PIEDMONT HEALTHCARE, INC. AND AFFILIATES Consolidated Financial Statements June 30, 2017 and 2016 (With Independent Auditors’ Report Thereon) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Table of Contents Page(s) Independent Auditors’ Report 1 Consolidated Financial Statements: Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Changes in Net Assets 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6–44 KPMG LLP Suite 2000 303 Peachtree Street, N.E. Atlanta, GA 30308-3210 Independent Auditors’ Report The Board of Directors Piedmont Healthcare, Inc. and Affiliates: We have audited the accompanying consolidated financial statements of Piedmont Healthcare, Inc. and Affiliates, which comprise the consolidated balance sheets as of June 30, 2017 and 2016, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Piedmont Healthcare, Inc. and Affiliates as of June 30, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. Atlanta, Georgia October 18, 2017 KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PIEDMONT HEALTHCARE, INC. AND AFFILIATES Consolidated Balance Sheets June 30, 2017 and 2016 Assets 2017 2016 (In thousands) Current assets: Cash and cash equivalents Patient accounts receivable, net of allowance for doubtful accounts of $307,597 and $302,596 in 2017 and 2016, respectively Bond proceeds receivable Current portion of self-insurance investments Other current assets 565,999 512,131 316,339 47,985 12,097 95,354 252,591 26,610 8,537 82,727 Total current assets 1,037,774 882,596 Investments and assets limited as to use Property and equipment, net Self-insurance investments, net of current portion Beneficial interest in perpetual trust Other assets 710,899 1,220,789 37,032 7,694 124,940 573,724 821,535 33,469 7,298 115,642 $ 3,139,128 2,434,264 $ 24,290 273,331 33,847 30,812 15,320 258,165 27,024 23,376 362,280 323,885 787,783 43,358 32,234 55,504 77,768 108,195 513,091 43,121 34,799 42,035 109,997 101,552 1,467,122 1,168,480 1,620,787 27,537 23,682 1,224,519 18,033 23,232 1,672,006 1,265,784 3,139,128 2,434,264 Total assets $ Liabilities and Net Assets Current liabilities: Current portion of bonds payable Accounts payable and accrued expenses Estimated third-party payor settlements Current portion of self-insurance reserves Total current liabilities Bonds payable, net of current portion Medical office building financing obligation Note payable to a bank Self-insurance reserves, net of current portion Accrued pension cost Other long-term liabilities Total liabilities Net assets: Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ See accompanying notes to consolidated financial statements. 2 PIEDMONT HEALTHCARE, INC. AND AFFILIATES Consolidated Statements of Operations Years ended June 30, 2017 and 2016 2017 2016 (In thousands) Unrestricted revenue, gains, and other support: Patient service revenue Provision for bad debt $ Net patient service revenue Other revenue Total revenue, gains, and other support Expenses: Salaries and benefits Supplies and other Depreciation and amortization Interest Total expenses Operating income before loss on extinguishment of debt, acquisition costs and unrestricted contribution received in acquisition Loss on extinguishment of debt Acquisition cost Contribution received in acquisition 2,585,540 (163,681) 2,224,016 (321,683) 2,421,859 1,902,333 87,681 80,863 2,509,540 1,983,196 1,330,355 892,923 106,004 33,479 1,044,062 703,922 87,852 27,729 2,362,761 1,863,565 146,779 119,631 (28,416) (6,418) 173,832 Operating income 285,777 Nonoperating income (expense): Investment income (loss), net Other components of pension expense Loss from equity investment Change in fair value of interest rate swaps Total nonoperating income (expense) Excess of revenue, gains, and other support over expenses Net assets released from restrictions used for purchase of property and equipment Pension adjustments Other Change in unrestricted net assets See accompanying notes to consolidated financial statements. 3 131,700 77,406 (688) — 8,855 (15,538) (8,739) (3,100) (7,108) 85,573 (34,485) 371,350 97,215 1,904 24,447 (1,433) $ — (1,717) 13,786 396,268 1,188 (46,097) (468) 51,838 PIEDMONT HEALTHCARE, INC. AND AFFILIATES Consolidated Statements of Changes in Net Assets Years ended June 30, 2017 and 2016 2017 2016 (In thousands) Unrestricted net assets: Excess of revenue, gains, and other support over expenses Net assets released from restrictions used for purchase of property and equipment Pension adjustments Other $ 1,904 24,447 (1,433) Change in unrestricted net assets Temporarily restricted net assets: Contributions Restricted contribution received in acquisition Net assets released from restrictions used for purchase of property and equipment Net assets released from restrictions used for operations Other Change in temporarily restricted net assets Permanently restricted net assets: Contributions Change in beneficial interest in perpetual trust Change in permanently restricted net assets Change in net assets Net assets at beginning of year Net assets at end of year $ See accompanying notes to consolidated financial statements. 4 371,350 97,215 1,188 (46,097) (468) 396,268 51,838 12,983 2,067 4,097 — (1,904) (3,647) 5 (1,188) (5,643) (635) 9,504 (3,369) 54 396 532 (620) 450 (88) 406,222 48,381 1,265,784 1,217,403 1,672,006 1,265,784 PIEDMONT HEALTHCARE, INC. AND AFFILIATES Consolidated Statements of Cash Flows Years ended June 30, 2017 and 2016 2017 2016 (In thousands) Cash flows from operating activities: Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Contribution received in acquisitions, net of cash acquired Net unrealized (gains) losses on investments Net realized gains on investments Change in beneficial interest in perpetual trust Amortization of bond (premium) discount Loss on extinguishment of debt Provision for bad debt Pension adjustments Change in fair value of interest rate swaps Contributions restricted for long-term investment (Increase) decrease in: Patient accounts receivable Other current assets Other assets (Decrease) increase in: Accounts payable and accrued expenses Estimated third-party payor settlements Self-insurance reserves Accrued pension cost Other long-term liabilities $ Net cash provided by operating activities 406,222 48,381 106,004 (115,208) (25,871) (41,575) (396) (5,761) 28,416 163,681 (24,447) (8,855) (15,104) 87,852 (13,183) 36,228 (7,303) 620 38 — 321,683 46,097 7,108 (4,629) (171,823) (7,843) (9,773) (327,274) (14,654) (6,716) (57,640) (3,445) 12,297 (7,782) 14,780 11,735 4,677 (8,644) 5,739 (81) 235,877 187,674 (970,011) 906,560 (184,978) (94,988) 81,378 (103,077) (248,429) (116,687) 15,104 (2,565) (12,800) 469,532 (402,851) 4,629 (2,425) (10,510) — — Net cash provided by (used in) financing activities 66,420 (8,306) Net increase in cash and cash equivalents 53,868 62,681 512,131 449,450 565,999 512,131 Cash flows from investing activities: Purchases of investments and assets limited as to use Proceeds from sale of investments and assets limited as to use Capital expenditures Net cash used in investing activities Cash flows from financing activities: Contributions restricted for long-term investment Repayments on note payable to a bank Repayments of indebtedness Proceeds from issuance of bonds Bond redemptions Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest Income taxes (net of refunds) Supplemental schedule of noncash investing and financing activities: Bond proceeds held by a trustee See accompanying notes to consolidated financial statements. 5 $ 26,196 (344) $ 39,448 27,961 485 — PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (1) Organization and General The Board of Directors of Piedmont Healthcare, Inc. and Affiliates (collectively, PHC) appoints the governing boards of:  Piedmont Atlanta Hospital, Inc. (Atlanta). Atlanta, located in Atlanta, Georgia, is a not-for-profit acute care hospital providing inpatient, outpatient, and emergency care services primarily for residents of the Atlanta metropolitan area.  Piedmont Fayette Hospital, Inc. (Fayette). Fayette, located in Fayetteville, Georgia, is a not-for-profit acute care hospital providing inpatient, outpatient, and emergency care services primarily for residents of Fayette County.  Piedmont Mountainside Hospital, Inc. (Mountainside). Mountainside, located in Jasper, Georgia, is a not-for-profit acute care hospital providing inpatient, outpatient, and emergency care services primarily for residents of Pickens County and Gilmer County.  Piedmont Newnan Hospital, Inc. (Newnan). Newnan, located in Newnan, Georgia, is a not-for-profit acute care hospital providing inpatient, outpatient, and emergency care services primarily for residents of Coweta County.  Piedmont Henry Hospital (Henry). Henry, located in McDonough, Georgia, is a not-for-profit acute care hospital providing inpatient, outpatient, and emergency care services primarily for residents of Henry County.  Piedmont Newton Hospital (Newton). Newton, located in Covington, Georgia, is a not-for-profit acute care hospital providing inpatient, outpatient, and emergency care services primarily for residents of Newton County.  Piedmont Athens Regional Hospital (Athens). Athens, located in Athens, Georgia, is a not-for-profit acute care hospital providing inpatient, outpatient, and emergency care services for residents of northeast Georgia and provides a home care nursing service to patients residing in the five Georgia counties of Clarke, Oconee, Madison, Barrow, and Jackson.  Piedmont Medical Care Corporation (PMCC). PMCC is a taxable, not-for-profit entity whose purpose is to develop a network of primary care, hospital-based and certain specialty physicians for the benefit of the PHC affiliates.  Piedmont Heart Institute Physicians, Inc. (PHIP). PHIP is a taxable, not-for-profit entity whose purpose is to provide an integrated cardiovascular healthcare delivery program for the benefit of the PHC affiliates.  Athens Regional Physician Services, Inc. (ARPS). ARPS is a not-for-profit corporation whose purpose is acquiring and operating primary care physician practices.  Athens Regional Specialty Services Inc. (ARSS). ARSS is not-for-profit corporation whose purpose is acquiring and operating specialty physician practices.  Regional FirstCare, Inc. (RFC). RFC is a not-for-profit corporation whose purpose is acquiring and operating urgent care centers and developing workers’ compensation/occupational medicine programs.  Athens Regional Health Resources, Inc. (ARHS). ARHS is a not-for-profit corporation whose purpose is to provide outpatient medical care and health services outside the Athens-Clarke County, Georgia area. 6 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016  Piedmont Heart Institute, Inc. (PHI). PHI is a not-for-profit entity whose purpose is to provide cardiovascular research services for the benefit of the PHC affiliates.  Amster-McRae Insurance Company (AMIC). AMIC was incorporated on December 10, 2003, under the laws of the Cayman Islands. AMIC insures the hospital professional liability and commercial general liability risks of PHC and certain PHC affiliates.  Piedmont Clinic, Inc. (the Clinic). The Clinic is a physician-hospital organization whose purpose is to negotiate contracts with various managed care payors for the PHC affiliates.  Piedmont Healthcare Foundation, Inc. (PHF). The Foundation’s primary purpose is assisting PHC in fund-raising and related management, making grants, and soliciting gifts.  Athens Regional Foundation, Inc. (ARF). ARF is a not-for-profit corporation whose purpose is assisting Athens, ARPS, ARSS and RFC in fund-raising and related management, making grants, and soliciting gifts.  Athens Area Health Plan Select (HPS). HPS is a taxable not-for-profit health maintenance organization that is discontinuing operations and was only operational through January 2016. HPS provided healthcare services to its enrolled members. HPS operated under a health maintenance organization (HMO) license from, and was regulated by, the State of Georgia Department of Insurance. (2) Significant Accounting and Reporting Policies A summary of the significant accounting and reporting policies followed by PHC in the preparation of its consolidated financial statements is presented below: (a) Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of PHC, Atlanta, Fayette, Mountainside, Newnan, Henry, Newton, Athens, PMCC, PHIP, ARPS, ARSS, RFC, ARHS, PHI, AMIC, the Clinic, PHF, ARF, and HPS. All significant intercompany transactions and accounts have been eliminated in consolidation. (b) Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the determination of the allowance for doubtful accounts, allowance for contractual adjustments, fair value of investments and assets limited as to use and interest rate swaps, reserves for general and professional liability, workers’ compensation and health insurance claims, third-party payor settlements, and the actuarial determined liability related to PHC’s defined-benefit pension plan. 7 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (c) Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, deposits with banks, and investments in highly liquid debt instruments with maturities of three months or less when purchased, excluding amounts limited as to use. PHC invests cash not required for immediate operating needs principally with major financial institutions with strong credit ratings. By policy, the amount of credit exposure to any one institution is limited, and such investments are generally not collateralized. (d) Investments and Investment Income Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the accompanying consolidated balance sheets. Investment income or loss (including unrealized and realized gains and losses on investments, interest, and dividends) is included in the excess of revenue, gains, and other support over expenses unless the income or loss is restricted by donor or law. PHC accounts for investment transactions on a settlement-date basis. All of PHC’s investment portfolio is classified as trading, with unrealized gains and losses included in excess of revenue, gains, and other support over expenses. Fair values are based on quoted market prices if available, or estimated using quoted market prices for similar securities. PHC invests in alternative investments, which provide PHC with a proportionate share of the fair value of the fund returns. PHC accounts for its ownership interests in the alternative investments based upon the equity method. Accordingly, PHC’s share of the alternative investments’ income or loss, both realized and unrealized, is recognized as investment income. Alternative investments held by the noncontributory defined-benefit plan are accounted for at estimated fair value. The cost of substantially all securities sold is based on the average-cost method. PHC classifies investments with maturities of less than one year from the balance sheet date when purchased as short term and investments with maturities of greater than one year from the balance sheet date when purchased as long term. (e) Assets Limited as to Use These assets are limited as to use by debt instruments or designations by PHC’s governing board for plant replacement, expansion of certain facilities, purchase of equipment, and payment of certain future debt service requirements. (f) Inventory Inventory is valued at average cost. Inventory consists primarily of pharmaceuticals and medical supplies and is recorded within other current assets in the accompanying consolidated balance sheets. 8 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (g) Property and Equipment Property and equipment acquisitions are recorded at cost, with the exception of donated items which are recorded at fair value at the date of donation. Expenditures for renewals and improvements are charged to the property accounts. For properties sold or retired, the cost and related accumulated depreciation are removed from the property accounts. Any resulting gains or losses are included in other revenue. Replacements, maintenance, and repairs that do not improve or extend the life of the respective assets are charged to operations. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. The ranges of estimated useful lives are 10–25 years for land improvements, 15–40 years for buildings and fixtures, and 3–20 years for equipment. Property and equipment under capital leases is stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value at inception of the lease. All property and equipment under capital leases is amortized using the straight-line method over the shorter of the asset life or term of the lease. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support and are excluded from excess of revenue, gains, and other support over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used, and gifts of cash or other assets that must be used to acquire long-lived assets, are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. (h) Software and Software Development Costs Software and software development costs include costs incurred by PHC to develop software for internal use in medical records maintenance, physician order entry, and clinical documentation. Costs of software developed for internal use are accounted for in accordance with the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350-40, Internal-Use Software. In accordance with ASC 350-40, internal and external costs incurred to develop internal-use computer software during the application development stage are capitalized. Application development stage costs generally include software configuration, coding, installation of hardware, and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized. All other costs incurred in connection with an internal software project, including maintenance, minor upgrades, enhancements, and training, are expensed as incurred. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the related software applications (3–12 years). 9 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (i) Long-Lived Assets PHC periodically reviews long-lived assets, such as property and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized to the extent that the carrying amount of an asset exceeds its fair value. Assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale are presented separately in the appropriate asset and liability sections of the consolidated balance sheet. In the period in which the disposal group is sold or classified as held-for-sale, the results of its operations are classified as discontinued operations in the consolidated statements of operations. Management believes that the long-lived assets in the accompanying consolidated balance sheets are appropriately valued at June 30, 2017 and 2016 and no related impairment losses were recognized during the years then ended. (j) Other Assets Other assets include goodwill of $62,133,000 at June 30, 2017 and 2016. In accordance with ASC 350, Intangibles – Goodwill and Other, PHC evaluates its goodwill annually for potential impairment. No impairment losses on goodwill were recognized for the years ended June 30, 2017 or 2016. (k) Beneficial Interest in Perpetual Trust PHC is the beneficiary of six separate endowments held in trust by a local bank, with fair values at June 30, 2017 and 2016 aggregating $7,694,000 and $7,298,000, respectively. The beneficial interest at June 30, 2017 and 2016 has been recorded in long-term assets at fair value and the change in value for the years then ended has been recorded as a change in permanently restricted net assets. (l) Vacation Policy PHC accrues employee vacation pay as earned by the employee. (m) Advertising Costs Advertising costs are expensed as incurred and approximated $10,886,000 and $8,438,000 for the years ended June 30, 2017 and 2016, respectively, and are included in supplies and other expenses in the accompanying consolidated statements of operations. (n) Estimated Malpractice Costs The provision for estimated medical malpractice claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported and are included in self-insurance reserves on the accompanying consolidated balance sheets. 10 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (o) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by PHC is restricted by donors for a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by PHC in perpetuity, with related investment earnings generally available for unrestricted or donor-restricted purposes. (p) Net Patient Service Revenue, Patient Accounts Receivable, and Allowance for Doubtful Accounts PHC has agreements with third-party payors that provide for payments to PHC at amounts different from their established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, and includes estimated retroactive revenue adjustments under reimbursement agreements with third-party payors due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Net patient service revenue is summarized below (in thousands): Year ended June 30 2017 2016 Patient service charges Less contractual adjustments and other deductions $ Patient service revenue Less provision for bad debt Net patient service revenue $ 10,135,557 7,550,017 7,998,670 5,774,654 2,585,540 2,224,016 163,681 321,683 2,421,859 1,902,333 Recognition of patient service revenue (gross patent service charges less contractual adjustments and other deductions) is dependent on factors such as proper completion of medical charts following a patient visit, medical coding of charts and processing charts through PHC’s billing systems, and verification of patient representations at the time services are rendered with the payors responsible for payment of PHC’s services. Patient service revenue is recorded based on the information known at the time of billing, which is subject to change. For example, patient payor information may change following an initial attempt to bill for services due to a change in payor status. Such changes in payor status have an impact on recorded net revenue due to different contractual agreements among payors. These changes in patient revenue are recognized in the period that the changes in payor become known. 11 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 The provision for bad debt is based upon management’s assessment of historical and expected net collections considering business and economic conditions, trends in healthcare coverage, and other collection indicators. Periodically, management assesses the adequacy of the allowance for doubtful accounts based upon historical write-off experience by payor category. The results of this review are then used to make any modifications to the provision for bad debt to establish an appropriate allowance for uncollectible receivables. Patient service revenue, net of contractual adjustments and other discounts and before the provision for bad debt, recognized from major payor sources are as follows (in thousands): Year ended June 30 2017 2016 Third-party payors, net of contractual allowances Self-pay patients Patient service revenue $ 2,245,460 340,080 1,959,796 264,220 $ 2,585,540 2,224,016 PHC records a provision for bad debt in the period services are provided related to self-pay patients. For receivables associated with patients who have third-party coverage, PHC analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debt, if necessary. Accounts receivable are written off after collection efforts have been undertaken in accordance with PHC’s policies. The allowance for doubtful accounts was 49% and 55% of patient accounts receivable after contractual allowances as of June 30, 2017 and 2016, respectively. (q) Charity Care PHC provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Amounts determined to qualify as charity care are not reported as patient service revenue. (r) Excess of Revenue, Gains, and Other Support over Expenses The consolidated statements of operations include excess of revenue, gains, and other support over expenses. Changes in unrestricted net assets, which are excluded from excess of revenue, gains, and other support over expenses, consistent with industry practice, include pension adjustments and contributions of long-lived assets (including assets acquired using contributions, which by donor restriction, are to be used for the purposes of acquiring such assets). 12 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (s) Pledges Receivable and Donor-Restricted Gifts Unconditional promises to give cash and other assets to PHC are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received or the date the donor conditions are substantially met. Gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. In February 2016, PHC was awarded a conditional grant by The Marcus Foundation, Inc. totaling $75,000,000 to support a portion of the construction of the Marcus Heart and Vascular Center. The grant is conditional upon incurring qualified expenditures toward and completion of the donor-stipulated construction project. As of June 30, 2017, PHC had not recognized any contribution revenue related to the grant. (t) Interest Expense PHC incurred interest expense totaling approximately $33,479,000 and $27,729,000 for the years ended June 30, 2017 and 2016, respectively. There was no interest capitalized in 2017 or 2016. (u) Electronic Health Record Incentive Payments The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in 2011 for eligible hospitals and professionals that adopt and meaningfully use certified electronic health record (EHR) technology. PHC has recognized approximately $2,695,000 and $5,553,000 of Medicare incentive payments in other revenue in the accompanying consolidated statements of operations for the years ended June 30, 2017 and 2016, respectively. PHC recognizes income related to Medicare and Medicaid incentive payments using a gain contingency model that is based upon when eligible hospitals have demonstrated meaningful use of certified EHR technology for the applicable period and the cost report information for the full cost report year that will determine the final calculation of the incentive payment is available. (v) Income Taxes Piedmont Healthcare, Inc., Atlanta, Fayette, Mountainside, Newnan, Henry, Newton, Athens, ARPS, ARSS, RFC, ARHS, PHI, PHF, and ARF are organizations exempt from federal income tax pursuant to U.S. Internal Revenue Code (IRC) Section 501(a), as organizations described in Section 501(c)(3) of the IRC of 1986, as amended, and state income tax. AMIC is exempt from federal and local income tax pursuant to the laws of the Government of the Cayman Islands. There is currently no taxation imposed on income or capital gains by the Government of the Cayman Islands. If any form of tax legislation were to be enacted, AMIC has been granted an exemption until the year 2024. PMCC and PHIP are taxable, not-for-profit entities that operated in a net loss position for financial reporting and tax purposes during the years ended June 30, 2017 and 2016. The Clinic is a taxable, not-for-profit entity that operated in a net loss position for financial reporting and tax purposes during the year ended June 30, 2017 and a net income position for financial reporting and tax purposes during the year ended 13 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 June 30, 2016. HPS is a taxable, not-for-profit entity that operated in a net income position for financial reporting and tax purposes during the period from October 1, 2016 through June 30, 2017. Due to previous operating losses and other factors, historical and current income tax effects associated with HPS are immaterial to the accompanying consolidated financial statements. At June 30, 2017 and 2016, Atlanta (as it relates to unrelated business income), PMCC, the Clinic, and PHIP had net operating loss carryforwards totaling approximately $752,692,000 and $623,444,000, respectively, which expire at various dates between 2019 and 2034. PMCC, the Clinic, and PHIP had deferred income tax assets totaling approximately $287,820,000 and $236,039,000 at June 30, 2017 and 2016, respectively. The deferred income tax assets, which consist primarily of net operating loss carryforwards and differences relating to allowances for doubtful accounts and accruals, were offset by a full valuation allowance. PHC accounts for income taxes under the provisions of the Income Taxes Topic of ASC (ASC 740). Under the requirements of ASC 740, tax-exempt organizations may be required to record an obligation as the result of a tax position they have historically taken on various uncertain tax exposure items. There were no material uncertain tax positions at June 30, 2017 or 2016. (w) Prior-Year Reclassifications Certain reclassifications have been made to the fiscal year 2016 consolidated financial statements to conform to the fiscal year 2017 presentation. These reclassifications had no impact on the results of operations, change in net assets, or cash flows in the accompanying consolidated financial statements. (x) Defined-Benefit Pension Plan PHC accounts for its defined-benefit pension plan in accordance with ASC 715, Compensation – Retirement Benefits. ASC 715 requires an entity to recognize in its balance sheet an asset for a defined-benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status; measure a defined-benefit postretirement plan’s assets and obligations that determine its funded status at the end of the employer’s fiscal year; and recognize changes in the funded status of a defined-benefit postretirement plan as a separate line item or items within changes in unrestricted net assets, apart from expenses, in the year in which the changes occur. Certain PHC employees participate in PHC’s trusteed noncontributory defined-benefit pension plan (the Plan). The Plan’s benefits are based on a combination of years of service and the employee’s compensation. PHC’s funding policy is to contribute annually to the Plan an amount sufficient to meet the minimum funding standards of Employee Retirement Income Security Act (ERISA) or an amount sufficient to maintain the Plan on a sound actuarial basis, as certified by an enrolled actuary. Plan assets consist primarily of common stocks, alternative investments, fixed-income investments, and cash equivalents. On September 20, 2012, the PHC Board of Directors and PHC management approved a freeze of the Plan effective December 31, 2014, whereby participants cease to accrue further benefits for service rendered subsequent to December 31, 2014. See note 2(z) regarding presentation of pension cost. (y) Subsequent Events PHC evaluated events and transactions occurring subsequent to June 30, 2017 through October 18, 2017, the date the consolidated financial statements were available to be issued. During this period, there were no additional subsequent events that required recognition in the accompanying consolidated financial statements. See note 18 for related disclosures. 14 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (z) Recent Accounting Pronouncements The FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, in May 2014. ASU No. 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for annual reporting periods beginning after December 15, 2017. PHC will implement the provisions of ASU No. 2014-09 as of July 1, 2018. PHC has not yet determined the impact of the new standard on its current policies for revenue recognition. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases, and makes other conforming amendments to U.S. GAAP. ASU No. 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on balance sheet via a right-of-use asset and lease liability, and additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for annual periods in fiscal years beginning after December 15, 2019, permits early adoption, and mandates a modified retrospective transition method. PHC is required to adopt ASU No. 2016-02 on July 1, 2019. PHC expects ASU No. 2016-02 to add significant right-of-use assets and lease liabilities to its consolidated balance sheet and it is evaluating other effects that the new standard will have on the consolidated financial statements. The FASB issued ASU No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, in August 2016. ASU No. 2016-14 is intended to improve the presentation of net asset classification as well as the information presented in the financial statements and financial statement notes regarding liquidity, financial performance, and cash flows for not-for-profit entities. ASU No. 2016-14 is effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. PHC is required to adopt ASU No. 2016-14 as of June 30, 2019. PHC has not determined the impact of ASU No. 2016-14 on its consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments – a consensus of the Emerging Issues Task Force. ASU No. 2016-15 amends ASC Topic 230, Statement of Cash Flows, to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted and entities must apply the guidance retrospectively to all periods presented. PHC has not determined the impact of ASU No. 2016-15 on its consolidated financial statements. In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which requires companies to present amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents on the statement of cash flows. ASU No. 2016-18 is effective for annual periods in fiscal years beginning after December 15, 2017 and requires retrospective application. PHC elected to early adopt ASU No. 2016-18 as of July 1, 2016. The adoption of ASU No. 2016-18 had no impact on PHC’s consolidated financial statements. 15 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires companies to present the service cost component of net benefit cost in the income statement line items where they report compensation cost, and all other components of net benefit cost in the income statement separately from the service cost component and outside of operating income, if this subtotal is presented. Additionally, the service cost component will be the only component that can be capitalized. ASU No. 2017-07 is effective in annual periods in fiscal years beginning after December 15, 2018. The standard requires retrospective application for the amendments related to the presentation of the service cost component and other components of net benefit cost, and prospective application for the amendments related to the capitalization requirements for the service cost components of net benefit cost. PHC adopted the provisions of ASU No. 2017-07 as of July 1, 2016. As a result of adopting the standard, PHC reclassified $8,739,000 from salaries and wages expense to other components of pension expense within nonoperating expense in the consolidated statement of operations for the year ended June 30, 2016. (3) Acquisitions Effective October 1, 2016, PHC entered into an affiliation agreement with Athens Regional Health Services, Inc. and Piedmont Athens Regional Hospital, Inc. (f/k/a Athens Regional Medical Center, Inc.) whereby PHC became the sole corporate member of the entity and its affiliates (collectively, The Athens Entities). Although no consideration was transferred, PHC assumed all the assets and liabilities of The Athens Entities as of the affiliation date. As part of the affiliation, PHC assumed Athens’ lease with the Hospital Authority of Clarke County, Georgia (the Clarke County Authority). The lease covers certain land, buildings, fixtures, improvements, mechanical systems, and parking areas. At the termination of the lease, the assets and liabilities revert back to the Clarke County Authority. In connection with the affiliation and PHC’s assumption of the lease, the lease term was extended to expire in 40 years. The total cost of affiliation with the Athens Entities has been allocated to the assets acquired and liabilities assumed based upon their respective fair values in accordance with ASC 958-805, Not-for-Profit Entities – Business Combinations. Based on the purchase price allocation as of June 30, 2017, PHC recorded the fair value of all assets acquired and liabilities assumed, resulting in a contribution of approximately $175,899,000 being recorded as a contribution received in affiliation on the accompanying 2017 consolidated statement of operations. 16 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 A summary of the purchase price allocation, including assumed liabilities, is as follows (in thousands): Assets: Cash Net patient accounts receivable Other current assets Assets limited as to use Property and equipment Other assets Liabilities: Current liabilities Long-term debt Other liabilities $ (78,551) (200,264) (9,328) Unrestricted contribution received in affiliation 173,832 Restricted contribution received in affiliation Total contribution received in affiliation 58,624 55,609 26,159 12,976 306,864 1,743 2,067 $ 175,899 Effective October 1, 2015, PHC entered into an affiliation agreement with Piedmont Newton Hospital (f/k/a Newton Health System, Inc.) whereby it became the sole corporate member of the entity. Although no consideration was transferred, PHC assumed all the assets and liabilities of Newton as of the affiliation date. As part of the affiliation, PHC assumed Newton’s lease with the Newton County Hospital Authority (the Newton County Authority). The lease covers all the assets and liabilities of Newton at the inception of the lease. At the termination of the lease, the assets and liabilities revert back to the Newton County Authority. In connection with the affiliation and PHC’s assumption of the lease, the lease term was extended to expire in 40 years. The total cost of the Newton affiliation has been allocated to the assets acquired and liabilities assumed based upon their respective fair values in accordance with ASC 958-805. Based on the purchase price allocation as of June 30, 2016, PHC recorded the fair value of all assets acquired and liabilities assumed, resulting in a contribution of approximately $13,786,000 being recorded as a contribution received in affiliation on the accompanying 2016 consolidated statement of operations. 17 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 A summary of the purchase price allocation, including assumed liabilities, is as follows (in thousands): Assets: Cash Net patient accounts receivable Other current assets Assets limited as to use Property and equipment Other assets Liabilities: Current liabilities Long-term debt Other liabilities $ 603 10,656 3,222 5,072 22,424 2,631 (11,938) (17,388) (1,496) Contribution received in affiliation $ 13,786 The operating results of The Athens Entities and Newton have been included in the consolidated statements of operations since their respective acquisition dates. The revenue, gains, and other support; operating income; and change in unrestricted net assets attributable to PHC related to the acquired operations of The Athens Entities for the period from October 1, 2016 through June 30, 2017 were approximately $554,031,000, $198,762,000, and $260,867,000, respectively. The revenue, gains, and other support; operating loss; and change in unrestricted net assets attributable to PHC related to the acquired Newton operations for the period from July 1, 2016 through June 30, 2017 were approximately $74,014,000, $1,190,000, and $19,409,000, respectively. The revenue, gains, and other support; operating loss; and change in unrestricted net assets attributable to PHC related to the acquired Newton operations for the period from October 1, 2015 through June 30, 2016 were approximately $56,135,000, $6,369,000, and $19,793,000, respectively. The unaudited pro forma combined summary of operations, which gives effect to including the acquired operating results of The Athens Entities and Newton as if the acquisitions had occurred as of July 1, 2015, is as follows (in thousands): Year ended June 30 2017 2016 Revenue, gains, and other support Operating income Change in unrestricted net assets $ 2,810,106 108,663 406,685 2,490,811 124,550 48,238 Pro forma adjustments to operating income and change in unrestricted net assets include adjustments to record The Athens Entities’ and Newton’s operating results on a consolidated basis, to record depreciation expense based on the estimated fair value assigned to the long-lived assets acquired, and to remove loss on extinguishment of debt relating to The Athens Entities’ acquired debt. These pro forma results are not necessarily indicative of the actual results of operations that would have occurred if these acquisitions had occurred on July 1, 2015. 18 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (4) Net Patient Service Revenue PHC has agreements with third-party payors that provide for payments to PHC at amounts different from its established rates. A summary of payment arrangements with major third-party payors is as follows: (a) Medicare and Medicaid PHC renders care to patients covered by the Medicare and Medicaid programs. Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Medicare reimburses for outpatient services based on a prospective outpatient payment system similar to the inpatient system. Inpatient services rendered to Medicaid program beneficiaries are reimbursed under a prospective payment reimbursement methodology. Outpatient services are reimbursed under a cost-based methodology. PHC is reimbursed at a tentative rate with final settlement determined after submission of annual cost reports by PHC and audits thereof by the Medicaid fiscal intermediary. Services rendered under these programs are recorded at established rates and reduced to the estimated amount due from the third-party payors through recording of contractual adjustments and other discounts. Because PHC cannot pursue collections for the contractual or discounted amounts, they are not reported as revenue. Net patient service revenue from the Medicare and Medicaid programs accounted for approximately 36% and 4%, respectively, of PHC’s net patient service revenue for the year ended June 30, 2017. Net patient service revenue from the Medicare and Medicaid programs accounted for approximately 32% and 4%, respectively, of PHC’s net patient service revenue for the year ended June 30, 2016. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Net patient service revenue is reported at the estimated net realizable amounts from the Medicare and Medicaid programs for services rendered and includes estimated retroactive revenue adjustments due to future audits, reviews, and investigations. Final settlement has been reached for all Medicare and Medicaid cost reports prior to fiscal year 2010. PHC has recorded amounts due to Medicare and Medicaid of $33,847,000 and $27,024,000 at June 30, 2017 and 2016, respectively, as an estimate of final third-party payor settlements for open cost report years. Management recorded a favorable change in estimate to net patient service revenue in the accompanying consolidated statements of operations related to third-party settlements of $7,590,000 and $4,689,000 for the years ended June 30, 2017 and 2016, respectively. The amounts due to Medicare and Medicaid represent management’s best estimates of final settlements. (b) Managed Care and Other Payors PHC has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations (HMOs), and preferred provider organizations. The bases for payments to PHC under these agreements include prospectively determined rates per discharge, discounts from established charges, and daily rates. 19 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (c) Self-Pay PHC incurred bad debt expense, valued at established charges, of $163,681,000 and $321,683,000 for the years ended June 30, 2017 and 2016, respectively. In an effort to improve amounts collected from uninsured patients that do not apply and/or qualify for charity assistance, PHC offered discounted prices to the uninsured under a policy that was revised in June 2016, as described below. In addition to charity care and bad debt write-offs, PHC provided discounts to the uninsured of $268,060,000 and $19,459,000 (recorded as deductions from net patient service revenue) for the years ended June 30, 2017 and 2016, respectively. The decrease in bad debt expense is due to the following changes in PHC’s policies:  Implementation of a 70% uninsured discount offered to self-pay patients (implemented June 2016)  Further automation of charity care determination with revised scoring methodologies (implemented January 2017) (d) Georgia Provider Payment Agreement Act Effective July 1, 2010, the State of Georgia imposed a fee on not-for-profit hospitals based on net revenue levels as defined by the State of Georgia. Included in supplies and other expenses in the accompanying consolidated statements of operations for the years ended June 30, 2017 and 2016 is approximately $23,852,000 and $18,751,000, respectively, relating to this fee. (5) Charity Care and Community Benefits PHC provides care to patients who meet certain criteria under its charity care policy without charge or at amounts significantly less than its established rates. Amounts determined to qualify as charity care are not reported as revenue or patient accounts receivable in the accompanying consolidated financial statements. PHC maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges forgone for services furnished under its charity care policy. The cost of providing this charity care was estimated to be approximately $81,564,000 and $36,226,000 for years ended June 30, 2017 and 2016, respectively. PHC estimates the direct and indirect costs of providing charity care by applying a cost to gross charges ratio to the gross uncompensated charges associated with providing charity care to patients. PHC offers many other wellness and educational services to the community at low and, in some cases, no cost. PHC also partners with five charitable clinics to provide supportive services for low-income patients, including the provision of free laboratory and diagnostic services to clinic patients at no charge. PHC operates 24-hour emergency rooms that provide care to all patients, regardless of ability to pay. The costs for these services are included in operating expenses in the accompanying consolidated statements of operations. 20 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (6) Investments (a) Investments and Assets Limited as to Use The composition of investments and assets limited as to use is set forth in the following table (in thousands): June 30 2017 Investments internally designated for capital acquisition: Cash and short-term investments Corporate obligations Fixed-income securities Corporate stocks Mutual funds Alternative investments $ Assets limited as to use: Cash and short-term investments Corporate obligations Fixed-income securities Corporate stocks Mutual funds Alternative investments Totals $ 21 2016 13,318 49 152,504 16,789 324,400 176,444 8,298 18,782 94,748 55,760 220,661 153,206 683,504 551,455 1,399 2 5,912 590 13,126 6,366 335 758 3,826 2,252 8,911 6,187 27,395 22,269 710,899 573,724 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (b) Alternative Investments Alternative investments included in investments and assets limited as to use at June 30, 2017 and 2016 and related net unrealized gains and losses for the years then ended consist of the following (in thousands): Estimated fair value, year ended June 30 2017 2016 Lighthouse Diversified Fund $ Archipelago Holdings Ltd Offshore Fund Titan Masters International Fund Clarion Lion Properties ING Fund LSV Emerging Markets Equity Fund Harvest MLP Income II Fund Golub Capital Investment Corporation IFP Global Equity, L.P. Chatham Asset High Yield Offshore Fund, Ltd. Canyon Balanced Fund PHC Fund, Ltd. $ Net unrealized gains (losses), year ended June 30 2017 2016 — 28,211 — (3,465) — — 17,726 31,260 26,808 25,468 — — (988) (1,523) (2,997) 1,906 — 15,386 19,538 28,108 — 74 (3,232) (4,833) 1,556 20,029 — — — 1,629 — — 24,627 18,537 84,949 — — — 1,214 1,537 343 — — — 182,810 159,393 3,809 (14,144) Redemption frequency and redemption notice periods for alternative investments held at June 30, 2017 are as follows: Clarion Lion Properties ING Fund Harvest MLP Income II Fund Golub Capital Investment Corporation IFP Global Equity L.P. Chatham Asset High Yield Offshore Fund, Ltd. Canyon Balanced Fund PHC Fund, Ltd. Redemption frequency Redemption notice period Quarterly Monthly Upon IPO Bi-weekly Quarterly Quarterly Monthly 90 Days 30 Days N/A 3 Days 45 Days 90 Days 90 Days As of June 30, 2017, PHC had an unfunded commitment with Golub Capital Investment Corporation of $15,470,000. 22 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (c) Investment Income (Loss), Net Investment income (loss), net related to investments and assets limited as to use is comprised of the following (in thousands): Year ended June 30 2017 2016 Interest income Net realized and unrealized gains (losses) on investments Other $ 11,112 67,446 (1,152) 13,009 (28,925) 378 Investment income (loss), net $ 77,406 (15,538) (7) Property and Equipment A summary of property and equipment, net is as follows (in thousands): June 30 2017 Land and land improvements Buildings and fixtures Equipment $ Less accumulated depreciation Construction in progress Property and equipment, net $ 2016 101,417 1,281,943 901,870 66,898 982,782 760,989 2,285,230 1,810,669 1,140,488 1,038,609 1,144,742 772,060 76,047 49,475 1,220,789 821,535 Construction in progress at June 30, 2017 primarily relates to ongoing construction at Atlanta. Construction in progress at June 30, 2016 primarily relates to ongoing construction at Fayette completed in 2017. Depreciation and amortization expense for the years ended June 30, 2017 and 2016 totaled approximately $106,004,000 and $87,852,000, respectively. Amortization of capitalized software costs of approximately $13,284,000 and $9,899,000 are included in depreciation and amortization expense in the accompanying consolidated statements of operations for the years ended June 30, 2017 and 2016, respectively. 23 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 Capitalized software and software development costs included in property and equipment were as follows (in thousands): June 30 2017 Capitalized software and software development costs Less accumulated amortization Capitalized software and software development costs, net 2016 $ 109,658 46,744 82,468 35,748 $ 62,914 46,720 Based on the amortizable capitalized software and software development costs that have been placed into service at June 30, 2017, the estimated amortization expense for the succeeding five fiscal years and thereafter is as follows (in thousands): Year ending June 30: 2018 2019 2020 2021 2022 Thereafter $ 14,337 11,953 9,805 8,248 6,901 11,670 $ 62,914 At June 30, 2017 and 2016, PHC’s remaining commitment for software and construction contracts approximated $351,901,000 and $49,263,000, respectively, primarily relating to ongoing construction at Atlanta expected to be completed by 2021. During fiscal year 2012, PHC completed construction of a new Piedmont Newnan hospital. In May 2012, the operations of Newnan were transferred to the new hospital. At that time, the replaced hospital building and certain assets that were not transferred to the new hospital were written down to fair value less estimated cost to sell. The building and related assets of $3,050,000 are classified as held-for-sale and are included in other current assets in the accompanying consolidated balance sheets as of June 30, 2017 and 2016. Sale of the assets is expected to occur within one year. In August 2006, Fayette entered into a ground lease with Piedmont Fayette Medical Office Building, LLC (PFB), whereby Fayette is leasing real property to PFB. In accordance with ASC 840, Leases, Fayette is considered the owner of the Medical Office Building (Fayette MOB) during the construction period and thereafter due to Fayette’s continuing involvement in the Fayette MOB. Accordingly, the value of the building and the construction notes paid by the developer are included in the accompanying consolidated balance sheets. At June 30, 2017 and 2016, the net book value of the Fayette MOB included in buildings and fixtures totaled approximately $12,384,000 and $13,516,000, respectively, and the related Medical Office Building financing obligation approximated $13,708,000 and $14,242,000, respectively. 24 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 In August 2005, Atlanta entered into a ground lease with Piedmont Physicians Plaza, L.P. (PPP), whereby Atlanta is leasing real property to PPP. In accordance with ASC 840, Atlanta is considered the owner of the Medical Office Building (Piedmont MOB) during the construction period and thereafter due to Atlanta’s continuing involvement in the Piedmont MOB. Accordingly, the cost of the building and the related financing obligation are included in PHC’s consolidated balance sheets. At June 30, 2017 and 2016, the net book value of the Piedmont MOB included in buildings and fixtures totaled approximately $14,277,000 and $15,264,000, respectively, and the related Medical Office Building financing obligation approximated $29,650,000 and $28,878,000, respectively. (8) Long-Term Debt (a) Bonds Payable Bonds payable consists of the following (in thousands): June 30 2017 Series 2006, fixed interest rate of 4.50%, interest payments due semiannually, payable through 2024 Series 2007, fixed interest rate of 2.47%, interest payments due semiannually, payable through 2024 Series 2009A, fixed interest rates ranging from 4.375% to 5.25%, interest payments due semiannually, payable through 2024 Series 2009C, variable interest rates (1.15% and 0.76% at June 30, 2017 and 2016, respectively), interest payments due monthly, payable through 2019 Series 2010, fixed interest rates ranging from 4.50% to 5.00%, interest payments due semiannually, payable through 2045 Series 2014A, fixed interest rates ranging from 3.00% to 5.00%, interest payments due semiannually, payable through 2044 Series 2014B, variable interest rates (1.35% and 0.96% at June 30, 2017 and 2016, respectively) interest payments due monthly, payable through 2034 Series 2016A, fixed interest rates ranging from 3.00% to 5.00%, interest payments due semiannually, payable through 2046 Unamortized original issue premium, net Unamortized debt issuance costs $ Less current maturities $ 25 2016 4,380 4,905 9,929 11,131 35,895 208,140 17,465 25,650 100,000 100,000 86,885 87,125 89,590 92,270 423,360 51,982 (7,413) — 4,383 (5,193) 812,073 528,411 (24,290) (15,320) 787,783 513,091 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 In connection with the acquisition of Athens effective October 1, 2016, PHC assumed responsibility for payment of the Clarke Authority’s outstanding revenue certificates through the lease agreement described in note 3. On October 27, 2016, the Development Authority of Fulton County, the Hospital Authority of Fayette County, and the Hospital Authority of Clarke County, Georgia issued $197,555,000, $47,580,000, and $178,225,000, respectively ($423,360,000 collectively), in Revenue Bonds Series 2016A (the Series 2016 Bonds) on behalf of PHC. The proceeds of the Series 2016 Bonds were used to redeem previously outstanding Series 2009A and Athens Series 2007 and 2012 Revenue Bonds and for certain construction projects. PHC recognized a $28,416,000 loss on extinguishment resulting from the write-off of associated unamortized bond issuance costs, premium and discount related to the Series 2009A and Athens Series 2007 and 2012 revenue bonds. The Series 2016 Bonds have been issued on a tax-exempt basis and are secured under a master trust indenture with all members of the Obligated Group (Piedmont Healthcare, Inc. and all of its affiliates exclusive of AMIC, ARPS, ARSS, RHC, ARHS, ARF, and HPS), which provides for, among other things, the deposit of revenue with the master trustee in the event of certain defaults, pledges of accounts receivable, pledges not to encumber property, and limitations on additional borrowings. Included in bond proceeds receivable on the accompanying June 30, 2017 consolidated balance sheet is $30,927,000 of bond proceeds from the Series 2016 Bonds, currently being held by a trustee that is remitted to PHC upon completion of certain construction projects. On November 19, 2014, the Development Authority of Fulton County, the Hospital Authority of Fayette County, and the Hospital Authority of Henry County issued $87,730,000, $42,060,000, and $53,420,000, respectively ($183,210,000 collectively), in Revenue Bonds Series 2014A and 2014B (the Series 2014 Bonds) on behalf of PHC. The proceeds of the Series 2014 Bonds were used to redeem previously outstanding Series 2004 and Series 2009B Revenue Bonds and for certain construction projects. The Series 2014 Bonds have been issued on a tax-exempt basis and are secured under a master trust indenture with all members of the Obligated Group, which provides for, among other things, the deposit of revenue with the master trustee in the event of certain defaults, pledges of accounts receivable, pledges not to encumber property, and limitations on additional borrowings. Included in bond proceeds receivable on the accompanying June 30, 2017 and 2016 consolidated balance sheets is $6,758,000 and $24,861,000, respectively, of bond proceeds from the Series 2014 Bonds, being held by a trustee which is remitted to PHC upon completion of certain construction projects. On October 27, 2010, the Coweta County Development Authority issued $100,000,000 in Revenue Bonds Series 2010 (the Series 2010 Bonds) on behalf of PHC. The proceeds of the Series 2010 Bonds were used to construct a replacement hospital for Newnan. The Series 2010 Bonds have been issued on a tax-exempt basis and are secured under a master trust indenture with all members of the Obligated Group, which provides for, among other things, the deposit of revenue with the master trustee in the event of certain defaults, pledges of accounts receivable, pledges not to encumber property, and limitations on additional borrowings. 26 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 On November 24, 2009, the Development Authority of Fulton County and the Hospital Authority of Fayette County issued $304,345,000 and $79,540,000, respectively ($383,885,000 collectively), in Revenue Bonds Series 2009A, 2009B, and 2009C (the Series 2009 Bonds) on behalf of PHC. The proceeds of the Series 2009 Bonds were used primarily to redeem previously outstanding Series 2007, Series 2005, Series 2001, and Series 1999 Revenue Bonds and fully repay a line of credit totaling approximately $65,000,000. The Series 2009 Bonds have been issued on a tax-exempt basis and are secured under a master trust indenture with all members of the Obligated Group, which provides for, among other things, the deposit of revenue with the master trustee in the event of certain defaults, pledges of accounts receivable, pledges not to encumber property, and limitations on additional borrowings. The Series 2009A Bonds were partially repaid ($172,245,000) with proceeds from the Series 2016 Bonds. The Series 2009B Bonds were repaid in full ($94,735,000) with proceeds from the Series 2014 Bonds. In connection with the acquisition of Newton effective October 1, 2015, PHC assumed responsibility for payment of the Newton Authority’s outstanding revenue certificates through the lease agreement described in note 3. In April 2006, the Newton County Hospital Authority issued $8,930,000 Revenue Certificates, Series 2006 (the Series 2006 Bonds). The certificates were issued for the purpose of financing certain capital additions and improvements to Newton’s facilities and paying costs of issuance of the Series 2006 Bonds. The Series 2006 bonds have been issued on a tax-exempt basis and are secured by a pledge of and lien on the gross revenues derived by Newton and payments made by Newton County, Georgia to Newton pursuant to a contract between Newton and Newton County. Under the terms of the Series 2006 Bonds, Newton is required to maintain certain deposits with a trustee for payment of bond principal and interest. Such deposits are included in investments and assets limited as to use on the accompanying June 30, 2016 and 2017 consolidated balance sheets. At the acquisition date, the stated value of the Series 2006 Bonds approximated $5,405,000; however, they were recorded at their fair value upon acquisition. At June 30, 2017 and 2016, the stated value and carrying value of the Series 2006 Bonds approximated $4,380,000 and $4,905,000, respectively. In May 2007, the Newton County Hospital Authority issued $17,225,000 Revenue Refunding Certificates, Series 2007 (the Series 2007 Bonds). The certificates were issued for the purpose of advance refunding Piedmont Newton’s Series 1999 bonds and paying costs of issuance of the 2007 bonds. The Series 2007 Bonds have been issued on a tax-exempt basis and are secured by a pledge of and lien on the gross revenues derived by Newton and payments made by Newton County, Georgia to Newton pursuant to a contract between Newton and Newton County. Under the terms of the 2007 Bonds, Newton is required to maintain certain deposits with a trustee for payment of bond principal and interest. Such deposits are included in investments and assets limited as to use on the accompanying June 30, 2017 and 2016 consolidated balance sheets. At the acquisition date, the stated value of the Series 2007 Bonds approximated $11,985,000; however, they were recorded at their fair value upon acquisition. At June 30, 2017 and 2016, the stated value of the Series 2007 Bonds approximated $9,690,000 and $10,860,000, respectively, and the carrying value approximated $9,929,000 and $11,131,000, respectively. 27 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 Scheduled principal repayments on the Series 2016, Series 2014, Series 2010, Series 2009, Series 2007, and Series 2006 Bonds are as follows (in thousands): Year ending June 30: 2018 2019 2020 2021 2022 Thereafter $ 24,290 20,795 22,705 25,065 26,210 648,200 $ 767,265 (b) Note Payable to a Bank Effective February 1, 2012, PHC entered into a note payable with a bank. The proceeds of the note totaling approximately $44,819,000 were used to fully repay Henry’s Series 1999 Bonds during fiscal year 2013. Amounts outstanding at June 30, 2017 and 2016 totaled $32,234,000 and $34,799,000, respectively. Effective June 29, 2016, the note was refinanced and certain terms were amended. Previous to June 29, 2016, the note bore interest at a rate of 1.8% per annum, payable monthly. Effective June 29, 2016, the note bears interest at a rate of the London InterBank Offered Rate (LIBOR) floating rate plus 0.650% (1.876% as of June 30, 2017) and the payment terms are as follows: $2,715,000 due on July 1, 2018, $1,950,000 due on July 1, 2019, $2,065,000 due on July 1, 2020, and the remaining principal of $25,504,000 due on July 1, 2021. (c) Line of Credit During fiscal year 2010, PHC entered into a line of credit for $70,000,000 with a local bank with an interest rate based on 30-day LIBOR plus 0.75% and a maturity date of December 31, 2011. During fiscal year 2012, PHC entered into an amendment to the line of credit, which reduced available borrowings to $1,000,000 and extended the maturity to December 31, 2012. On December 17, 2012, PHC entered into an amendment to the line of credit, which extended the maturity to December 31, 2015 and revised the interest rate to LIBOR plus 0.60%. On October 7, 2013, PHC entered into an amendment to the line of credit, which increased available borrowing, to $70,000,000. On December 7, 2015, PHC entered into an amendment to the line of credit that reduced available borrowings to $1,000,000 and extended the maturity to December 31, 2018. There were no outstanding borrowings on the line of credit at June 30, 2017 or 2016. (d) Interest Rate Swap Agreements PHC has seven interest rate swap agreements that are not accounted for as cash flow hedges. These interest rate swaps are primarily utilized to economically hedge PHC’s exposure to variable interest rates under its debt obligations. The change in value of the interest rate swaps is reported as a component of nonoperating income (expense) in the period it occurs. At June 30, 2017 and 2016, the total notional amount of PHC’s interest rate swaps was approximately $121,820,000 and $125,520,000, respectively. 28 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 These interest rate swap agreements expose PHC to credit losses in the event of nonperformance by the counterparty to the financial instruments. The counterparty is a creditworthy financial institution and PHC management believes the counterparty will be able to fully satisfy its obligations under the contracts. PHC’s interest rate swaps are reported at estimated fair value in the accompanying consolidated balance sheets, as follows (in thousands): June 30 2017 Other long-term liabilities $ 24,743 2016 33,537 The effects of PHC’s interest rate swaps on the accompanying consolidated statements of operations are as follows (in thousands): Year ended June 30 2017 2016 Loss recognized in nonoperating income (expense) Loss recognized in supplies and other expenses $ 8,855 3,866 7,108 4,325 $ 12,721 11,433 (9) Medical Office Buildings As discussed in note 7, PHC is considered the owner of the Fayette MOB and the Piedmont MOB for financial reporting purposes. In accordance with ASC 840, Leases, PHC has reflected the operations of the Piedmont and Fayette MOBs in its consolidated financial statements, which resulted in other revenue of approximately $6,279,000, interest expense of approximately $5,184,000, and supplies and other expenses of approximately $2,322,000 for the year ended June 30, 2017 and other revenue of approximately $6,011,000, interest expense of approximately $5,305,000, and supplies and other expenses of approximately $2,141,000 for the year ended June 30, 2016. (10) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets available primarily for capital purchases, education, and geriatric services were approximately $27,537,000 and $18,033,000 at June 30, 2017 and 2016, respectively. 29 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 Permanently restricted net assets are summarized as follows, whose investment income is to be used according to the purpose description below (in thousands): June 30 2017 Support of education Beneficial interest in perpetual trust Support of specific services 2016 $ 1,064 7,694 14,924 1,064 7,298 14,870 $ 23,682 23,232 (11) Employee Benefits (a) Pension Plan PHC has a trusteed, noncontributory defined-benefit pension plan (the Plan) covering certain PHC employees. The Plan’s benefits are based on a combination of years of service and the employee’s compensation. PHC’s funding policy is to contribute annually to the Plan an amount sufficient to meet the minimum funding standards of ERISA or an amount sufficient to maintain the Plan on a sound actuarial basis, as certified by an enrolled actuary. Plan assets consist primarily of common stocks, alternative investments, guaranteed investment contracts, and cash equivalents. In fiscal year 2008, the PHC’s Board of Directors approved the freezing of the Plan for participation purposes, so that employees hired or rehired on and after July 1, 2008 are not eligible to participate in the Plan. Then-current participants had the option under the “Choice” program to continue to accrue benefits in the Piedmont Healthcare Retirement Plan or to participate in the new Piedmont 401(k) plan, which began on January 1, 2009. Approximately 64% of active participants elected to continue to accrue benefits in the defined-benefit pension plan. On September 20, 2012, the Plan was amended to reflect a freeze as of December 31, 2014. Therefore, no further benefit accruals will be provided after that date for additional credited service or earnings. In addition, all existing participants became fully vested as of December 31, 2014. The following cumulative amounts have not yet been recognized in the net periodic cost, and are recognized as a reduction to unrestricted net assets (in thousands): June 30 2017 Actuarial losses Prior service cost Total 30 2016 $ 115,539 — 139,986 — $ 115,539 139,986 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 Changes in the Plan’s obligations and assets resulted in the following changes in unrestricted net assets (in thousands): Year ended June 30 2017 2016 Amortization of prior service cost Amortization of net actuarial loss Net actuarial income (loss) during the year Total $ — 3,148 21,299 — 13,133 (59,230) $ 24,447 (46,097) The unrecognized loss included in unrestricted net assets and expected to be recognized in net periodic pension cost during the year ended June 30, 2018 is approximately $2,487,000. The following table presents a reconciliation of the beginning and ending balances of the Plan’s projected benefit obligation, the fair value of plan assets, the funded status of the Plan, and the accumulated benefit obligation (in thousands): June 30 2017 Change in benefit obligation: Projected benefit obligation, beginning of year: Service cost Interest cost Benefits paid Settlements Actuarial (gain) loss Administrative expenses paid from pension trust Projected benefit obligation, end of year Accumulated benefit obligation 31 2016 $ 400,303 3,530 15,594 (11,608) — (9,860) (3,186) 387,257 2,000 17,995 (10,560) (32,872) 39,181 (2,698) $ 394,773 400,303 $ 394,773 400,303 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 June 30 2017 Change in Plan assets: Fair value of Plan assets, beginning of year Actual return on Plan assets Employer contributions Benefits paid Settlements Administrative expenses paid from pension trust Fair value of Plan assets, end of year Funded status of the Plan 2016 $ 290,306 29,493 12,000 (11,608) — (3,186) 329,096 2,340 5,000 (10,560) (32,872) (2,698) $ 317,005 290,306 $ (77,768) (109,997) The unfunded status of the Plan of approximately $77,768,000 and $109,997,000 at June 30, 2017 and 2016, respectively, is recognized in the accompanying consolidated balance sheets as accrued pension cost. No Plan assets are expected to be returned to PHC during the fiscal year ending June 30, 2018. During the year ended June 30, 2016, the Plan offered a bulk lump-sum payment window. Benefits paid from the Plan relating to this bulk lump-sum window totaled approximately $32,872,000 and resulted in a curtailment charge of $11,498,000, which is included in other components of pension expense with in nonoperating expense in the accompanying consolidated statement of operations for the year ended June 30, 2016. The following table sets forth the components of net periodic benefit cost (in thousands): Year ended June 30 2017 2016 Components of net periodic benefit cost: Service cost Interest cost Expected return on Plan assets Curtailment charge Amortization of prior service cost Amortization of net actuarial loss Total net periodic benefit cost 32 $ 3,530 15,594 (18,054) — — 3,148 2,000 17,995 (22,389) 11,498 — 1,635 $ 4,218 10,739 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 The actuarial assumptions used in the accounting for the net periodic cost for the Plan were as follows: Year ended June 30 2017 2016 Discount rate Rate of increase in future compensation levels Expected long-term rate of return on Plan assets 3.96 % N/A 6.40 4.72 % N/A 6.95 The actuarial assumptions used to determine the year-end benefit obligations for the Plan were as follows: June 30 Discount rate Rate of increase in future compensation levels 2017 2016 4.03 % N/A 3.96 % N/A PHC uses fair value as the market-related value of assets in calculating the expected return on Plan assets component of net periodic pension expense for the years ended June 30, 2017 and 2016. No contributions are expected to be paid to the Plan during fiscal year 2018. Benefits expected to be paid in each of the next five fiscal years are as follows: fiscal year 2018, $15,214,000; fiscal year 2019, $15,397,000; fiscal year 2020, $16,572,000; 2021, $17,699,000; and fiscal year 2022, $18,680,000. For fiscal years 2023–2027, the aggregate benefits expected to be paid is $105,098,000. The following table sets forth the asset allocation for the Plan: June 30 2017 Growth/equity securities Hedge funds/private equity Fixed-income securities 33 2016 44 % 13 43 43 % 14 43 100 % 100 % (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 The target allocation for the Plan is as follows: June 30 2017 Growth/equity securities Hedge funds/private equity Fixed-income securities 2016 45 % 15 40 57 % 13 30 100 % 100 % To develop the expected long-term rate of return on assets assumption, PHC considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the Plan’s portfolio. The investment strategy of the Plan is to ensure, over the long-term life of the Plan, an adequate pool of assets, along with contributions by PHC to satisfy the benefit obligations to participants and beneficiaries. PHC desires to achieve market returns consistent with a prudent level of diversification. All investments are made solely in the interest of the Plan’s participants and beneficiaries for the exclusive purposes of providing benefits to such participants and their beneficiaries and defraying the expenses related to administering the Plan. The target allocation of all assets is to reflect proper diversification in order to reduce the potential of a single security or single sector of securities having a disproportionate impact on the portfolio. In an effort to maintain the overall risk level of the portfolio within an acceptable range, the relative mix of asset classes will be rebalanced back toward the target allocations as opportunities permit, but in any event not less often than annually. The use of futures and options contracts will be limited to liquid instruments listed and actively traded on major exchanges (except for short-term funds) to over-the-counter options or forward-contract positions executed with major dealers. No derivatives strategy may be used if it would subject the portfolios to greater variance than would be the case with the physical portfolio under a worst case scenario. Short-term funds may use only exchange-traded futures contracts and options–specifically prohibited are any off-exchange instruments and any exotic or structured securities, as well as notes whose interest rate is tied to security with a maturity of more than one year. PHC utilizes an outside investment consultant to implement its investment strategy. 34 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 The fair value of plan assets of the Plan measured at fair value on a recurring basis was determined using the following inputs (note 15) at June 30, 2017 (in thousands): Level 1 Cash and short-term investments Corporate obligations Fixed-income securities Municipal securities Corporate stocks Mutual funds Total assets at fair value Level 2 Level 3 Total $ 27,424 13,512 9,998 — 6,873 126,270 — 58,381 — 5,201 — — — — — — — — 27,424 71,893 9,998 5,201 6,873 126,270 $ 184,077 63,582 — 247,659 Investments measured at NAV as a practical expedient 69,346 $ 317,005 The fair value of Plan assets measured at fair value on a recurring basis was determined using the following inputs (note 15) at June 30, 2016 (in thousands): Level 1 Cash and short-term investments Corporate obligations Fixed-income securities Corporate stocks Mutual funds Total assets at fair value Level 2 Level 3 Total $ 1,849 422 25,878 20,513 132,065 — 7,920 — — — — — — — — 1,849 8,342 25,878 20,513 132,065 $ 180,727 7,920 — 188,647 Investments measured at NAV as a practical expedient 101,659 $ 35 290,306 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 Alternative investments included in the Plan at June 30, 2017 and 2016 and related net unrealized gains and losses for the years then ended consist of the following (in thousands): Estimated fair value, year ended June 30 2017 2016 Lighthouse Diversified Fund $ Archipelago Holdings Ltd Offshore Fund Titan Masters International Fund Clarion Lion Properties ING Fund LSV Emerging Markets Equity Fund Loomis Sayles Long Duration Fund IFP Global Equity L.P. Chatham Asset High Yield Offshore Fund, Ltd. Canyon Balanced Fund PHC Fund, Ltd. LGIMA Long Duration Fund Harvest MLP Income II Fund $ Net unrealized gains (losses), year ended June 30 2017 2016 — 9,398 — (424) — — 5,289 6,248 12,861 8,507 — — 323 (416) (1,438) 733 — 11,579 — (1,948) — 11,335 22,900 — — 921 3,000 — 12,873 9,465 25,899 — 4,485 — — — 22,049 8,117 1,373 865 355 — 431 69,346 101,659 4,268 — — — 2,747 (1,686) 568 Redemption frequency and redemption notice periods for alternative investments held by the Plan at June 30, 2017 are as follows: Clarion Lion Properties ING Fund Harvest MLP Income II Fund Canyon Balanced Fund Chatham Asset High Yield Offshore Fund, Ltd. IFP Global Equity, L.P. PHC Fund, Ltd. Redemption frequency Redemption notice period Quarterly Monthly Quarterly Quarterly Biweekly Monthly 90 Days 30 Days 90 Days 45 Days 3 Days 90 Days All investments at June 30, 2017 and 2016 were in domestic investments. The fair values of the securities included in Level 1 were determined through quoted market prices. The fair values of Level 2 financial assets for the corporate obligations were determined through evaluated bid prices provided by third-party pricing services where quoted market prices are not available. The fair value of Level 2 alternative investments was determined based on the use of net asset value per share as a practical expedient in accordance with ASC 820, Fair Value Measurement. 36 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (b) Deferred Compensation Plans PHC also offers two nonqualified deferred compensation plans, which are available to certain highly compensated PMCC and PHIP employees. These plans permit such employees to defer the receipt and taxation of all or a portion of their salary until future years. The deferred compensation is available for distribution to employees upon the election by the employee, provided the distribution election with respect to the deferred amounts has been made for a minimum of one year prior to the date of distribution. All deferrals are held as part of PHC’s general assets and are subject to the claims of PHC’s general creditors. Employees’ rights to the payment of benefits under these plans are equal to those of general and unsecured creditors of the PHC. PHC has no liability for losses under the deferred compensation plans. The amounts recorded for the deferred compensation plans are approximately $48,390,000 and $38,360,000 at June 30, 2017 and 2016, respectively, and are recorded within other long-term liabilities in the accompanying consolidated balance sheets. (c) 401(k) Plan PHC offers, as the sponsor, a deferred tax annuity plan (the 401(k) Plan) pursuant to Section 401(k) of the IRC of 1986, covering substantially all employees of PHC. PHC contributes 100% of pretax contributions up to the first 3% of eligible pay and 50% of pretax contributions up to the next 2% into the 401(k) Plan and may make an additional discretionary contribution. PHC recognized as salaries and benefits expense approximately $39,006,000 and $34,158,000 for the years ended June 30, 2017 and 2016, respectively, related to the 401(k) Plan. No discretionary contributions were made during the year ended June 30, 2017 or 2016. (12) Concentrations of Credit Risk PHC grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The mix of gross receivables from patients and third-party payors was as follows: June 30 2017 Medicare Medicaid Other third-party payors Patients 2016 30 % 14 43 13 26 % 13 43 18 100 % 100 % PHC recognizes that revenue and receivables from government agencies and third-party payors are significant to its operations. PHC does not believe that there are significant credit risks associated with these sources of revenue. 37 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 As of June 30, 2017 and 2016, PHC had approximately $560,831,000 and $514,737,000, respectively, in funds deposited with various financial institutions in excess of Federal Deposit Insurance Corporation limits. (13) Commitments and Contingencies (a) General and Professional Liability Insurance PHC has a self-insurance program for general and professional liability coverage through AMIC. AMIC insures PHC with professional liability and commercial general liability risks of PHC affiliates, namely Atlanta, Mountainside, Fayette, Newnan, Henry, Newton, Athens, PHIP, PMCC, ARPS, ARSS, and RFC on a claims-made basis for the hospital professional liability and on an-occurrence basis for the commercial general liability. The insurance policies between PHC and AMIC are $5,000,000 per occurrence and $20,000,000 aggregate annual limit for coverage effective May 1, 2003 through April 30, 2005, and $5,000,000 per occurrence and $19,000,000 aggregate annual limit for coverage effective May 1, 2005 through April 30, 2014 returning to $5,000,000 per occurrence and $20,000,000 aggregate annual limit for coverage effective May 1, 2014 through April 30, 2016 and $5,000,000 per occurrence and $21,000,000 annual aggregate as of May 1, 2016 and changing to $5,000,000 per occurrence and $25,000,000 annual aggregate as of May 1, 2017. The per occurrence general liability limit provided by AMIC was reduced from $5,000,000 to $2,000,000 on May 1, 2011 and remains at that level. AMIC is consolidated by PHC. PHC records the reported and estimated incurred-but-not-reported liability based on an actuarial study at June 30, 2017 and 2016, which totaled approximately $66,603,000 and $49,863,000, respectively, and is recorded as self-insurance reserves in the accompanying consolidated balance sheets. Commercial insurance has been obtained on a claims-made (professional liability) and on an-occurrence (general liability) basis to provide for excess coverage. The general and professional self-insurance reserves included in the accompanying consolidated balance sheets include estimates of the ultimate costs for claims incurred but not reported through June 30, 2017 and 2016, applicable to the general and professional liability self-insurance plans for PHC. PHC has employed independent actuaries to estimate the ultimate costs, if any, of the settlement of such claims. Accrued malpractice and general losses have been discounted at 2% at June 30, 2017 and 2016. (b) Other Self-Insurance Programs PHC self-insures a portion of its workers’ compensation liability exposure up to $450,000 per claim at June 30, 2017 and 2016. Reserves for the self-insurance program are established to provide for estimated claims losses and applicable legal expenses for any claims incurred, both reported and unreported, through June 30, 2017 and 2016, and are recorded in the accompanying consolidated financial statements. PHC recorded the reported and estimated incurred-but-not-reported liability for its claims at June 30, 2017 and 2016, which totaled approximately $5,800,000 and $4,621,000, respectively. Commercial insurance has been obtained on an-occurrence basis to provide for excess coverage. 38 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 The workers’ compensation self-insurance reserves included in the accompanying consolidated balance sheets include estimates of the ultimate costs for claims incurred but not reported through June 30, 2017 and 2016. PHC has employed independent actuaries to estimate the ultimate costs, if any, of the settlement of such claims. Accrued workers’ compensation losses have been discounted at 2% at June 30, 2017 and 2016. PHC is self-insured for employee health benefits for its subsidiaries with reinsurance for high dollar claims. Effective January 1, 2016, QualCare, Inc., a Cigna company, became the plan administrator for PHC’s health benefits. Prior to that, beginning January 1, 2014, Piedmont WellStar HealthPlans, Inc. (PWHP), a 50% owned subsidiary of PHC (note 16), administered the plan for PHC’s health benefits. At June 30, 2017 and 2016, PHC recorded $13,409,000 and $10,927,000, respectively, as an estimated liability for health benefit claims within the current portion of self-insurance reserves line item in the accompanying consolidated balance sheets. The employee health benefits self-insurance reserves in the accompanying consolidated balance sheets include estimates of the ultimate costs for claims incurred but not reported through June 30, 2017 and 2016, applicable to the employee health benefits self-insurance plans. PHC has employed independent actuaries to estimate the ultimate costs, if any, of the settlement of such claims. Accrued employee health benefits losses have not been discounted due to the short-term nature of the payout of these liabilities. In the opinion of management, adequate provision has been made for losses that may occur from the asserted and unasserted claims for all self-insurance programs. (c) Operating Leases PHC leases various equipment and facilities under operating leases expiring at various dates through fiscal year 2099. Total rent expense in fiscal years 2017 and 2016 for all operating leases was approximately $44,915,000 and $41,708,000, respectively, and is included in supplies and other expenses on the accompanying consolidated statements of operations. The following is a schedule by year of future minimum lease payments under operating leases that have initial or remaining lease terms in excess of one year (in thousands): Year ending June 30: 2018 2019 2020 2021 2022 Thereafter 39 $ 36,785 35,049 33,538 31,144 27,884 103,792 $ 268,192 (Continued) PIEDMONT HEALTHCARE, INC. AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2017 and 2016 (d) Litigation and Other Commitment and Contingencies PHC is involved in litigation arising in the ordinary course of business. Liabilities for loss contingencies arising in the ordinary course of business are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. After consultation with legal counsel, management estimates that these matters will be resolved without a material adverse effect on PHC’s future financial position or results of operations. On December 15, 2016, the United States Attorney's Office for the Northern District of Georgia issued a Civil Investigative Demand in connection with an investigation of PHC under the civil False Claims Act. PHC is cooperating fully with the United States Attorney's Office in connection with this investigation. PHC is currently unable to predict the likely outcome of this matter and unable to estimate the amount or range of potential loss that could result in the event of an unfavorable outcome. (14) Functional Expenses PHC does not present expense information by functional classification because its resources and activities are primarily related to providing healthcare services. Further, since PHC receives substantially all of its resources from providing healthcare services in a manner similar to a business enterprise, other indicators contained in these consolidated financial statements are considered important in evaluating how well management has discharged their stewardship responsibilities. (15) Fair Value of Financial Instruments PHC applies ASC 820, Fair Value Measurements, which defines fair value as the price that would be rec...
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