J. Audited Fin. Statements and Projections (º 999 (4)

7/23/2019 J. Audited Fin. Statements and Projections ( 999 (4)

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C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T SA N D S U P P L E M E N T A R Y S C H E D U L E S

Daughters of Charity Health SystemAs of and for the Years Ended June 30, 2014 and 2013With Report of Independent Auditors


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Daughters of Charity Health System

Consolidated Financial Statements and Supplementary Schedules

As of and for the Years Ended June 30, 2014 and 2013

Contents

Report of Independent Auditors.......................................................................................................1

Consolidated Financial Statements

Consolidated Balance Sheets ...........................................................................................................3Consolidated Statements of Operations and Changes in Net Assets ...............................................4Consolidated Statements of Cash Flows ..........................................................................................6Notes to Consolidated Financial Statements....................................................................................8

Supplementary Schedules

Report of Independent Auditors on Supplementary Information ..................................................57Consolidating Balance Sheets ........................................................................................................58Consolidating Statements of Operations ........................................................................................62


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Report of Independent Auditors

The Board of DirectorsDaughters of Charity Health System

We have audited the accompanying consolidated financial statements of Daughters of CharityHealth System, which comprise the consolidated balance sheets as of June 30, 2014 and 2013,and the related consolidated statements of operations and changes in net assets and cash flowsfor the years then ended, and the related notes to the consolidated financial statements.

Managements Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statementsin conformity with U.S. generally accepted accounting principles; this includes the design,implementation and maintenance of internal control relevant to the preparation and fairpresentation of financial statements that are free of material misstatement, whether due to fraudor error.

Auditors Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. Wedid not audit the financial statements of Marillac Insurance Company, Ltd (Marillac), a wholly-owned subsidiary, which statements reflect total assets constituting 6.68% as of June 30, 2014and 6.82% as of June 30, 2013 and total revenues constituting .85% in 2014 and .87% in 2013 ofthe related consolidated totals. Those statements were audited by other auditors whose report hasbeen furnished to us, and our opinion, insofar as it relates to the amounts included for Marillac, isbased solely on the report of the other auditors. We conducted our audits in accordance withauditing standards generally accepted in the United States. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit involves performing procedures to obtain audit evidenceabout the amounts and disclosures in the financial statements. The procedures selected depend onthe auditors judgment, including the assessment of the risks of material misstatement of thefinancial statements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entitys preparation and fair presentation of the financialstatements in order to design audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the entitys internal control.Accordingly, we express no such opinion. An audit also includes evaluating the appropriatenessof accounting policies used and the reasonableness of significant accounting estimates made bymanagement, as well as evaluating the overall presentation of the financial statements.


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We believe that the audit evidence we have obtained is sufficient and appropriate to provide abasis for our audit opinion.

Opinion

In our opinion, based on our audits and the report of the other auditors, the financial statementsreferred to above present fairly, in all material respects, the consolidated financial position ofDaughters of Charity Health System at June 30, 2014 and 2013, and the consolidated results ofits operations and changes in net assets and its cash flows for the years then ended in conformitywith U.S. generally accepted accounting principles.

Daughters of Charity Health Systems Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming thatDaughters of Charity Health System will continue as a going concern. As discussed in Note 2 tothe consolidated financial statements, Daughters of Charity Health System has recurring lossesfrom operations and deteriorating liquidity that raise substantial doubt about its ability tocontinue as a going concern. Managements plans in regard to these matters are also described inNote 2. The consolidated financial statements do not include any adjustments that might resultfrom the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

eyNovember 24, 2014


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2014 2013

Assets

Current assets:

Cash and equivalents $ 100,355 $ 31,160

Interest in pooled investment fund short-term 921 62,478

101,276 93,638

Patient accounts receivable net of allowance for doubtful accounts

of $35 million and $40 million in 2014 and 2013, respectively 163,569 153,851

Due from government agencies 21,052 22,336

Other current assets 49,718 119,354

Total current assets 335,615 389,179

Assets limited as to use:

Interest in pooled investment fund long-term 26,881 112,882

Other investments 58,737 63,491

Under bond indenture agreements 26,133 40,859

111,751 217,232

Goodwill and intangibles net 590 10,905

Property and equipment net 339,439 369,530

Other long-term assets 10,852 13,283

$ 798,247 $ 1,000,129

Liabilities and net assets

Current liabilities:

Accounts payable $ 54,969 $ 37,234

Current portion of long-term debt 6,607 22,915

Due to government agencies 11,006 20,163

Accrued liabilities and other current liabilities 120,632 137,284

193,214 217,596

Other liabilities:

Long-term debt net of current portion 289,427 437,344

Workers compensation and hospital professional and general liability 37,209 43,527

Pension obligations 235,467 234,074

Other long-term liabilities 4,051 3,654

Total other liabilities 566,154 718,599

Net assets:

Unrestricted 1,661 20,666

Temporarily restricted 28,064 33,988

Permanently restricted 9,154 9,280

Total net assets 38,879 63,934

$ 798,247 $ 1,000,129

See accompanying notes.


Consolidated Balance Sheets(In Thousands)

June 30

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2014 2013Unrestricted revenues and other supportNet patient service revenue $ 1,136,718 $ 1,271,229Provision for doubtful accounts (43,282) (40,354)Net patient service revenue less provision for doubtful accounts 1,093,436 1,230,875Premium revenue 83,298 65,489Other operating revenue 59,657 29,435

Contributions 157,694 16,723

Total unrestricted revenues and other support 1,394,085 1,342,522

Expenses:

Salaries and benefits 805,075 783,586Supplies 172,535 170,262Purchased services and other 346,817 393,619Depreciation and amortization 65,554 60,439Interest net 19,106 25,336

Goodwill impairment loss 13,376 Total expenses 1,422,463 1,433,242

Operating loss (28,378) (90,720)Investment income net 16,276 16,252Excess (deficit) of revenues over expenses (12,102) (74,468)

Net assets released from restrictions used for purchase

of property and equipment 1,319 1,248Change in funded status of pension plans (8,564) 32,581Other 342 529Decrease in unrestricted net assets (19,005) (40,110)


Consolidated Statements of Operations and Changes in Net Assets(In Thousands)

Year Ended June 30

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2014 2013Temporarily restricted net assetsContributions $ 138,443 $ 17,800Net assets released from restrictions:

Operations (143,942) (15,584)Property and equipment (1,319) (1,248)Other 894 (447)

(Decrease) increase in temporarily restricted net assets (5,924) 521

Permanently restricted net assetsNet realized and unrealized gains on investments 354 138Contributions 278Other (480) (Decrease) increase in permanently restricted net asset (126) 416

Decrease in net assets (25,055) (39,173)

Net assets beginning of year 63,934 103,107Net assets end of year $ 38,879 $ 63,934



Consolidated Statements of Operations and Changes in Net Assets (continued)(In Thousands)

Year Ended June 30

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2014 2013

Operating activities

Decrease in net assets (25,055)$ $ (39,173)

Adjustments to reconcile decrease in net assets to net cash

provided by (used in) operating activities:

Depreciation and amortization 65,554 60,439

Provision for doubtful accounts 43,282 40,354

Changes in fair value and unrealized and realized gains on investments, net (12,408) (13,110)

Amortization of bond premium (359) (468)

Amortization of deferred debt issuance cost 1,683 223

Change in funded status of pension plans 8,564 (32,581)

Asset and goodwill impairment 13,376 10

Gain on disposal of property and equipment (4,390) (221)

Gains on disposal of other assets (13,691)

Gain on contribution for debt repayment (130,000)

Gain on loan forgiveness (12,409)

Changes in operating assets and liabilities:

Patient accounts receivable (53,000) (35,113)

Due to government agencies (7,873) (1,896)

Other current assets 64,002 15,753

Other long-term assets 486 436

Accounts payable 17,735 10,771

Accrued liabilities (5,535) (23,855)

Workers compensation and hospital professional and general liabilities (6,318) 2,877

Pension obligations (7,171) (342)Other long-term liabilities 397 (128)

Net cash provided by (used in) operating activities (63,130) (16,024)

Investing activities

Purchases of investments and deposits to interest in pooled investment

fund long-term (272,990) (348,774)

Proceeds from sales of investments and withdrawals from the interest in

pooled investment fund long-term 338,273 418,656

Net withdrawals from interest in pooled investment fund short-term 90,644 11,102

Purchase of assets for health-related activity (2,488) (4,738)

Cash and cash equivalent movements in assets limited as to use 348 (2,985)

Changes in assets under bond indenture agreements 14,726 994

Purchases of property and equipment (39,662) (50,066)Proceeds from disposal of property and equipment 5,296 271

Proceeds from disposal of other assets 18,047

Net cash provided by investing activities 152,194 24,460

Financing activities

Retirement of debt (13,655)

Repayment of debt (8,787) (13,283)

Cash contributions received for the purchase of property and equipment 2,573 1,137

Net cash used in financing activities (19,869) (12,146)


Consolidated Statements of Cash Flows(In Thousands)

Year Ended June 30

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2014 2013

Increase (decrease) in cash and cash equivalents $ 69,195 $ (3,710)

Cash and cash equivalents beginning of year 31,160 34,870

Cash and cash equivalents end of year $ 100,355 $ 31,160

Supplemental disclosures of cash flow information

Cash paid for interest net of amounts capitalized $ 17,735 $ 25,581

Supplemental disclosures of noncash items

Gain on contribution for debt repayment $ (130,000) $

Gain on loan forgiveness $ (12,409) $

Capitalized interest $ 824 $ 1,078

Decrease in receivable for investments sold $ (488) $ (1,894)

Decrease in payable for investments purchased $ (7,132) $ (10,125)

Accrued additions to property and equipment $ 747 $ (4,462)

Purchases of assets for health-related activity acquired through

the issuance of notes payable $ 985 $ 500



Consolidated Statements of Cash Flows (continued)(In Thousands)

Year Ended June 30

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Notes to Consolidated Financial Statements

June 30, 2014

1. Organization

The Daughters of Charity Health System (Parent), a California nonprofit religious corporation,was formed in June 2001 by the Daughters of Charity Ministry Services Corporation (MinistryServices), a California not-for-profit religious corporation. Ministry Services is the solecorporate member of Daughters of Charity Health System. Daughters of Charity Health Systemis the sole corporate member of six California not-for-profit religious corporations that operatesix acute care hospitals and other facilities (the Hospitals, see list below) in the state ofCalifornia. Daughters of Charity Health System and the following list of affiliated entities

(collectively, DCHS) became one of the largest not-for-profit health care systems in the stateof California, with approximately 1,660 licensed acute care and skilled nursing beds.

DCHS consists of Parent* and the following:

OConnor Hospital* Saint Louise Regional Hospital* St. Francis Medical Center Lynwood* St. Vincent Medical Center* Seton Medical Center*

Seton Medical Center Coastside (a division of Seton Medical Center)*

Caritas Business Services Marillac Insurance Company, Ltd. (Marillac) OConnor Hospital Foundation Saint Louise Regional Hospital Foundation St. Francis Medical Center of Lynwood Foundation St. Vincent Medical Center Foundation Seton Health Services Foundation St. Vincent de Paul Ethics Corporation St. Vincent Dialysis Center De Paul Ventures, LLC (see Note 2) DCHS Medical Foundation (see Note 2)

* Part of the Obligated Group (see discussion below and Note 9)

The Daughters of Charity of St. Vincent de Paul (the Daughters of Charity) commenced itshealth care mission in California in 1856, with four of the Hospitals having been sponsored bythe Daughters of Charity since their formation.


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Notes to Consolidated Financial Statements (continued)

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1. Organization (continued)

DCHS established an Obligated Group (see listing of entities included in the Obligated Groupabove) to access the capital markets. Obligated Group members are jointly and severally liablefor the long-term debt outstanding under the Bond Master Indenture.

2. Summary of Significant Accounting Policies

Basis of Presentation and Going Concern

In recent years, DCHS has experienced recurring operating losses that have been fundedprimarily from cash reserves. For the year ended June 30, 2014, DCHS recorded a net operatingloss of $28,378,000 and a decline in cash, cash equivalents and long-term investments of$83,117,000, inclusive of a one-time $130,000,000 contribution from the Daughters of CharityFoundation that was restricted for the purpose of defeasing the Series 2008 Bonds. Refer toNote 9 for further details on the defeased Series 2008 Bonds. DCHS anticipates that it willcontinue to incur operating losses and intends to continue to fund its losses from operations. Inorder to provide liquidity support, subsequent to June 30, 2014, DCHS borrowed $125,000,000in short-term debt from the California Statewide Development Corporation. Refer to Note 12 forfurther details

On October 10, 2014, DCHS Parent and Daughters of Charity Ministry Services Corporationexecuted an agreement to transfer control of DCHS Parent and the other entities comprisingDCHS to Prime Healthcare Services, Inc. (Prime) and Prime Healthcare Foundation, Inc. bymeans of membership substitutions, and simultaneously to convert DCHS, the hospitals andSt. Vincent Dialysis Center, Inc. into business corporations, among other actions (theTransaction). The agreement stipulates that, upon Transaction close, DCHS shall use cashproceeds from Prime to refund all outstanding tax-exempt bonds, Prime shall assume all pensionliabilities, and the transferred entities shall remain subject to substantially all DCHS liabilitiesnot repaid in cash at the time of closing. The Transaction is subject to regulatory approval andthere can be no guarantee of Transaction closure. Refer to Note 12 for further details on the

Transaction.

In the event that the Transaction does not close, the Board of DCHS will consider allalternatives, which may include seeking alternative transactions, closure, and use of bankruptcyproceedings to accomplish alternatives.


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2. Summary of Significant Accounting Policies (continued)

The uncertainties surrounding future cash flows and liquidity position raise substantial doubtregarding DCHS ability to continue as a going concern. The accompanying consolidatedfinancial statements have been prepared in accordance with U.S. generally accepted accountingprinciples applicable to a going concern, which contemplates the realization of assets and thesettlement of liabilities and commitments in the normal course of business for the foreseeablefuture. Such financial statements do not include any adjustments relating to the recoverability ofthe carrying amounts of recorded assets or the amount of liabilities that might result from the

outcome of the uncertainties described above.

Consolidation

The accompanying consolidated financial statements include the accounts of DCHS afterelimination of intercompany transactions.

Use of Estimates

The preparation of the consolidated financial statements in conformity with United States (U.S.)generally accepted accounting principles requires management to make certain estimates and

assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingentassets and liabilities at the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period. Actual results could differ from thoseestimates.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of cash and highly liquid marketable securities withoriginal maturities, at the time of purchase, of three months or less.

Patient Accounts Receivable, Allowance for Doubtful Accounts, and Net Patient Service

Revenue

Patient accounts receivable and net patient service revenue are reported at the estimated netrealizable amounts from patients, third-party payers, and others for services rendered, includingestimated settlements under reimbursement agreements with third-party payers. Settlements withthird-party payers are accrued on an estimated basis in the period in which the related servicesare rendered and are adjusted in future periods as final settlements are determined.


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Patient service revenues less provision for bad debts are reported net of the provision for baddebts on the consolidated statement of operations and changes in net assets. DCHSs self-payprovision was $43,282,000 and $40,354,000 for the years ended June 30, 2014 and 2013,respectively.

DCHS manages the receivables by regularly reviewing its patient accounts and contracts and byproviding appropriate allowances for uncollectible amounts. These allowances are estimated

based upon an evaluation of historical payments, negotiated contracts and governmentalreimbursements. Adjustments and changes in estimates are recorded in the period in which theyare determined.

Patient services revenues, net of contractual allowances and discounts, are as follows(in thousands):

Year Ended June 302014 2013

Government $ 656,291 $ 754,971Contracted 412,280 454,262Self-pay and others 68,147 61,996

1,136,718 1,271,229Less: Provision for doubtful accounts (43,282) (40,354)

$ 1,093,436 $ 1,230,875

Significant concentrations of net patient accounts receivable are as follows:

June 302014 2013

HMO/PPO/Commercial 38% 40%Medicare 29 30Medi-Cal 28 25Other 5 5

Total 100% 100%


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Inpatient acute care services, outpatient services, and skilled nursing services rendered toMedicare program beneficiaries are paid at prospectively determined rates per discharge. Theserates vary according to a patient classification system that is based on clinical, diagnostic, andother factors. Certain inpatient nonacute services and defined capital and medical education costsrelated to Medicare beneficiaries are paid using a cost reimbursement methodology.

Health care services are provided free of charge or at a significant discount based on a sliding

scale to individuals who meet certain financial criteria. DCHS makes every effort to determine ifa patient qualifies for charity care upon admission. If a patient is determined to qualify forcharity care, services are rendered to the patient free of cost. The costs of providing theseservices are included in unsponsored community benefit expense (see Note 3).

After satisfaction of amounts due from insurance and the application of financial discounts topatients balances, and after exhausting all reasonable efforts to collect from the patients, asignificant portion of the DCHSs uninsured and self-pay patient accounts are referred to thethird-party agencies based on DCHSs established guidelines for further collection activities. Asa result, DCHSs records a significant provision for doubtful accounts related to these uninsuredpatients in the period the services are rendered.

Gross patient revenue is recorded based on usual and customary charges. Gross patient revenuewas $6,067,992,000 and $5,919,043,000 for the years ended June 30, 2014 and 2013,respectively. The percentage of inpatient and outpatient services is as follows:

June 302014 2013

Inpatient services 63.0% 65.2%Outpatient services 37.0 34.8


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DCHS derives significant portions of its revenues from Medicare, Medicaid (Medi-Cal), andother third-party payer programs. As a result, DCHS is exposed to certain credit risks. Theestimated percentage of gross patient revenues by major payer group is as follows:

June 302014 2013

Medicare 44.8% 46.9%Medicare capitated 1.5 1.4Medi-Cal 24.3 23.5Medi-Cal capitated 1.3 1.0Contracted-rate payers 19.5 19.9Commercial capitated 0.2 0.1Commercial insurance self-pay and other payers 8.4 7.2

100.0% 100.0%

Medi-Cal and contracted-rate payers are paid on a per diem, per discharge, modified cost, orcapitated basis or a combination of these.

Adjustments for the finalization of prior year cost reports from both Medicare and Medi-Calresulted in an increase to patient service revenues of $9,291,000 and $12,214,000, for the yearsended June 30, 2014 and 2013.

DCHSs St. Francis Medical Center qualified for and received Medi-Cal funding as adisproportionate-share hospital from the state of California under Senate Bill (SB) 855. Relatedrevenues were $27,381,000 and $31,299,000, for the years ended June 30, 2014 and 2013,respectively, and are included in net patient service revenue. Amounts to be received in futureyears, if any, are subject to annual determination.


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The St. Francis Medical Center also received funding for Medi-Cal disproportionate-sharehospitals under Senate Bill 1255 (SB 1255). These SB 1255 funds are paid from the EmergencyServices and Supplemental Payments Fund Related revenues were $9,023,000 and $7,700,000,for the years ended June 30, 2014 and 2013, respectively, and are included in net patient servicerevenue. This funding must be applied for and approved each year.

The St. Francis Medical Center also qualifies for Medi-Cal funding as a disproportionate-share

hospital from the state of California under Senate Bill 1732 (SB 1732). This SB 1732 programpermits health care facilities servicing a disproportionate share of Medi-Cal patients to receivesupplemental reimbursement for a portion of their debt service for qualified capital projects.St. Francis Medical Center has an amendment to its Medi-Cal contract, which was executed onJune 19, 1993, for reimbursement related to the St. Francis Medical Center Health ServicesPavilion, which was completed in 1991. Related revenues were $2,475,000 and $8,052,000, forthe years ended June 30, 2014 and 2013, respectively, and are included in net patient servicerevenue.

As part of DCHSs mission to serve the community, DCHS provides care to patients even thoughthey may lack adequate insurance or may participate in programs that do not pay full charges.

Reserves for charity care and uncollectible amounts have been established and are netted againstpatient accounts receivable in the consolidated balance sheets.

Industry Concentration

The receipt of future revenues by DCHS is subject to, among other factors, federal and statepolicies affecting the health care industry. There are future revenue uncertainties that mayrequire that costs be controlled, which will be subject to the capability of management; futureeconomic conditions, which may include an inability to control expenses in periods of inflation;increased competition; and other conditions, which are impossible to predict.

Inventories

Inventories consist of supplies and are stated at the lower of cost or market value, which isdetermined using the first-in, first-out method. Inventories are reviewed for obsolescence on aperiodic basis. Amounts are included in other current assets.


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Assets Limited as to Use

Assets limited as to use represent assets designated by the board of directors for future capitalimprovements, other specific purposes for Marillac over which the board of directors retainscontrol, assets held by trustees under bond indenture agreements, and investments restricted bydonors. The board of directors has the full ability to utilize those Marillac assets limited as to useto satisfy the needs of on-going operations as necessary. Excluding the assets held as part of the

pooled investment fund, described below, these assets include investments in cash, equitysecurities domestic and foreign, U.S. federal and corporate obligations, to-be-announced(TBA) mortgage-backed securities, asset-backed securities, and fixed-income securities, whichare stated at fair value. The composition and fair value of the long-term interest in the pooledinvestment fund also are limited as to use and are as shown below.

Investment income or loss is included in deficit of revenues over expenses, unless the income orloss is restricted by donor or law. The assets are reflected in the assets limited as to use line itemin the consolidated balance sheet.

Interest in Pooled Investment Fund

DCHS has been participating in a pooled investment fund administered by Ascension Health.This pooled investment fund is referred to as the Health System Depository (HSD). DCHSrecognizes its rights to the assets held in the HSD as a beneficial interest in the pooledinvestment fund. Beginning April 1, 2012, Ascension Health has decided to operate itsinvestment management activities through its subsidiary, Catholic Healthcare InvestmentManagement Company (CHIMCO), an investment advisor registered with the Securities andExchange Commission. Consequently, DCHSs HSD accounts were closed, and the remainingbalance was then invested into the newly created CHIMCO Alpha Fund, LLC (the Fund).CHIMCO serves as a manager and the principal advisor of the Fund.

The fair value of DCHS beneficial interest in the HSD fund is determined using DCHSsownership percentage of the Fund based on the net asset value (NAV) of the pool. The fair valueof DCHSs investment in the Fund decreased by $147,558,000 and $66,946,000 as of June 30,2014 and 2013, respectively. DCHSs total investment in the Fund, reflected at fair value, was$27,802,000 and $175,360,000 as of June 30, 2014 and 2013, respectively. The total investmentin the Fund is comprised of cash, equity securities domestic and foreign, U.S. federal andcorporate obligations, TBA mortgaged-backed securities, asset-backed securities, andfixed-income securities, which are stated at fair value.


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As of June 30, 2014 and 2013, investment balances of approximately $921,000 and $62,478,000,respectively, in the Fund represented cash invested in a short-term pooled investment account,which is a centralized cash management arrangement that allows DCHS to access the Fund ondemand using the Funds short-term investments accounts.

Investments

Investments received through gifts are recorded at estimated fair value at the date of donation.Gains and losses that result from market fluctuations are recognized in the period that suchfluctuations occur. Realized gains or losses resulting from sales or maturities are calculated on anadjusted-cost basis. Adjusted-cost is the original cost of the security adjusted for any purchasesor sales during the year. Dividend and interest income are accrued when earned.

Investment income includes the following (in thousands):


Interest and dividends $ 1,559 $ 3,238Investment fees (246) (288)Unrealized gain on investments net 8,871 5,856Net realized gain on sales of securities 6,450 8,025

16,634 16,831Amounts included in changes in restricted net assets (358) (579)

Investment income $ 16,276 $ 16,252

Derivative Financial Instruments

DCHS entered into forward contracts related to the purchase and sale of TBA mortgage-backedsecurities under a dollar-roll strategy. The contracts represent a commitment to purchase or sellthe security at a fixed price on a specified future date and include net settlement provisions,therefore, meeting the definition of a derivative under Financial Accounting Standards Board(FASB) Accounting Standards Codification (ASC) 815,Derivatives and Hedging. The Companyhas recorded the gross amounts of benefits and obligations as assets and liabilities, respectively,as the contracts are not settled daily. As of June 30, 2014, there were no open TBAs; therefore,


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there are no associated assets, liabilities or unrealized gains. As of June 30, 2013, the value of thebenefits and the value of the obligations under the outstanding contracts both approximate$3,200,000. These amounts represent pending unsettled benefits and obligations, and have beenincluded in the other current assets and the accrued liabilities line items within the consolidatedbalance sheets. The amount of net realized gain (loss) included in investment income within theconsolidated statements of operations and changes in net assets and unrealized gains wereimmaterial for the years ended June 30, 2014 and 2013, respectively, to the consolidated

financial statements.

DCHS enters into TBA transactions to generate short-term investment income; the aggregatenotional amounts transacted during the year were approximately $21 million and $46 million forthe fiscal years ended June 30, 2014 and 2013, respectively. DCHS transacts all of its TBAtransactions with its custodian and does not expect any significant occurrences of counterpartydefault. All TBA securities are exchange-traded and subject to the credit risk associated with theunderlying pool of mortgages. However, management believes that such risk associated withtrading these securities is insignificant to its overall investment strategy.

Property and Equipment

Property and equipment are stated at cost, if purchased, and at fair market value, if donated.Depreciation of property and equipment is calculated using a half-year convention and thestraight-line method for financial statement purposes. Estimated useful lives by classification areas follows:

Land improvements 525 yearsBuildings 1040 yearsBuilding service equipment 525 yearsEquipment 420 years


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Long-Lived Asset Impairment

DCHS evaluates the carrying value of its long-lived assets for impairment periodically orwhenever events or changes in circumstances indicate that the carrying amount of the asset, orrelated group of assets, may not be recoverable from estimated future undiscounted cash flowsgenerated by the underlying tangible assets. When carrying value of an asset exceeds therecoverability, an asset impairment charge is recognized. When an asset is not operating at full

capacity, it is also deemed impaired. The remaining net book value is recognized as animpairment charge in the consolidated statements of operations and changes in net assets. For theyears ended June 30, 2014 and 2013, losses from the disposal of assets were immaterial.

Goodwill and Intangible Assets

Goodwill is measured as of the effective date of a business acquisition as the excess of theaggregate of the fair value of consideration transferred over the fair value of the tangible andintangible assets acquired and liabilities assumed.

The changes in the carrying amount of goodwill are as follows (in thousands):


Beginning balance $ 10,421 $ 6,779Addition from acquisition 2,955 3,642Impairment (13,376)

Ending balance $ $ 10,421

DCHS, through the DCHS Medical Foundation, acquired intangible assets and goodwill valuedat $3,251,000 and $3,884,000 as of June 30, 2014 and 2013, respectively, as a result of variousphysician practice acquisitions during fiscal years 2014 and 2013.

The goodwill impairment tests are based on financial projections prepared by management thatincorporate anticipated results from programs and initiatives being implemented. If theseprojections are not met or if negative trends occur that impact outlook, the value of goodwill isimpaired. During the year ended June 30, 2014, management determined that all goodwill wasimpaired.


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It is DCHSs policy to amortize intangible assets with a finite life over their useful lives.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents,accounts receivable, accounts payable, accrued liabilities, and due to/from government agenciesapproximate fair value. The fair value of investments is disclosed in Notes 4 and 8, and the fair

value of debt is disclosed in Note 9.

Medical Foundation

The DCHS Medical Foundation (Medical Foundation) was established in December 2011 andincorporated under the California Nonprofit Religious Corporation regulations as a not-for-profitcorporation exempted from IRC Section 501(c)(3). The sole member of this corporation isDCHS, acting through its board of directors.

During the years ended June 30, 2014 and 2013, the Medical Foundation has acquired eight andnine physician groups, comprising the physician groups tangible and intangible assets,

respectively. The total purchase consideration for the year ended June 30, 2014, amounted to$3,473,000, of which $2,488,000 was paid in cash and the remaining balance of $985,000 innotes payable in two installments of $492,500 due in fiscal years 2015 and 2016, respectively.The total purchase consideration for the year ended June 30, 2013, amounted to $5,023,000, ofwhich $4,523,000 was paid in cash and the remaining balance of $500,000 in notes payable duein two installments of $350,000 and $150,000 in fiscal years 2014 and 2015, respectively. Theseacquisition costs have been reflected in DCHSs consolidated financial statements as of June 30,2014 and 2013.


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The purchase consideration for the two years were allocated as follows (in thousands):

June 302014 2013

Assets purchasedInventory $ 5 $ 130Deposit 66Equipment 217 737Leasehold improvements 206Intangibles:

Finite-lived intangibles 296 242Goodwill 2,955 3,642

$ 3,473 $ 5,023

De Paul Ventures, LLC

In August 2010, DCHS filed with the state of California to form a California limited liabilitycompany called De Paul Ventures, LLC, which is a wholly owned and operated holdingcompany of DCHS. The company is formed as a means to support the mission of DCHS byproviding multiple needs of the poor, particularly for housing, health, and social services.Around the same time, De Paul Ventures, LLC entered into an operating agreement to form DePaul Ventures San Jose ASC, LLC, and became the sole Member of De Paul Ventures SanJose ASC, LLC.

In February 2011, De Paul Ventures San Jose ASC, LLC entered into a partnership agreementwith Physician Surgery Services, a California limited liability partnership, dba AdvancedSurgery Center. De Paul Ventures San Jose ASC, LLC received a 25% partnership interest, asa limited partner, in exchange for DCHSs cash investment of $1,170,250. Physician SurgeryServices, LLC is made up of various physician owners and operates a freestanding surgery centerin San Jose, California. DCHSs net investment of $704,000 and $735,000 in the partnershipinterest of Physician Surgery Services, LLC is reflected under De Paul Ventures, LLC as aseparate nonobligated entity in the consolidated balance sheets of DCHS as of June 30, 2014 and2013, respectively. DCHS received a total of $627,569 and $554,000, as partnership distributionfrom the activities of DePaul Ventures San Jose ASC, LLC, for the years ended June 30, 2014and 2013, respectively.


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In April 2013, De Paul Ventures, LLC formed De Paul Ventures San Jose Dialysis, LLC, aCalifornia limited liability company, and became the sole member of De Paul Ventures San JoseDialysis, LLC. In May 2013, De Paul Ventures San Jose Dialysis, LLC entered into anagreement to acquire a 10% interest in Priday Dialysis, LLC, a Delaware limited liabilitycompany. The latter is an ambulatory health care center specializing in end-stage renal diseasetreatment. De Paul Ventures San Jose Dialysis, LLCs net investment in Priday Dialysis, LLCwas valued at $51,000 and $215,000 in DCHSs consolidated financial statements as of June 30,

2014 and 2013, respectively.

Guarantees

In the normal course of its business, DCHS enters into various types of guarantees withcounterparties in connection with certain derivative, underwriting, asset sale, and othertransactions. DCHS also provides indemnifications against potential losses to certain partiesinvolved in their bond financing. The indemnifications are ordinarily documented in standardcontract terms. Generally, there are no stated or notional amounts included in theseindemnifications, and the events or contingences triggering the obligations to indemnify aregenerally not expected to occur. There have been no claims, and none are expected to occur;

therefore, it is not possible to develop an estimate of the maximum payout and fair value underthese guarantees and indemnifications. DCHS has not recorded any liabilities in the consolidatedfinancial statements as of June 30, 2014 and 2013, related to any guarantees or indemnificationarrangements.

Self Insurance

DCHS is self-insured for hospital professional and general liabilities by a wholly ownedself-insured captive insurance company. The provisions for estimated hospital professional andgeneral liability claims include estimates of the ultimate costs for both uninsured reported claimsand claims incurred-but-not-reported (IBNR), in accordance with actuarial projections or paid

claims lag models based on past experience. Such claim reserves are based on the best dataavailable to DCHS; however, these estimates are subject to a significant degree of inherentvariability. There is at least a reasonable possibility that a material change to the estimatedreserves will occur in the near term. Such estimates are continually monitored and reviewed, andas reserves are adjusted, the differences are reflected in current operations. Management is of theopinion that the associated liabilities recognized in the accompanying consolidated financialstatements are adequate to cover such claims.


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DCHS has entered into reinsurance, stop loss, and excess policy agreements with independentinsurance companies to limit its losses on hospital professional and general liability claims.

Hospital professional and general liabilities were $6,022,000 and $14,909,000 discounted at arate of 3% and 3% as of June 30, 2014 and 2013, respectively. Management is not aware of anypotential hospital professional and general liability claims whose settlement would have amaterial adverse effect on the DCHSs consolidated financial position.

Workers Compensation Insurance

DCHS is insured for workers compensation claims with major independent insurancecompanies, subject to certain deductibles of $500,000 per occurrence as of June 30, 2014 and2013. Based on actuarially determined estimates, provisions have been made in the consolidatedfinancial statements, with the current portion included within accrued liabilities and thenoncurrent portion within workers compensation and hospital professional and generalliabilities, for all known claims and incurred but not reported claims as of June 30, 2014 and2013. Workers compensation liabilities were $26,115,000 and $22,891,000 discounted using arate of 3% and 3%, as of June 30, 2014 and 2013, respectively. Estimation differences between

actual payments and amounts recorded in previous years are recognized as expense in the yearsuch amounts become determinable.

Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are those for which use by DCHS has been limited by donors toa specific time period or purpose. Permanently restricted net assets have been restricted bydonors to be maintained by DCHS in perpetuity.

California Hospital Fee Program

California legislation established a program in 2009 that imposes a Quality Assurance Fee (QAFee) on certain general acute-care hospitals in order to make supplemental and grant paymentsand increased capitation payments (Supplemental Payments) to hospitals up to the aggregateupper payment limit for various periods. There have been four such programs (Programs) sinceinception.


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The Programs are designed to make supplemental inpatient and outpatient Medi-Cal payments toprivate hospitals, including additional payments for certain facilities that provide high-acuitycare and trauma services to the Medi-Cal population. This hospital QA Fee program provides amechanism for increasing payments to hospitals that serve Medi-Cal patients, with no impact onthe states General Fund. Payments are made directly by the state or Medi-Cal managed careplans, which will receive increased capitation rates from the state in amounts equal to theSupplemental Payments. Outside of the legislation, the California Hospital Association has

created a private program, operated by the California Health Foundation and Trust (CHFT),which was established to alleviate disparities potentially resulting from the implementation of thePrograms.

The Programs require full federal approval (i.e., by the Centers for Medicare and MedicaidServices (CMS)) in order for them to be fully enacted. If final federal approval was notultimately obtained, provisions in the underlying legislation allowed for the QA Fee, previouslyassessed, and Supplemental Payments, previously received, to be returned and recouped,respectively. As such, revenue and expense recognition was not allowed until full CMS approvalwas obtained. Full CMS approvals for the first two programs were obtained in December 2010and December 2011, respectively.

In June 2012, the legislation governing the third program (30-Month Program) with coveringperiod from July 2011 to December 2013 was amended to allow for the fee-for-service portion tobe administered separately from the managed care portion. The fee-for-service portion of the30-Month Program was approved in June 2012, while the managed-care portion covering theperiod from July 2011 to June 2013 was approved by CMS in June 2013. Final CMS approval onthe managed-care portion for the remaining six months of the 30-Month Program did not occurprior to June 30, 2014.

DCHS recognized payments to the California Department of Health Care Services for the QA feein the amount of $33,411,000 and $97,609,000 and pledge payments to CHFT of approximately

$1,577,000 and $4,938,000 within purchased services and other expenses for the years endedJune 30, 2014 and 2013, respectively. DCHS also recognized Supplemental Payment revenue inthe amount of $49,606,000 and $169,454,000 pertaining to the 30-Month Program within the netpatient service revenues for the years ended June 30, 2014 and 2013, respectively.

In October 2013, the fourth program (36-Month Program) covering the period from January2014 to December 2016 was signed into law by the Governor of California. Management expectspartial CMS approval of the 36-Month Program by December 2014.


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Meaningful Use Incentives

The American Recovery and Reinvestment Act of 2009 established payments under theMedicare and Medi-Cal programs for certain professionals and hospitals that meaningfully usecertified electronic health record (EHR) technology. The Medicare incentive payments are paidout to qualifying hospitals over four consecutive years on a transitional schedule. To qualify forMedi-Cal incentives, hospitals and physicians must annually meet EHR meaningful use

criteria that become more stringent over three stages as determined by CMS. For the years endedJune 30, 2014 and 2013, DCHS has recorded meaningful use incentive payments of $10,104,000and $6,492,000, respectively. These incentive payments have been recorded as other operatingrevenue in the DCHS consolidated financial statements.

Premium Revenue

Certain entities of DCHS have at-risk agreements with various payers to provide medicalservices to enrollees. Under these agreements, DCHS receives monthly payments based on thenumber of enrollees, regardless of services actually performed by DCHS. DCHS accrues costswhen services are rendered under these contracts, including estimates of IBNR claims and

amounts receivable/payable under risk-sharing arrangements.

The IBNR accrual includes an estimate of the costs of services for which DCHS is responsible,including out-of-network services.

Other Operating Revenue

Included in other operating revenue are amounts from investments in health-related activities,rental income, cafeteria, and other nonpatient care revenue.

Contributions

Unconditional promises to give cash and other assets to DCHS are reported at fair value at thedate the promise is received. The gifts are reported as either temporarily or permanentlyrestricted support if they are received with donor stipulations that limit the use of the donatedassets. When a donor restriction expires, that is, when a stipulated time restriction ends orpurpose restriction is accomplished, temporarily restricted net assets are reclassified asunrestricted net assets. Net assets released from restrictions used for operations are also includedin other operating revenue as contribution revenue to the Hospitals.


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Interest Expense

Interest expense on debt issued for construction projects, net of income earned on the funds heldpending use, is capitalized from the date of the borrowing until the projects are placed in service.Interest components include the following (in thousands):

Year Ended June 30

2014 2013

Total interest expense $ 19,930 $ 26,414Less: capitalized interest expense (824) (1,078)

Net interest expense $ 19,106 $ 25,336

Income Taxes

DCHS has established its status as an organization exempt from income taxes under the InternalRevenue Code (IRC) Section 501(c)(3) and the laws of California. Certain activities of theoperating entities of DCHS may be subject to income taxes; however, such activities are notsignificant to the consolidated financial statements.

Performance Indicator

Management considers the excess (deficit) of revenues over expenses to be DCHSs performanceindicator. Excess (deficit) of revenues over expenses includes all changes in unrestricted netassets, except net assets released from restrictions used for purchase of property and equipmentand the change in funded status of pension plans and other.

Transactions Between Related Organizations

DCHS and various members of DCHS pay for sisters services provided to it by its sponsoringcongregation at amounts comparable to low-wage employees salaries.


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Certain Obligated Group members have a policy whereby assets are periodically transferred ascharitable distributions to subsidiaries of DCHS that are not members of the Obligated Group.These transfers are accounted for as direct charges to the Obligated Group members unrestrictednet assets. It is anticipated that Obligated Group members will continue to make asset transfers tothe subsidiaries. These transfers are eliminated upon consolidation.

Asset Retirement Obligations (AROs)

AROs are legal obligations associated with the retirement of long-lived assets. These liabilitiesare initially recorded at fair value, and the related asset retirement costs are capitalized byincreasing the carrying amount of the related assets by the same amount as the liability. Assetretirement costs are subsequently depreciated over the useful lives of the related assets.Subsequent to initial recognition, DCHS records period-to-period changes in the ARO liabilityresulting from the passage of time. DCHSs ARO liabilities recorded in the consolidatedfinancial statements at June 30, 2014 and 2013, were $3,227,000 and $3,043,000, respectively.

Revenue Guarantees

DCHS has agreements with physicians whereby minimum revenues are guaranteed by DCHS forstipulated dollar amounts over specified periods, as defined in the contracts. DCHS records aliability for the amount of the guaranteed revenue at the time the contract is entered into andadjusts the liability as it is expended. DCHS has recorded liabilities of $1,396,000 and$1,014,000 as of June 30, 2014 and 2013, respectively.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting StandardsUpdate (ASU) No. 2014-15, Presentation of Financial Statements Going Concern (ASU 2014-15), which requires the entitys management to evaluate whether there are conditions or events,

considered in the aggregate, that raise substantial doubt about the entitys ability to continue as agoing concern within one year after the date that the financial statements are issued (or withinone year after the date that the financial statements are available to be issued when applicable).The amendments in this update are effective for DCHS beginning July 1, 2015. DCHS iscurrently evaluating the impact of the adoption of ASU No. 2014-15 on the consolidatedfinancial statements.


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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers(ASU 2014-09). The guidance outlines a comprehensive model for entities to use in accountingfor revenue arising from contracts with customers and supersedes the revenue recognitionrequirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The coreprinciple of the guidance is that an entity recognizes revenue to depict the transfer of promisedgood or services to customers in an amount that reflects the consideration to which the entityexpects to be entitled in exchange for those goods or services. The adoption of ASU 2014-09 is

effective for DCHS beginning July 1, 2017. DCHS is currently evaluating the impact of theadoption of ASU 2014-09 on the consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations andDisclosures of Disposals of Components of an Entity(ASU 2014-08), which changes the criteriafor reporting discontinued operation and requires entities to disclose additional information aboutdisposal transactions that do not meet the discontinued operations criteria. The adoption of ASU2014-08 is effective for DCHS beginning July 1, 2015. The adoption of ASU No. 2014-08 is notexpected to have a material impact on the consolidated financial statements of DCHS.

In April 2013, the FASB issued ASU No. 2013-06, Not-for-Profit Entities (Topic 958), Services

Received from Personnel of an Affiliate (ASU 2013-06), which requires that a recipient non-for-profit entity recognize all services from personnel of an affiliate that directly benefit the recipientnot-for-profit entity, and for which the affiliate does not charge the recipient not-for-profit entity.The adoption of ASU 2013-06 is effective for DCHS beginning July 1, 2015. The adoption ofASU 2013-06 is not expected to have a material impact on the consolidated financial statementsof DCHS.


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3. Unsponsored Community Benefit Expense (Unaudited)

The following is a summary of DCHSs community service in terms of services to the poor andbenefits to the broader community for the year ended June 30, 2014. The summary has beenprepared in accordance with the Catholic Health Association of the United States publication,AGuide for Planning and Reporting Community Benefit(dollars in thousands) (unaudited):

TotalCommunity Benefit

Expense at Cost

UnsponsoredCommunity Benefit

Expense at Cost

Amount

Percentageof Total

Expenses

DirectOffsettingRevenue Amount

Percentageof Total

Expenses

(Unaudited)

Benefits for the poor:Traditional charity care $ 21,768 1.5% $ $ 21,768 1.5%Unpaid costs of public programs

Medi-Cal 348,813 24.7 206,536 142,277 10.1Nonbilled services 14,800 1.0 4,419 10,381 0.7Cash and in-kind donations 11 11 Other 3,943 0.3 706 3,237 0.2

Total quantifiable benefits for the poor 389,335 27.5 211,661 177,674 12.5

Benefits for the broader community:Nonbilled services 3,349 0.2 1,684 1,665 0.1Education and research 467 467 Cash and in-kind donations 333 46 287 Other 2,064 0.1 2,064 0.1

Total quantifiable benefits for the broadercommunity 6,213 0.3 1,730 4,483 0.2

Total quantifiable community benefits 395,548 27.8 213,391 182,157 12.7

Unpaid costs of Medicare program 545,292 38.7 390,945 154,347 10.9

Total quantifiable community benefitsand unpaid costs of Medicare program $ 940,840 66.5% $ 604,336 $ 336,504 23.6%

Benefits for the Poor

Benefits for the poor include services provided to persons who cannot afford health care becauseof inadequate resources and/or who are uninsured or underinsured.


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3. Unsponsored Community Benefit Expense (Unaudited) (continued)

Benefits for the Broader Community

Benefits for the broader community include services and programs provided to other needypopulations that may not qualify as poor, but that need special services and support. Examplesinclude the elderly, substance abusers, victims of child abuse, and persons with acquired immunedeficiency syndrome. They also include the cost of health promotion and education, healthclinics and screenings, and medical research, which benefit the broader community.

Traditional Charity Care

Traditional charity care covers services provided to persons who cannot afford to pay and whomeet DCHSs criteria for financial assistance. DCHS utilizes information obtained directly frompatients as well as information from publicly available sources in determining charity careeligibility. The amounts above reflect the costs of these services (based on DCHSs relationshipof costs to charges) before and after contributions and other revenues received as directassistance for the provision of charity care. The amount of traditional charity care at cost was$21,768,000 and $36,718,000 for the years ended June 30, 2014 and 2013, respectively.

Unpaid Costs of Public Programs Medi-Cal

Unpaid costs of public programs are the costs of treating indigent and Medi-Cal beneficiaries inexcess of government payments. Cost is based on DCHSs relationship of costs to charges.

Nonbilled Services

Nonbilled services include the cost of services for which a patient is not billed or for which anominal fee has been assessed. These are services that are not expected to be financiallyself-supporting. Examples are free clinic services and meal programs.

Cash and In-Kind Donations

Cash and in-kind donations are made by DCHS to special funds used to benefit the poor and thecommunity.


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3. Unsponsored Community Benefit Expense (Unaudited) (continued)

Education

Education includes the unpaid cost of training health professionals, such as medical residents,nursing students, and students in allied health professions.

Research

Research includes the unpaid cost of testing medical equipment and controlled studies oftherapeutic protocols.

Other Benefits for the Broader Community Expenses

Other benefits for the broader community expenses include low- or negative-margin services,which are services offered because of a need in the community. They do not include servicesoffered because they create revenues elsewhere.

Total Community Benefit Expense

Total community benefit expense is the total cost of community benefits before direct offsettingrevenue, donations, or other funds used to defray such costs.

Unsponsored Community Benefit Expense

Unsponsored community benefit expense is the total cost incurred after direct offsetting revenue,if any, from patients, donations, and other sources.

Unpaid Costs of Medicare Program

Unpaid costs of the Medicare program are the costs of treating Medicare beneficiaries in excess

of government payments. Cost is based on DCHSs relationship of costs to charges.


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4. Fair Value Measurements

DCHS accounts for certain assets at fair value or on a basis that approximates fair value. A fairvalue hierarchy for valuation inputs prioritizes the inputs into three levels based on the extent towhich inputs used in measuring fair value are observable in the market. Each fair valuemeasurement is reported in one of the three levels and is determined by the lowest-level inputthat is significant to the fair value measurement in its entirety. These levels are as follows:

Level 1 Quoted prices are available in active markets for identical assets as of the

measurement date. Financial assets and liabilities in Level 1 include listed equities andmoney markets balances.

Level 2 Pricing inputs are based upon quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that are not active,and model-based valuation techniques for which all significant assumptions areobservable in the market or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities. Financial assets in this categorygenerally include asset-backed securities, corporate bonds, municipal bonds, andcommingled investment funds.

Level 3 Pricing inputs are generally unobservable for the assets and include situationswhere there is little, if any, market activity for the investment. The inputs used indetermination of fair value require managements judgment or estimation of assumptionsthat market participants would use in pricing the assets. Therefore, the fair values aredetermined using discounted cash flow models and similar techniques. There were noLevel 3 investments at June 30, 2014 and 2013.


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4. Fair Value Measurements (continued)

The following represents assets measured at fair value on a recurring basis (in thousands):

June 30, 2014

Total

Quoted Pricesin Active

Markets forIdentical

Assets

(Level 1)

SignificantOther

ObservableInputs

(Level 2)Pooled investment funds:

Pooled funds short-term $ 921 $ $ 921Pooled funds long-term 26,881 26,881

27,802 27,802

Other investments assets limited as to use:

Cash equivalents 10,665 10,665 Debt securities issued by foreign corporations 2,364 2,364Debt securities issued by the U.S. Treasury and

other U.S. government corporations 8,608 8,608Government mortgage-backed securities 2,243 2,243Commercial mortgage-backed securities 2,872 2,872

Corporate U.S. debt securities 15,987 15,987Index funds 10,458 10,458Convertible equity 199 199Investment held in trust account 5,341 5,341

58,737 10,665 48,072

Under bond indenture agreements assets limited as to use:Cash equivalents 2,000 2,000

Debt securities issued by foreign corporations 24,133 24,133

26,133 2,000 24,133

$ 112,672 $ 12,665 $ 100,007


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June 30, 2013

Total



Assets(Level 1)

SignificantOther

ObservableInputs

(Level 2)

Pooled investment funds:

Pooled funds short-term $ 62,478 $ $ 62,478Pooled funds long-term 112,882 112,882

175,360 175,360

Other investments assets limited as to use:

Cash equivalents 11,174 11,174


Debt securities issued by the U.S. Treasury and otherU.S. government corporations 6,780 6,780Government mortgage-backed securities 3,205 3,205TBA mortgage-backed securities 3,178 3,178Commercial mortgage-backed securities 3,963 3,963Corporate U.S. debt securities 18,382 18,382

Index funds 9,248 9,248Convertible equity 348 348Investment held in trust account 4,491 4,491

63,491 11,174 52,317

Under bond indenture agreements assets limited as to use:Cash equivalents 15,718 15,718


40,859 15,718 25,141

$ 279,710 $ 26,892 $ 252,818


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There were no transfers to or from Levels 1, 2 or 3 during the years presented. The Level 2financial assets listed in fair value hierarchy tables above use the following valuation techniquesand inputs:

As described in Note 2, DCHS participates in Ascension Healths pooled CHIMCO fund,which is carried at fair value based on quoted market prices, quoted market prices for similarinstruments, and observable and unobservable inputs. The pooled fund is composed of cash,

equity securities domestic and foreign, U.S. federal and corporate obligations, TBAmortgage-backed securities, asset-backed securities, and fixed-income securities and isdesignated as Level 2.

For marketable securities, such as foreign corporation and U.S. government debt securities,government and commercial mortgage-backed securities, TBA mortgaged-backed securities,corporate U.S. debt securities, index funds, and beneficial interest held in trust accounts,wherein identical quoted market prices are not readily available, the fair value of suchinvestments is determined based on market participant pricing or other available market datafor comparable instruments and transactions at the measurement date in establishing thevaluation. DCHS, therefore, incorporates industry-standard valuation techniques as inputs to

fair valuation of its investments designated as Level 2.

DCHSs rationale for the assignment of levels is based on types or classes of financial assetsrather than an analysis of each individual asset. Key consideration in the assignment of levelswas given to the determination of a securitys fair valuation measurement if obtained from anactive market, and then further consideration was given for the types of inputs used toevaluate the fair value price. This approach has been supported by managements analysis ofthe methodology, the evaluated pricing models, and inputs used by its pricing vendors. It isalso consistent with industry practice.

Where quoted prices are available in an active market (exchange-traded), the securities are

classified as Level 1. It is a market in which transactions occur with sufficient frequency andvolume to provide pricing information on an ongoing basis. If quoted market prices are notreadily available for a specific financial asset, then value is determined using quoted prices ofassets with similar characteristics and is classified as Level 2. Examples of these categoriesare DCHSs investment in high-yield debt securities, collateralized mortgage obligations, andfixed-income prices provided by a broker-dealer. In cases where there is limited activity andless transparency associated with inputs to the valuation, DCHS will designate theinvestments as Level 3.


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Included within the assets above are investments in certain securities that report fair value, usinga calculated NAV or its equivalent. The following table and explanations identify attributesrelating to the nature and risk of such investments (in thousands):

June 30, 2014

Fair ValueRedemption Frequency(If Currently Eligible)

RedemptionNotice Period

Level 2

Pooled funds short-term (1) $ 921 Daily 13 daysPooled funds long-term (1) 26,881 Daily 13 days

Total pooled funds 27,802

Investment held in trust account (3) 5,341 Not eligible Not applicable

Total limited as to use 5,341

$ 33,143

June 30, 2013

Fair ValueRedemption Frequency(If Currently Eligible)

RedemptionNotice Period

Level 2Pooled funds short-term (1) $ 62,478 Daily 13 days

Pooled funds long-term (1) 112,882 Daily 13 days

Total pooled funds 175,360

TBA mortgaged-backed securities (2) 3,178 Daily 13 days

Investment held in trust account (3) 4,491 Not eligible Not applicable

Total limited as to use 7,669

$ 183,029

(1)

This category includes investments in CHIMCO Alpha Fund and is mainly invested in U.S. government, state, municipal, andagency obligations; corporate- and foreign government-fixed maturities; and U.S. government and corporate asset-backedsecurities.

(2)

This category includes investments in forward contracts (derivative instruments) related to the purchase and sale of TBAmortgage-backed securities within a dollar roll. The contracts represent a commitment to purchase and sell the securities at afixed price on a specified future date and include net settlement provisions. The primary objective of these funds is to seekattractive short-term risk-adjusted absolute returns. There is no redemption limitation imposed on these investments;therefore, the liquidity is not limited to beyond one to three business days.

(3)

This category includes investments in equity securities, fixed-income securities, commodities, cash, and short-terminvestments. This includes investments in donor-restricted trust funds managed by select brokerage firms. There are no

provisions for redemptions until donor restrictions are released. Distributions from some of these trust funds are receivedperiodically; however, redemption of the fair value of the trusts (corpus) may remain restricted during the life of these fundsor may be liquidated at a future date.


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The investments included above are not expected to be sold at amounts that are different fromtheir NAV. There were no unfunded commitments at June 30, 2014 and 2013.

Investment Held in Trust Accounts

DCHS is the beneficiary of a split-interest agreement from a donor. The related assets arecontrolled and invested by an independent third party. DCHS records the assets for its share

when formal written or other verifiable documentation is received. DCHSs share of the assets isbased on the present value of the estimated future distributions to be received by DCHS over theterm of the agreement. The agreements are carried at fair value based on the underlying assets.DCHS used 2.2% discount rate to value split-interest agreements at June 30, 2014.

5. Property and Equipment

Property and equipment consists of the following (in thousands):

June 302014 2013

Land $ 29,955 $ 30,446Land improvements 20,244 20,244Buildings and service equipment 709,161 698,645Equipment 522,180 496,444Construction in progress 14,082 17,122

Total 1,295,622 1,262,901

Less accumulated depreciation (956,183) (893,371)

$ 339,439 $ 369,530

DCHSs depreciation expense was $65,349,000 and $60,284,000 for the years ended June 30,2014 and 2013, respectively.


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6. Other Assets

Other current assets consist of the following (in thousands):

June 302014 2013

Inventories $ 21,253 $ 18,334Prepaid expenses 5,175 18,483Provider fee receivable 3,881 54,740Other receivable 4,969 5,881Pledges receivable 6,669 5,641Other current assets 7,771 16,275

$ 49,718 $ 119,354

Other long-term assets consist of the following (in thousands):

June 302014 2013

Notes receivable primarily secured $ 1,546 $ 1,943Ownership interest in health-related activities net 4,417 4,656Other 4,889 6,684

$ 10,852 $ 13,283

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

June 30

2014 2013

Wages and benefits $ 62,592 $ 64,198Out-of-network cost and IBNR 17,324 11,680Provider fee payable 2,653 25,531Other 38,063 35,875

$ 120,632 $ 137,284


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8. Pension and Other Postretirement Benefit Plans

DCHS maintains two different defined benefit retirement plans that cover substantially alleligible employees of DCHS. Benefits are generally based on age, years of service, andemployee compensation. DCHS also offers postretirement health care benefits to a limitednumber of its employees. The postretirement health care benefits are determined based on ageand years of service.

The first retirement plan is a multiemployer defined benefit pension plan called Retirement Plan

for Hospital Employees (RPHE). The entities that participate in the RPHE are Seton MedicalCenter, Seton Medical Center Coastside, OConnor Hospital, Saint Louise Regional Hospital,and Caritas Business Services. Benefits are generally based on years of service and theemployees compensation. Contributions to the plan are based on actuarially determined amountssufficient to meet the benefits to be paid to plan participants. DCHS contributed cash of$14,788,000 and $15,873,000 to the RPHE during the fiscal years ended June 30, 2014 and2013, respectively.

The second retirement plan is a single-employer defined benefit pension plan (the DCHSRetirement Plan). DCHS associates at St. Francis Medical Center, St. Vincent Medical Center,and the system office are eligible to participate in this plan. DCHS contributed $19,333,000 and

$13,018,000 to the DCHS Retirement Plan during the fiscal years ended June 30, 2014 and 2013,respectively.

The third retirement plan is a retiree health insurance program (the Postretirement HealthcarePlan). DCHS employees at OConnor Hospital, St. Louise Regional Hospital, Seton MedicalCenter, and Seton Medical Center Coastside are eligible to participate in this plan. ThePostretirement Healthcare Plan is an unfunded plan. DCHS contributed $114,000 and $200,000to the Postretirement Healthcare Plan during the fiscal years ended June 30, 2014 and 2013,respectively.

Defined Contribution Pension Plans

In addition to the above pension plans, DCHS maintains three different defined contributionpension plans for its employees. Two of these contribution plans require employer participationbased on a percentage of the employees contributions. A third plan was adopted by DCHSsboard of directors for all its new and existing nonunion employees in September 2010. This planwas further expanded to cover the nurses union (United Nurses Associations of California or


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8. Pension and Other Postretirement Benefit Plans (continued)

UNAC) of St. Francis Medical Center, effective January 1, 2012, and to the Service EmployeesInternational Union (SEIU) on January 1, 2013. The third plan is a fully employer-paid definedcontribution pension plan. During the fiscal years ended June 30, 2014 and 2013, the employerscontribution for these three defined contribution plans was $24,935,000 and $21,568,000,respectively.

Pension Plan Amendments

In April 2012, DCHSs largest union, SEIU, had ratified freezing the defined benefit pensionplan belonging to all its members in DCHSs six hospitals effective January 1, 2013. Uponfreezing the defined benefit pension plan, DCHS had introduced an employer-paid definedcontribution plan (IRC 401(a)) for its SEIU members beginning January 1, 2013.

The funded status of the DCHS Retirement Plan and Postretirement Healthcare Plan benefits isas follows (in thousands):

June 30, 2014 June 30, 2013

DCHS

RetirementPlan

Postretirement

HealthcarePlan

DCHS

RetirementPlan

Postretirement

HealthcarePlan

Change in benefit obligation:Benefit obligation

beginning of year $ 458,316 $ 4,678 $ 474,848 $ 6,083Service cost 1,931 240 3,426 331Interest cost 23,425 223 21,608 265Actuarial (gain) loss 37,663 (25) (25,934) (386)Benefits paid (15,812) (114) (15,632) (200)Plan amendments (1,415)

Benefit obligation end of year $ 505,523 $ 5,002 $ 458,316 $ 4,678

Accumulated benefit obligation $ 493,968 $ 5,002 $ 448,001 $ 4,678


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June 30, 2014 June 30, 2013

DCHSRetirement

Plan

PostretirementHealthcare

Plan

DCHSRetirement

Plan


Plan

Change in plan assets:Fair value of plan assets

beginning of year $ 228,920 $ $ 213,934 $ Actual return on plan assets 44,231 19,135

Employer contribution 19,333 114 13,021 200Benefits paid (15,812) (114) (15,632) (200)Administrative expenses (1,614) (1,538)

Fair value of plan assets end of year $ 275,058 $ $ 228,920 $

Funded status $ (230,465) $ (5,002) $ (229,396) $ (4,678)

Amounts that have not yet been recognized as components of net period benefit cost are asfollows (in thousands):

June 30, 2014 June 30, 2013

DCHS

RetirementPlan

Postretirement

HealthcarePlan

DCHS

RetirementPlan

Postretirement

HealthcarePlan

Net actuarial loss (gain) $ 157,007 $ (10,211) $ 149,190 $ (11,144)Prior service costs 424 496

Total amount not recognized $ 157,007 $ (9,787) $ 149,190 $ (10,648)


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The components of net period benefit cost and amounts recognized in the consolidatedstatements of operations and changes in net assets apart from expenses are as follows(in thousands):

Year Ended June 30, 2014 Year Ended June 30, 2013

DCHSRetirement

Plan


Plan

DCHSRetirement

Plan


PlanComponents of net periodic benefitcost (income):

Service cost $ 1,931 $ 240 $ 3,426 $ 331Interest cost 23,425 223 21,608 265Expected return on plan assets (16,209) (16,626) Net prior service cost

amortization 72 285Net loss (gain) amortization 3,438 (958) 4,304 (974)

Net periodic benefit cost (income) $ 12,585 $ (423) $ 12,712 $ (93)

Change in net assets apart fromperiodic benefit cost:

Net actuarial loss (gain) $ 11,255 $ (25) $ (26,876) $ (386)(Deduct) add:Amortization of prior service

cost (72) (285)Amortization of actuarial

(loss) gain (3,438) 958 (4,304) 974Net prior service credit (plan

amendments) (1,415)

Total $ 7,817 $ 861 $ (31,180) $ (1,112)

The estimated actuarial loss and prior service cost for the DCHS Retirement Plan that will beamortized into net periodic benefit cost over the next fiscal year is $4,226,000 and $0,respectively.


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Assumptions

The weighted-average assumptions used to determine benefit obligations and net period benefitcosts, are as follows:

June 30, 2014 June 30, 2013

DCHS

RetirementPlan

Postretirement

HealthcarePlan

DCHS

RetirementPlan

Postretirement

HealthcarePlan

Weighted-average assumptions usedto determine benefit obligations:

Discount rate 4.70% 4.40% 5.20% 4.89%Rate of compensation increase 3.50 N/A 3.50 N/A

Weighted-average assumptions used todetermine net periodic benefit costs:

Discount rate 5.20% 4.89% 4.62% 4.46%Expected return on plan assets 7.25 N/A 7.25 N/ARate of compensation increase 3.50 N/A 3.50 N/A

Expected Return on Plan Assets

The DCHS Retirement Plans estimated long-term rate of return on pension assets is drivenprimarily by historical asset-class returns, an assessment of expected future performance, advicefrom external actuarial firms, and the incorporation of specific asset-class risk factors. Assetallocations are periodically updated using pension plan asset/liabilities studies, and DCHSsestimated long-term rates of return are consistent with these studies. The DCHS Retirement Planportfolio return assumption is 7.25%, at June 30, 2014 and 2013.

Discount Rate

The discount rate assumptions used to determine the postretirement benefit plan obligations andexpenses reflect the prevailing rate available on high-quality, fixed-income debt instruments. Therate was based on cash flow analysis that matched estimated future benefit payments to thenoncollateralized bond discount yield curve as of June 30, 2014 and 2013.


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Other Benefit Assumptions

For the measurement of accumulated postretirement benefit obligations at June 30, 2014, thePostretirement Healthcare Plan assumed health care cost trend rates start at 9.25% in 2014 anddecrease by 0.25-0.75 % annually, reaching an ultimate rate of 5.50% in fiscal year 2023.

Plan Assets and Investment Strategy

The following information represents DCHSs pension plan assets measured at fair value andindicate the fair value hierarchy and valuation techniques utilized to determine such fair value(in thousands):

June 30, 2014

Total Balance



Assets(Level 1)

SignificantOther

ObservableInputs

(Level 2)

Cash equivalents $ 3,770 $ 3,770 $ Common collective trust funds 78,701 78,701Fixed-income funds 96,353 96,353Domestic stocks 21,839 21,839 Real estate equity investments 19,330 19,330 Foreign stock funds 55,065 55,065

Total plan assets $ 275,058 $ 44,939 $ 230,119

June 30, 2013

Total Balance



Assets(Level 1)

SignificantOther

Observable

Inputs(Level 2)

Cash equivalents $ 1,460 $ 1,460 $ Common collective trust funds 63,856 63,856Fixed-income funds 80,485 80,485Domestic stocks 20,290 20,290 Real estate

Documents

J. Audited Fin. Statements and Projections (º 999 (4)