysubsequentappeals.Differencesbetweenfinalsettlementsandamountsaccruedinpreviousyearsarereportedasadjustmentstonetrevenueintheyearinwhichtheexaminationiscompleted.Netpatientservicerevenueincreased$3,365,000anddecreased$3,039,000in2012and2011, respectively, related toupdatesofprioryears’ cost report reservesand increasedby$14,082,000 and $3,202,000, respectively, related to successful appeals of prior years’ cost reportsettlements.Other–CMChasenteredintopaymentagreementswithcertaincommercialinsurancecarriers,healthmaintenanceorganizations(HMOs),andpreferredproviderorganizations.ThebasisforpaymenttoCMCundertheseagreementsincludesprospectivelydeterminedratesperdiagnosis,discountsfromestablishedcharges,andprospectivelydetermineddailyrates.CMCalsoreceivesStateofCaliforniafundspursuanttoProposition99.Premiumrevenue–CMChasanagreementwithanindependentphysicianassociation(IPA)toprovidemedicalservicestocertainIPAmembers.Underthisagreement,CMCreceivesmonthlycapitationpaymentsandrecognizesasrevenueduringtheperiodregardlessofservicesactuallyperformedbyCMC.Charitycare–HealthcareservicesareprovidedtopatientswhomeetcertaincriteriaunderCMC’scharitycarepolicieswithoutchargeoratamounts less thanestablishedrates.Traditionalcharitycarecoversservicesprovidedtopersonswhomeetcertaincriteriaandcannotaffordtopay.Unpaidcostsofcharityaretheestimatedcostsofservicesprovidedtosuchpatients.Theestimatedcostofprovidingtheseserviceswas$9,198,000and$12,550,000fortheyearsendedAugust31,2012and2011,respectively,calculatedbymultiplyingtheratioofcosttogrosschargesforCMCbythegrossuncompensatedchargesassociatedwithprovidingcharitycaretoitspatients.



15

NOTE4–NETPATIENTSERVICEANDPREMIUMREVENUES(CONTINUED)Hospitalfeeprogram–InNovember2009,theCaliforniaHospitalFeeProgram(theProgram)wassignedintoCaliforniastate law.TheProgramprovidessupplementalMedi‐Calpayments tocertainCaliforniahospitals.TheProgramisfundedbyaqualityassurancefee(theFee)paidbyparticipatinghospitalsandbymatchingfederalfunds.HospitalsreceivesupplementalpaymentsfromeithertheCaliforniaDepartmentofHealthCareServices(DHCS),managedcareplansoracombinationofboth.TheProgramwasadministeredintwoparts.Thefirstpart(PartOne),createdbyAssemblyBill1653(signedintolawinSeptember2010),coverstheperiodbeginningApril1,2009throughDecember31,2010.Thesecondpart(PartTwo),createdbySenateBill90(signedintolawinMarch2011),coverstheperiodbeginningJanuary1,2011throughJune30,2011.PartOnebecameeffectiveinfiscalyear2011afterapprovalfromtheCentersforMedicareandMedicaidServices(CMS).CMCrecognized$117,598,000innetpatientservicerevenueand$62,286,000inexpensefortheyearendedAugust31,2011.Additionally,theCaliforniaHospitalAssociationcreatedaprivateprogram,theCaliforniaHealthFoundationandTrust(CHFT),establishedforseveralpurposes,includingaggregatinganddistributingfinancialresourcestosupportcharitableactivitiesatvarioushospitalandhealthsystemsinCalifornia.ApledgeagreementwasexecutedduringthefiscalyearendedAugust31,2010betweenCMCandCHFTwherebyCMCpaid$4,263,000priortoAugust31,2011intoagrantfundestablishedbyCHFT,pendingapprovalofthelegislationnotedabove.PartTwoof theProgramhadnot received final approval fromCMSasofAugust31, 2011.CMCpaid$22,178,000in2011forPartTwooftheProgram,andrecordedthisasaprepaidexpenseatAugust31,2011.CMCreceivedsupplementalpaymentsforPartTwoof$38,394,000in2011.Astheprogramwasnotyetlegallyeffectivein2011,theserevenuesweredeferredandrecordedasapartofothercurrentliabilitiesatAugust31,2011.FinalapprovalbyCMSoccurredonDecember29,2011.CMCrecognized$48,187,000innetpatientservicerevenueand$22,351,000inexpensefortheyearendedAugust31,2012relatingtoPartTwooftheProgram.Californiasubsequentlyenactedathirty‐monthqualityassurancefeeprogram(30monthProgram)fortheperiodJuly1,2011throughDecember31,2013.FinalapprovalbyCMSforthefeeforserviceportionofthisprogramoccurredonJune22,2012.ForthefeeforserviceportionfortheyearendedAugust31,2012,estimatedsupplementalpaymentsfortheperiodJuly1,2011throughAugust31,2012of$90,878,000areincluded in net patient service revenue, and estimated fees and pledges for this same timeperiod of$52,607,000areincludedinotherexpenses.AtAugust31,2012,CMChasareceivableof$72,747,000andaliabilityof$36,364,000relatingtothe30monthProgram.ThemanagedcareportionofthisprogramhasnotreceivedfinalapprovalfromCMSandisnotyeteffectiveasofAugust31,2012.Asthemanagedcareportionofthe30monthProgramhasnotbeenfinalapproved,CMChasnotrecordedanyactivityrelatingtothemanagedcareportionatAugust31,2012.


16

NOTE5–ASSETSLIMITEDASTOUSEAssetslimitedastouseincludemarketablesecuritiesthatarecarriedatfairvalue,basedonquotedmarketprices.Pledgesreceivablearecarriedatnetrealizablevalue.ThecompositionofassetslimitedastouseatAugust31,2012and2011,isasfollows(inthousands):

Fairvalue Fairvalueand and

carrying carryingCost value Cost value

Cashandequivalents 48,906$ 48,906$ 112,597$ 112,597$U.S.Treasurybillsandnotes 20,945 20,945 27,410 27,554U.S.governmentagencydebt 48,900 49,321 43,824 44,426Corporatedebtsecurities 119,244 119,536 92,340 93,198Equitysecurities 46,229 51,035 26,828 29,334Mutualfunds 28,120 28,311 17,563 17,841Repurchaseagreements 19,394 19,394 19,393 19,393

Totalcashandmarketablesecurities 331,738 337,448 339,955 344,343

Lessamountsclassifiedasshort‐terminvestments (14,283) (14,283) (39,816) (39,816)

Pledgesreceivable,net 5,623 5,623 5,488 5,488

Totalassetslimitedastouse 323,078$ 328,788$ 305,627$ 310,015$

2012 2011

During 2012 and 2011, CMC incurred impairment charges of $63,000 and $400,000, respectively, torecognizeunrealizedlossesthatweredeemedtobeother‐than‐temporary.CMC adopted ASC 820,FairValueMeasurementsandDisclosure, on September 1, 2008 for fair valuemeasurementsoffinancialassetsandliabilities.ASC820establishedafairvaluehierarchythatprioritizestheinputstovaluationtechniquesusedtomeasurefairvalue.Thehierarchygivesthehighestprioritytounadjustedquotedpricesinactivemarketsforidenticalassetsorliabilities(Level1measurements)andthelowestprioritytomeasurementsinvolvingsignificantunobservableinputs(Level3measurements).Thethreelevelsoffairvaluehierarchyareasfollows:

Level1inputsarequotedprices(unadjusted)inactivemarketsforidenticalassetsorliabilitiesthatCMChastheabilitytoaccessatthemeasurementdate.

Level2inputsareinputsotherthanquotedpricesincludedwithinLevel1thatareobservablefortheassetorliability,eitherdirectlyorindirectly.

Level3inputsareinputsthatareunobservableinputsfortheassetorliability.Thelevelinthefairvaluehierarchywithinwhichafairvaluemeasuremententirelyfallsisbasedonthelowestlevelinputthatissignificanttothefairvaluemeasurementinitsentirety.



17

NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThefollowingtablepresentsfinancialassetsmeasuredatfairvalueasofAugust31,2012(inthousands):

Quotedprices Significantinactive other Significant

marketsfor observable unobservableidenticalassets inputs inputs Fairvalue

Investments Level1 Level2 Level3 total

Cashandequivalents 14,283$ ‐$ ‐$ 14,283$

U.S.TreasuryandU.S.agencyfixedincome:U.S.Treasurybillsandnotes 20,945 ‐ ‐ 20,945U.S.governmentagencydebt ‐ 49,321 ‐ 49,321

20,945 49,321 ‐ 70,266

Corporatedebtsecurities:Healthcare ‐ 7,087 ‐ 7,087Energy ‐ 14,019 ‐ 14,019Financials ‐ 56,130 ‐ 56,130Industrials ‐ 7,200 ‐ 7,200Informationtechnology ‐ 5,877 ‐ 5,877Telecommunications ‐ 7,497 ‐ 7,497Consumerstaples ‐ 1,553 ‐ 1,553Consumerdiscretionary ‐ 9,066 ‐ 9,066Other ‐ 11,107 ‐ 11,107

‐ 119,536 ‐ 119,536

Equitysecurities:Healthcare 8,928 ‐ ‐ 8,928Utilities 1,981 ‐ ‐ 1,981Financials 4,676 ‐ ‐ 4,676Consumerstaples 5,439 ‐ ‐ 5,439Consumerdiscretionary 3,968 ‐ ‐ 3,968Materials 2,282 ‐ ‐ 2,282Energy 5,581 ‐ ‐ 5,581Informationtechnology 10,449 ‐ ‐ 10,449Industrials 5,793 ‐ ‐ 5,793Telecommunications 1,938 ‐ ‐ 1,938

51,035 ‐ ‐ 51,035

Mutualfunds:Midcapcore 8,078 ‐ ‐ 8,078Smallcapcore 7,797 ‐ ‐ 7,797Internationalcore 4,068 ‐ ‐ 4,068Emergingmarkets 4,174 ‐ ‐ 4,174Specialty‐realestate 4,194 ‐ ‐ 4,194

28,311 ‐ ‐ 28,311114,574 168,857 ‐ 283,431

Fundsheldbytrustees

Repurchaseagreements ‐ 19,394 ‐ 19,394Cashandequivalents 34,623 ‐ ‐ 34,623

34,623 19,394 ‐ 54,017Total 149,197$ 188,251$ ‐$ 337,448$

2012


18

NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThefollowingtablepresentsfinancialassetsmeasuredatfairvalueasofAugust31,2011(inthousands):






27,554 44,426 ‐ 71,980

Corporatedebtsecurities:Healthcare ‐ 1,425 ‐ 1,425Energy ‐ 12,370 ‐ 12,370Financials ‐ 42,510 ‐ 42,510Industrials ‐ 4,825 ‐ 4,825Informationtechnology ‐ 3,959 ‐ 3,959Telecommunications ‐ 7,024 ‐ 7,024Consumerstaples ‐ 10,858 ‐ 10,858Consumerdiscretionary ‐ 6,015 ‐ 6,015Other ‐ 4,212 ‐ 4,212

‐ 93,198 ‐ 93,198

Equitysecurities:Healthcare 3,830 ‐ ‐ 3,830Utilities 958 ‐ ‐ 958Financials 3,054 ‐ ‐ 3,054Consumerstaples 4,380 ‐ ‐ 4,380Consumerdiscretionary 2,435 ‐ ‐ 2,435Materials 1,508 ‐ ‐ 1,508Energy 3,588 ‐ ‐ 3,588Informationtechnology 5,426 ‐ ‐ 5,426Industrials 3,391 ‐ ‐ 3,391Telecommunications 764 ‐ ‐ 764

29,334 ‐ ‐ 29,334

Mutualfunds:Midcapcore 4,820 ‐ ‐ 4,820Smallcapcore 5,019 ‐ ‐ 5,019Internationalcore 4,031 ‐ ‐ 4,031Emergingmarkets 1,754 ‐ ‐ 1,754Specialty‐realestate 2,217 ‐ ‐ 2,217

17,841 ‐ ‐ 17,841114,546 137,624 ‐ 252,170

Fundsheldbytrustees

Repurchaseagreements ‐ 19,393 ‐ 19,393Cashandequivalents 72,780 ‐ ‐ 72,780

72,780 19,393 ‐ 92,173

Total 187,326$ 157,017$ ‐$ 344,343$

2011



19

NOTE5–ASSETSLIMITEDASTOUSE(CONTINUED)ThescheduledmaturitiesofthedebtsecuritiesasofAugust31,2012,areasfollows:

Amortized Estimatedcostbasis fairvalue

Duewithin1yearorless 16,261$ 16,369$Dueafter1yearthrough5years 100,444 100,466Dueafter5years 22,483 22,644

139,188 139,479Mortgage‐backedsecuritiesaccruedinterest

andother 34,635 35,056

173,823$ 174,535$

ThescheduledmaturitiesofthedebtsecuritiesasofAugust31,2011,areasfollows:

Amortized Estimatedcostbasis fairvalue

Duewithin1yearorless 14,940$ 14,964$Dueafter1yearthrough5years 85,447 85,979Dueafter5years 21,699 22,090

122,086 123,033

Mortgage‐backedsecuritiesaccruedinterestandother 41,488 42,145

163,574$ 165,178$

Investment income is composed of the following for the years ended August 31, 2012 and 2011 (inthousands):

2012 2011

Interestincome 4,392$ 6,011$Netrealizedgains/lossesonsalesofsecuritiesand

other‐than‐temporaryimpairment 10,398 2,157Dividends 1,180 491

15,970$ 8,659$


20

NOTE6–PROPERTY,PLANT,ANDEQUIPMENTProperty,plant,andequipmentconsistofthefollowingasofAugust31,2012and2011(inthousands):

2012 2011

Landandlandimprovements 32,226$ 29,995$Buildingsandimprovements 468,059 492,176Equipment 440,247 336,805

940,532 858,976

Accumulateddepreciation (443,565) (401,117)

496,967$ 457,859$

NOTE7–OTHERASSETSOtherassetsconsistofthefollowingasofAugust31,2012and2011(inthousands):

2012 2011

LoanreceivablefromDKACCLenders(Note9) 18,844$ 18,844$Investmentinrentalproperties 12,662 13,624Realestateheldfordevelopment 6,037 6,037Intangibleassets,net 3,543 3,119Unamortizedfinancingcosts,net 8,009 8,325Investmentinjointventures 10,453 8,487Other 1,755 2,568

61,303$ 61,004$

CMCowns rental properties, recordedat cost, net of accumulateddepreciation. Investments in rentalpropertiesconsistofthefollowingasofAugust31,2012and2011andareincludedinotherassetsintheaccompanyingconsolidatedbalancesheets(inthousands):

2012 2011

Land 4,085$ 4,085$Buildingsandlandimprovements 24,843 25,023Equipment 2,957 2,883

31,885 31,991Accumulateddepreciation (19,223) (18,367)

12,662$ 13,624$



21

NOTE8–LONG‐TERMDEBTLong‐termdebtconsistsofthefollowingasofAugust31,2012and2011(inthousands):

2012 2011

CaliforniaMunicipalFinanceAuthority

193,800$ 197,146$Unamortizedbonddiscount (3,177) (3,371)

Totalcertificatesofparticipation 190,623 193,775


303,455 306,690Unamortizedbondpremium 8,127 8,499

Totalcertificatesofparticipation 311,582 315,189


7,291 11,372

25,589 25,589

Otherlong‐termdebt 2,401 2,694

537,486 548,619

Currentmaturities (11,542) (10,951)

525,944$ 537,668$

Building Loan Agreement (DKACC), interest at 0.90% to 1.97%payable quarterly, principal due December 2038, collateralized byaguaranteebytheCMCObligatedGroup

NotepayabletoanLLCanditsowners,payableinmonthlyinstallmentsthrough2021,interestat4.25%

Certificates of Participation (Community Hospitals of CentralCalifornia Project) Series 2009, interest ranging from 3% to5.5% payable semiannually; principal payable in installmentsranging from $3,510,000 in 2013 to $13,850,000 in 2039,collateralized by gross revenues. Interest payments werefundedthroughFebruary1,2012

Certificates of Participation (Community Hospitals of CentralCalifornia Project) Series 2007, interest ranging from 5% to5.25% payable semi‐annually; principal payable in installmentsranging from $3,400,000 in 2013 to $18,775,000 in 2046,collateralizedbygrossrevenues

Certificates of Participation (Community Hospitals of CentralCalifornia Project) Series 2009, interest at 5.19% payablemonthly; principal payable in installments ranging from$4,299,000 in 2013 to $2,992,000 in 2014, collateralized byequipment.


22

NOTE8–LONG‐TERMDEBT(CONTINUED)Underthetermsof themaster trust indentureassociatedwiththecertificatesofparticipation,certainmembers of CMCaredesignated asmembers of theObligatedGroup. There are restrictive covenantsrequiringcompliancebytheObligatedGroup.Theseinclude,amongotherthings,limitationsontheissuanceofadditionaldebtandthemaintenanceofcertainfinancialratios. In2009,DKACCborrowed$25,589,000tofinancetheacquisitionandconstructionofcertainfacilitiesandequipmentunderafinancingstructuredtoqualifyforNewMarketsTaxCredits.TheNewMarketsTaxCreditsprogramisadministeredbytheFederalgovernmentandprovidestaxincentivesforthebenefitoflow‐incomecommunities.Inordertocomplywiththisprogram,affiliatesofCMC’sunderwriterformedagroupofentities(theLenders),whichwerecapitalizedby$7,500,000fromanaffiliateoftheunderwriterand by an $18,844,000 loan from CMC. This resulted in the Lenders accumulating funds totaling$25,589,000,whichwerethenloanedtoDKACC.TheObligatedGrouphasguaranteedDKACC’srepaymentobligationsunderthisborrowing,whichhasafinalmaturityofJanuary20,2038,butsuchguarantyisnotsecuredbyanObligationissuedundertheMasterIndenture.Additionally,theObligatedGrouphasalimitedguaranty,upto$10,000,000over7years,relatedtotheLenders’realizationoftaxcreditsavailableundertheNewMarketsTaxCreditprogram.TheObligatedGroupdoesnotcurrentlyexpecttomakeanypaymentsundertheseguarantees. Scheduledprincipalrepaymentsonlong‐termdebtandpaymentsoncapitalleaseobligationsbyfiscalyearareasfollows(inthousands):

Long‐termdebt

2013 11,726$2014 10,7592015 7,8612016 8,2532017 8,635Thereafter 485,302

532,536Addnetunamortizedbondpremium 4,950

537,486$

The aggregate estimated fair value of CMC’s long‐term obligations at August 31, 2012 and 2011, of$485,473,000and$458,551,000,respectively,wereestimatedusingdiscountedcashflowanalysesbasedonCMC’scurrentincrementalborrowingratesforsimilardebtinstruments.



23

NOTE9–LINEOFCREDITCMC has a credit agreement with a bank that allows CMC to borrow up to $40,000,000. Under thisagreement,creditcardborrowingsareinterest‐freeandduemonthly.AllotherborrowingsbearinterestonaLIBORbase.Amountsappliedforletterofcreditagreementstotaled$4,800,000onAugust31,2012and2011.Outstandingcreditcardborrowingswere$3,489,000and$2,806,000onAugust31,2012and2011,respectively.TherewerenoLIBOR‐basedborrowingsasofthesedates.Anotesecuringthelineofcredithasbeenissuedunderthemastertrustindenture.TheagreementexpiresonApril30,2013.NOTE10–PENSIONPLAN CMCmaintains a contributory defined benefit cash balance pension plan that covers substantially allemployees upon their retirement. Benefit payments for participants in the plan are determined byapplication of a benefit formula to the average base earnings of participants. In addition to normalretirementbenefits,undercertaincircumstances,theplanalsoprovidesearlyretirement,disability,death,andspousalbenefits.EmployeesofCMCbecomeeligibletoparticipateintheplanonJanuary1orJuly1followingthecompletionof1,000hoursandoneyearofservice.Thevestingperiodisthreeyears.Mandatorycontributionsaremadetotheplanbytheemployeesasspecifiedintheplandocuments.TotalemployeecontributionstotheplanfortheyearsendingAugust31,2012and2011,were$4,711,000and$4,357,000,respectively.TotalemployercontributionstotheplanfortheyearsendingAugust31,2012and2011were$14,000,000and$13,000,000,respectively.TotalbenefitspaidfortheyearsendingAugust31,2012and2011,were$10,012,000and$8,375,000,respectively.Theunfundedstatusispresentedasanoncurrentliabilityintheaccompanyingconsolidatedbalancesheets.


24

NOTE10–PENSIONPLAN(CONTINUED)Thefollowingtablesetsforththeplan’sbenefitobligation,fairvalueofplanassets,andfundedstatusasofAugust31,2012and2011(inthousands):

2012 2011

Changeinprojectedbenefitobligation(PBO):PBOatbeginningofyear 193,426$ 183,733$Employerservicecost 12,177 13,401Interestcost 8,886 8,019Actuarialloss(gain) 22,076 (7,653)Planparticipants’contributions 4,711 4,357Benefitspaidfromplanassets (10,012) (8,374)Administrativeexpensespaid (56) (57)

PBOatendofyear 231,208$ 193,426$

2012 2011Changeinplanassets:

Fairvalueofassetsatbeginningofyear 129,818$ 108,943$Actualreturnonassets 14,485 11,950Employercontributions 14,000 13,000Planparticipants’contributions 4,711 4,357Benefitspaid (10,012) (8,375)Administrativeexpensespaid (56) (57)

Fairvalueofassetsatendofyear 152,946$ 129,818$



25

NOTE10–PENSIONPLAN(CONTINUED)

2012 2011

Fundedstatusatendofyear (78,261)$ (63,607)$Unrecognizedactuarialloss 70,196 54,911Unrecognizedpriorservicecost 350 404Unfundedaccumulatedpensionbenefitobligation (70,546) (55,315)

Pensionbenefitobligationrecognizedinconsolidatedbalancesheets (78,261)$ (63,607)$

Accumulatedbenefitobligationatendofyear 205,794$ 173,995$

WeightedaverageassumptionsasofAugust31areasfollows:

2012 2011

Discountrate 3.90% 4.70%Expectedlong‐termrateofreturnonassets 7.50% 7.50%Rateofcompensationincrease 4.00% 4.00%

Netperiodicpensioncostfortheplanfor2012and2011isincludedinsalaries,wages,andbenefitsintheaccompanyingconsolidatedfinancialstatementsofoperations.Componentsofnetperiodicpensioncostincludethefollowing(inthousands):

2012 2011

Servicecost 12,177$ 13,401$Interestcost 8,886 8,019Expectedreturnonplanassets (10,151) (8,628)Amortizationofpriorservicecost 55 55Recognizednetactuariallosses 2,457 3,652

Netperiodicpensioncost 13,424$ 16,499$

2012 2011

Amountsrecognizedinnetassets:Netactuarialloss 70,196$ 54,911$Netpriorservicecost 350 404

70,546$ 55,315$


26

NOTE10–PENSIONPLAN(CONTINUED)

2012 2011

Amountsrecognizedaschangesinnetassets:Netloss(gain) 17,742$ (10,975)$Amortizationofpriorservicecost (55) (55)Amortizationofnetloss (2,457) (3,652)

15,230$ (14,682)$

Theestimatednetlossandpriorservicecostthatwillbeamortizedintonetperiodpensioncostduringthe2013fiscalyearare$3,175,000and$55,000,respectively.CMC’spensionplanassetallocationsatAugust31,2012and2011,byassetcategoryareasfollows:

2012 2011

Cashandequivalents 6% 9%Debtsecurities 35% 32%Equitysecurities 59% 59%

100% 100%

Theassetallocationpolicyforthepensionplanisasfollows:fixedincomesecurities30%to60%(whichmayincludeU.S.governmentsecuritiesandU.S.governmentagencybonds,corporatenotesandbonds,mortgage‐backed bonds, preferred stock and the fixed income securities of foreign governments andcorporations);equitysecurities30%to60%(whichmayincludedomesticcommonstock,convertiblenotesandbonds,convertiblepreferredstocks,foreignequitysecurities);andmutualfundsandlimitedliabilitycompaniesorpartnershipsthatinvestinallowedsecuritiesasdefinedabove.CMC’sinvestmentstrategyforpensionplanassetsisdesignedtoemphasizelong‐termgrowthofprincipalwhileavoidingexcessiverisk.Theinvestmentperformanceofthetotalportfolio,aswellasassetclasscomponents,ismeasuredagainstcommonlyacceptedperformancebenchmarks.Theexpectedlong‐termrateofreturnonplanassetsistheexpectedaveragerateofreturnonthefundsinvestedcurrentlyandonfundstobeinvestedinthefutureinordertoprovideforthebenefitsincludedintheprojectedbenefitobligation.TheCMCpensionplanused7.5%incalculatingthe2012and2011expenseamounts.Thisassumptionisbasedoncapitalmarketassumptionsandtheplan’stargetassetallocation.CMCcontinuestomonitortheexpectedlong‐termrateofreturnifchangesinthoseparameterscause7.5%tobeoutsideofareasonablerangeofexpectedreturns,orifactualplanreturnsoveranextendedperiodoftimesuggestgeneralmarketassumptionsarenotrepresentativeofexpectedplanresults.



27

NOTE10–PENSIONPLAN(CONTINUED)ThefollowingtablepresentstheplanassetsmeasuredatfairvalueatAugust31,2012:






11,108 10,721 ‐ 21,829

Corporatefixedincome:Stripandzerocoupon ‐ 600 ‐ 600Asset‐backedsecurities ‐ 6,575 ‐ 6,575Financials ‐ 7,887 ‐ 7,887Industrials ‐ 13,483 ‐ 13,483Otherglobalcorporatebonds ‐ 3,172 ‐ 3,172

‐ 31,717 ‐ 31,717

Commonstocks:Healthcare 2,558 ‐ ‐ 2,558Utilities 938 ‐ ‐ 938Financials 3,930 ‐ ‐ 3,930Consumerstaples 3,887 ‐ ‐ 3,887Consumerdiscretionary 6,614 ‐ ‐ 6,614Materials 5,111 ‐ ‐ 5,111Energy 4,671 ‐ ‐ 4,671Informationtechnology 10,209 ‐ ‐ 10,209Industrials 6,713 ‐ ‐ 6,713Americandepositoryreceipts 5,355 ‐ ‐ 5,355

49,986 ‐ ‐ 49,986

Mutualfunds:Largecapcore 4,281 ‐ ‐ 4,281Midcapcore 7,752 ‐ ‐ 7,752Smallcapcore 6,692 ‐ ‐ 6,692Internationalcore 6,912 ‐ ‐ 6,912Emergingmarkets 6,011 ‐ ‐ 6,011Specialty‐realestate 7,990 ‐ ‐ 7,990

39,638 ‐ ‐ 39,638110,508$ 42,438$ ‐$ 152,946$


28

NOTE10–PENSIONPLAN(CONTINUED)ThefollowingtablepresentstheplanassetsmeasuredatfairvalueatAugust31,2011:






5,660 11,525 ‐ 17,185

Corporatefixedincome:Stripandzerocoupon ‐ 588 ‐ 588Asset‐backedsecurities ‐ 4,521 ‐ 4,521Financials ‐ 5,186 ‐ 5,186Industrials ‐ 9,785 ‐ 9,785Otherglobalcorporatebonds ‐ 4,865 ‐ 4,865

‐ 24,945 ‐ 24,945

Commonstocks:Healthcare 3,140 ‐ ‐ 3,140Utilities 625 ‐ ‐ 625Financials 2,469 ‐ ‐ 2,469Consumerstaples 3,410 ‐ ‐ 3,410Consumerdiscretionary 4,048 ‐ ‐ 4,048Materials 3,732 ‐ ‐ 3,732Energy 3,670 ‐ ‐ 3,670Informationtechnology 6,811 ‐ ‐ 6,811Industrials 6,624 ‐ ‐ 6,624Americandepositoryreceipts 3,808 ‐ ‐ 3,808

38,337 ‐ ‐ 38,337

Mutualfunds:Largecapcore 11,415 ‐ ‐ 11,415Midcapcore 6,471 ‐ ‐ 6,471Smallcapcore 1,734 ‐ ‐ 1,734Internationalcore 7,787 ‐ ‐ 7,787Emergingmarkets 4,721 ‐ ‐ 4,721Specialty‐realestate 6,131 ‐ ‐ 6,131

38,259 ‐ ‐ 38,25993,348$ 36,470$ ‐$ 129,818$



29

NOTE10–PENSIONPLAN(CONTINUED)Forinformationaboutthevaluationtechniquesandinputstomeasurefairvalueoftheplanassets,seediscussionincludedinthefairvaluemeasurementdiscussionatNote5.Thefollowingpensionbenefitpaymentsreflectexpectedfutureservice.Paymentsexpectedtobepaidoverthenexttenyearsareasfollows(inthousands):

Fiscalyear:2013 9,745$2014 9,0412015 18,4372016 15,7502017 14,7752018‐2022 97,230

CMCexpectstocontributeapproximately$79,000,000tothepensionplanduringthe2013fiscalyear.NOTE11–RESTRICTEDNETASSETSTemporarilyandpermanentlyrestrictednetassetsareavailableforthefollowingpurposesasofAugust31,2012and2011(inthousands):

2012 2011

Temporarilyrestrictednetassets:Patientcare 4,146$ 3,596$Purchaseofequipment 758 2,549Scholarshipsandothereducation 4,202 2,032Other 3,620 3,882

12,726 12,059

Permanentlyrestrictednetassets 384 384

Totaltemporaryandpermanentlyrestrictednetassets 13,110$ 12,443$


30

NOTE12–FUNCTIONALCLASSIFICATIONOFOPERATINGEXPENSESThefollowingisasummaryofmanagement’sestimatedfunctionalclassificationofoperatingexpensesasofAugust31,2012and2011(inthousands):

2012 2011

Programservices 950,183$ 905,194$Managementandgeneral 100,606 86,869Fund‐raising 1,454 1,207

1,052,243$ 993,270$

NOTE13–OPERATINGLEASESCMCleasescertainpropertyandequipmentundernoncancelableoperatingleasesthatexpireinvariousyearsthrough2017.FutureminimumpaymentsatAugust31,2012,byfiscalyearandintheaggregate,undernoncancelableoperatingleaseswithinitialtermsofoneyearormoreconsistofthefollowing(inthousands):

Fiscalyear:2013 3,604$2014 4,4302015 2,6282016 1,6222017 1,453Thereafter 12,047

25,784$

Totaloperatingleaseexpensein2012and2011was$10,373,000and$12,466,000,respectively.NOTE14–COMMITMENTSANDCONTINGENCIESClovisCommunityMedicalCenterexpansion–AsofAugust31,2012,approximately$217,100,000isrecordedinconstructioninprogressfortheCCMCexpansionproject.InNovember2012,CMCexpectstoplacealargeportionoftheprojectinservice.TheGrossMaximumPrice(GMP)fortheconstructionportionoftheprojectis$203,900,000.Atotalof$164,100,000hasbeenpaidtothegeneralcontractorasof August31,2012,withtheremaining$39,800,000expectedtobepaidinfullshortlyafterthecompletiondateoftheprojectinDecember2013.



31

NOTE14–COMMITMENTSANDCONTINGENCIES(CONTINUED)Claimsandregulatoryenvironment–CMCisinvolvedinvariousclaimsandlitigation,asbothplaintiffanddefendant,arisingintheordinarycourseofbusiness.Thehealthcareindustryissubjectedtonumerouslawsandregulationsoffederal,state,andlocalgovernments.Theselawsandregulationsinclude,butarenotnecessarily limited to, matters such as licensure, accreditation, government healthcare programparticipationrequirements,reimbursementforpatientservices,andMedicarefraudandabuse.Governmentactivityremainsatahighlevelwithrespecttoinvestigationsandallegationsacrossthenationconcerningpossibleviolationsoffraudandabusestatutesandregulationsbyhealthcareproviders.Violationsoftheselaws and regulations could result in expulsion from government healthcare programs together withimpositionofsignificantfinesandpenalties,aswellassignificantrepaymentsforpatientservicespreviouslybilled.InJuly2012,CRMCreceivedaletterfromtheDepartmentofHealthandHumanServices/OfficeofInspectorGeneral/OfficeofAuditServicestobeginahospitalcompliancereview.Thereviewisgoingonathospitalsnationwide,andfocusesonknownareasofnoncomplianceidentifiedinpastOfficeoftheInspectorGeneral(OIG)reviewsnationally.TheOIGconductedanonsitereviewinSeptember/Octoberof2012,thefinalresultsofwhichhavenotbeenreceived by CMC. Based on preliminary findings, CMC estimates that approximately $1,100,000 inoverpayments has occurred and has recorded a corresponding liability at August 2012 to reflect arepaymentobligation.TheindividualrepaymentshavebeensubmittedtoCMSthroughthere‐billprocess.Thistotalrepaymentwasrecordedasareductionofnetpatientservicerevenue.CMCmanagementbelievesthattherepaymentestimateisreasonableandthatanyfurtheradjustmentsbasedontheconclusionoftheOIGreviewwouldnothaveamaterialeffectonthefinancialpositionorresultsofoperationsofCMC.CCMChasbegunaself‐audittoidentifypotentialnoncomplianceintheareasidentifiedintheCRMCreviewbyOIG.ManagementestimatesapaymentreturntoCMSofapproximately$242,000.TheserepaymentsareintheprocessofbeingsubmittedtoCMSthroughthere‐billprocess.ItemswhicharenotinthetimelyfillingperiodswillhaveacheckissuedtoCMSwithaletterandappropriatedocumentation.InMarch2010,PresidentObamasignedtheHealthCareReformLegislationintolaw.Thenewlawwillresultinsweepingchangesacrossthehealthcareindustry.Theprimarygoalofthiscomprehensivelegislationistoextendcoveragetoapproximately32millionuninsuredlegalU.S.residentsthroughacombinationofpublicprogramexpansionandprivatesectorhealthinsurancereforms.Tofundtheexpansionofinsurancecoverage,thelegislationcontainsmeasuresdesignedtopromotequalityandcostefficiencyinhealthcaredeliveryandtogeneratebudgetarysavingsintheMedicareandMedicaidprograms.CMCisunabletopredictthefullimpactoftheHealthCareReformLegislationatthistimeduetothelaw’scomplexityandcurrentlackofimplementingregulations or interpretive guidance. However, CMC expects that provisions of the Health Care ReformLegislation,shoulditremainineffectinsubstantiallyitscurrentform,willhaveamaterialeffectonitsbusiness.PledgestoMedicalFoundation–CMChasmadesignificantpledgestotheSantéMedicalFoundationtosupportitseffortstorecruitneededspecialistsandprimarycarephysicianstotheFresnoareaaswellasitsefforts to install electronic health record systems in local physician offices. Pledges of $8,815,000 and$1,900,000,andpledgepaymentsof$1,909,000and$0weremadein2012and2011,respectively.

SINGLEAUDIT


dbaCOMMUNITYMEDICALCENTERSSCHEDULEOFEXPENDITURESOFFEDERALAWARDS

YEARENDEDAUGUST31,2012


FederalCFDA/ContractNumber

Pass‐ThroughEntity

IdentifyingNumber

FederalExpenditures

U.S.DepartmentofHealthandHumanServices

GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children, 93.153 406,435$andYouth(RyanWhiteProgram)

HIVCareFormulaGrants 93.917 521,503

GrantstoProvideOutpatientEarlyInterventionServiceswithRespecttoHIVDisease(RyanWhiteHIV/AIDSProgramPartC) 93.918 612,316

TotalExpenditureofFederalAwards 1,540,254$

FederalGrantorProgramTitle


dbaCOMMUNITYMEDICALCENTERSNOTESTOSCHEDULEOFEXPENDITURESOFFEDERALAWARDS


34

1. GENERAL The accompanying schedule of expenditures of federal awards (the Schedule) includes the

federalgrantactivityofCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCenters(CMC)underprogramsofthefederalgovernmentfortheyearendedAugust31,2012.The information in this schedule ispresented inaccordancewith therequirementsof theOfficeofManagementandBudget (OMB)CircularA‐133,AuditsofStates,LocalGovernments,andNon‐ProfitOrganizations.BecausetheSchedulepresentsonlyaselectedportion of the operations of CMC, it is not intended to and does not present the financialposition,changesinnetassets,orcashflowsofCMC.

2. BASISOFACCOUNTING Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such

expendituresarerecognizedfollowingthecostprinciplescontainedinOMBCircularA‐122,CostPrinciplesforNon‐profitOrganizations,whereincertaintypesofexpendituresarenotallowableor are limited as to reimbursement. Negative amounts shown on the Schedule representadjustments or credits made in the normal course of business to amounts reported asexpenditures in prior years. Pass‐through entity identifying numbers are presented whereavailable.

3. RELATIONSHIPTOFINANCIALSTATEMENTS FederalawardsarereportedasotherrevenueinCMC’sconsolidatedstatementsofoperations

whenqualifyingexpensesareincurredforthestatedpurposeofthegrants.4. SUBRECIPIENTAWARDS Of the federal expenditures presented in the Schedule, CMC provided federal awards to

subrecipientsasfollows:

FederalCFDA/ContractNumber

AmountProvided

GrantsforCoordinatedServicesandAccesstoResearchforWomen,Infants,Children,andYouth(RyanWhiteProgram) 93.153 90,000$

ProgramName

35

REPORTOFINDEPENDENTAUDITORSONINTERNALCONTROLOVERFINANCIALREPORTINGANDONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDITOFFINANCIALSTATEMENTS

PERFORMEDINACCORDANCEWITHGOVERNMENTAUDITINGSTANDARDS

TotheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersWehaveauditedtheconsolidatedfinancialstatementsofCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCenters(CMC),fortheyearendedAugust31,2012,andhaveissuedourreportthereondatedNovember21,2012.Weconductedourauditinaccordancewithauditingstandardsgenerallyaccepted intheUnitedStatesofAmericaandthestandardsapplicabletofinancialauditscontained inGovernmentAuditingStandards, issuedbytheComptrollerGeneralof theUnitedStates.InternalControlOverFinancialReportingManagement of CMC is responsible for establishing and maintaining effective internal control overfinancial reporting. In planning andperforming our audit,we consideredCMC’s internal control overfinancial reportingasabasis fordesigningourauditingprocedures for thepurposeofexpressingouropinionon theconsolidated financialstatements,butnot for thepurposeofexpressinganopinionontheeffectivenessofCMC’s internalcontrolover financialreporting.Accordingly,wedonotexpressanopinionontheeffectivenessofCMC’sinternalcontroloverfinancialreporting.A deficiency in internal control exists when the design or operation of a control does not allowmanagementoremployees,inthenormalcourseofperformingtheirassignedfunctions,toprevent,ordetectandcorrectmisstatementsonatimelybasis.Amaterialweaknessisadeficiencyorcombinationofdeficienciesininternalcontrolsuchthatthereisareasonablepossibilitythatamaterialmisstatementofthefinancialstatementswillnotbeprevented,ordetectedandcorrectedonatimelybasis.Ourconsiderationoftheinternalcontroloverfinancialreportingwasforthelimitedpurposedescribedinthefirstparagraphofthissectionandwasnotdesignedtoidentifyalldeficienciesininternalcontroloverfinancialreportingthatmightbedeficiencies,significantdeficiencies,ormaterialweaknesses.Wedid not identify any deficiencies in internal control over financial reporting that we consider to bematerialweaknessesasdefinedabove.

36

ComplianceandOtherMattersAspartofobtainingreasonableassuranceaboutwhetherCMC’sconsolidated financialstatementsarefree ofmaterialmisstatement,we performed tests of its compliancewith certain provisions of laws,regulations, contracts and grant agreements, non‐compliance with which could have a direct andmaterialeffecton thedeterminationofconsolidated financialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofourauditand,accordingly,wedonot express such an opinion. The results of our tests disclosedno instances of non‐compliance orothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards.This report is intendedsolely for the informationanduseof theAuditCommittee,BoardofTrustees,management of CMC, and state and federal awarding agencies and pass‐through entities and is notintendedtobeandshouldnotbeusedbyanyoneotherthanthesespecifiedparties.Stockton,CaliforniaNovember21,2012

37

REPORTOFINDEPENDENTAUDITORSONCOMPLIANCEWITHREQUIREMENTSTHATCOULDHAVEADIRECTANDMATERIALEFFECTONEACHMAJORPROGRAMANDONINTERNAL

CONTROLOVERCOMPLIANCEINACCORDANCEWITHOMBCIRCULARA‐133TheBoardofTrusteesCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedicalCentersComplianceWehaveauditedCommunityHospitalsofCentralCaliforniaandAffiliatedCorporationsdbaCommunityMedical Centers’ (CMC) compliancewith the types of compliance requirementsdescribed in theOMBCircularA‐133 Compliance Supplement that could have a direct andmaterial effect on each of CMC’smajor federal programs for the year ended August 31, 2012. CMC’s major federal programs areidentified in the summary of auditor’s results section of the accompanying schedule of findings andquestioned costs. Compliance with the requirements of laws, regulations, contracts, and grantsapplicable to each of its major federal programs is the responsibility of CMC’s management. OurresponsibilityistoexpressanopiniononCMC’scompliancebasedonouraudit.

WeconductedourauditofcomplianceinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica;thestandardsapplicabletofinancialauditscontainedinGovernmentAuditingStandards, issuedby theComptrollerGeneralof theUnitedStates; andOMBCircularA‐133,AuditsofStates, Local Governments, and Non‐Profit Organizations. Those standards and OMB Circular A‐133require that we plan and perform the audit to obtain reasonable assurance about whethernoncompliancewith the typesof compliance requirements referred toabove that couldhaveadirectandmaterialeffectonamajorfederalprogramoccurred.Anaudit includesexamining,onatestbasis,evidenceaboutCMC’scompliancewiththoserequirementsandperformingsuchotherproceduresasweconsiderednecessary in the circumstances.Webelieve thatour auditprovidesa reasonablebasis forour opinion. Our audit does not provide a legal determination of CMC’s compliance with thoserequirements.

In ouropinion, CMC complied, in allmaterial respects,with the compliance requirements referred toabove that couldhaveadirect andmaterial effect oneachof itsmajor federalprograms for theyearendedAugust31,2012.InternalControloverComplianceManagement of CMC is responsible for establishing and maintaining effective internal control overcompliance with the requirements of laws, regulations, contracts, and grants applicable to federalprograms.Inplanningandperformingouraudit,weconsideredCMC’sinternalcontrolovercompliancewith the requirements that could have a direct and material effect on a major federal program todeterminetheauditingproceduresforthepurposeofexpressingouropiniononcomplianceandtotestandreportoninternalcontrolovercomplianceinaccordancewithOMBCircularA‐133,butnotforthepurposeofexpressinganopinionontheeffectivenessofinternalcontrolovercompliance.Accordingly,wedonotexpressanopinionontheeffectivenessofCMC’sinternalcontrolovercompliance.

38

InternalControlOverCompliance(continued)Adeficiencyin internalcontrolovercomplianceexistswhenthedesignoroperationofacontrolovercompliance does not allow management or employees, in the normal course of performing theirassigned functions, to prevent, or detect and correct, non‐compliance with a type of compliancerequirement of a federal program on a timely basis. A material weakness in internal control overcomplianceisadeficiency,orcombinationofdeficiencies,ininternalcontrolovercompliance,suchthatthereisareasonablepossibilitythatmaterialnon‐compliancewithatypeofcompliancerequirementofafederalprogramwillnotbeprevented,ordetectedandcorrectedonatimelybasis.Ourconsiderationofinternalcontrolovercompliancewasforthelimitedpurposedescribedinthefirstparagraph of this section and was not designed to identify all deficiencies in internal control overcompliance that might be deficiencies, significant deficiencies, or material weaknesses. We did notidentifyanydeficienciesininternalcontrolovercompliancethatweconsidertobematerialweaknesses,asdefinedabove.Thepurpose of this report on internal control over compliance is solely todescribe the scope of ourtestingofinternalcontrolovercomplianceandtheresultsofthattestingbasedontherequirementsofOMBCircularA‐133.Accordingly,thisreportisnotsuitableforanyotherpurpose.

Stockton,CaliforniaMay30,2013

COMMUNITYMEDICALCENTERSSCHEDULEOFFINDINGSANDQUESTIONEDCOSTS


39

SECTIONI–SUMMARYOFAUDITOR’SRESULTSFinancialStatementsTypeofauditor’sreportissued: UnqualifiedInternalcontroloverfinancialreporting:

Materialweakness(es)identified? yes no Significantdeficiency(ies)identified? yes nonereported

Non‐compliancematerialtofinancial

statementsnoted? yes noFederalAwardsInternalcontrolovermajorprograms:

Materialweakness(es)identified? yes no Significantdeficiency(ies)identified? yes nonereported

Typeofauditor’sreportissuedon

complianceformajorprogram: UnqualifiedAnyauditfindingsdisclosedthatare

requiredtobereportedinaccordancewithsection510(a)ofOMBCircularA‐133? yes no

IdentificationofMajorPrograms

CFDANumber(s) NameofFederalProgramorCluster

93.917 RyanWhiteHIV/AIDSTreatmentExtensionActof200993.918 RyanWhitePartCEISProgram

DollarthresholdusedtodistinguishbetweenTypeAandTypeBprograms $300,000

Auditeequalifiedaslow‐riskauditee? yes noSECTIONII–FINANCIALSTATEMENTFINDINGSNonenoted.SECTIONIII–FEDERALAWARDFINDINGSANDQUESTIONEDCOSTSNonenoted.

COMMUNITYMEDICALCENTERSSUMMARYSCHEDULEOFPRIORAUDITFINDINGS


40

SECTIONIV–SUMMARYOFPRIORAUDITFINDINGSFINDING2011‐01–Programincome(Instanceofnon‐complianceandsignificantdeficiency)Condition: CMC’s charity policy does not specifically address the requirements above and does notreferenceaseparatepolicy forHIVpatients, the trackingof thecap ismaintainedby theLabTrackersystem,buttheinformationforqualifyingpatientsisnotconsistentlymaintained.Recommendation:CMCupdatetheircharitypolicytoincludetherequirementsaboveandtrainstaffonthis policy and ensure consistency is maintained to monitor the cap on the charges and sliding feeadjustmentsaremadeaccordingly.Currentstatus:Implemented.InAugust2011,CMCdevelopedandimplementedanewslidingfeepolicyfortheHIVpatient.

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