環球健康 (UHS) 2002 Q4 法說會逐字稿

Good morning. My name is Liwana and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Universal Health Services fourth quarter and full-year conference call. All lines have been place on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. Mr. Miller, you may begin your conference.

Thank you, Liwana.

Good morning. I'm Alan Miller. Welcome to this review of Universal Health Services results for the full year and fourth quarter ended December 31, 2002. As disclosed in our press release last night, the company had another very strong year recording earnings per share of $2.74 for the year and 69 cents for the quarter. This marks the tenth consecutive year of rising income.

Joining me this morning is Steve Filton, who has recently been named CFO, acting CFO, and Kirk Gorman, who until recently has been CFO and as we announced last night will be leaving the company following a transition period. During this conference call, we will be using words such as expects, believes, anticipates, and similar words that constitute forecast projections and forward-looking statements. While we certainly believe all such statements to be true, listeners should be familiar with the risks and uncertainties of these forward-looking statements as discussed on page 15 of our form 10-Q for the period ended December 30 2002.

Kirk, would you like to start please?

Thank you, Alan.

Sometimes when a CFO leaves the company, people jump to the conclusion that there is something wrong with the financial statements or financial condition of the company. In this case nothing could be further from the truth. During the nearly 16 years I have been with UHS, I have always been proud of the type and style of our disclosure, the accuracy and appropriateness of our financials and the integrity of the people who pull all of this together. This basic integrity was here from the very earliest days of the company and it will be here long after I leave. The people who prepare our financials have reported to Steve and there will be no change in this.

I am completely comfortable with the financials that we are reporting today and the ongoing financial strength of the company. My leaving UHS is related to a conversation I have been having with the company's independent auditors regarding the changing environment in which companies and their auditors operate. Issues regarding what responsibilities if any auditors may have to companies, where certain technical accounting expertise should exist, the appropriate level of technical accounting expertise a CFO should possess, and whether companies and CFOs can rely on independent auditors for such expertise. This conversation led KPMG to recently express discomfort to UHS's board and to Alan.

Obviously, Alan and the board are responsible for causing audited financials to be produced in a timely manner and the board decided the best course of action to meet this obligation was to name Steve as interim CFO and to begin a search for a permanent replacement for me. Another potential concern whenever a senior officer leaves the company is the loss of knowledge or experience and the fear that the company might temporarily stumble in some way -- this is certainly not going to happen at UHS and this fear is completely misplaced. UHS has been fortunate to attract and retain many highly skilled and dedicated people at all levels in the hospitals and corporate office.

I have no doubt that all during and following a reasonable transition period, UHS will continue to be among the top performing hospital companies. I have enjoyed speaking and meeting with investors and others interested in UHS over the years. I look forward to opportunities to continue our conversations in the future -- Alan.

Thank you, Kirk.

Let me reiterate what was stated in our press release. Towards the end of the press release, I commented that the company has the utmost regard for Mr. Gorman's integrity and capabilities, and is very disappointed that the situation has arisen that caused Mr. Gorman's departure. Let me go on further and say, as you know, that Kirk has been a member of our team, a valuable member for 16 years, he has made solid contributions to the company throughout his tenure, and we are all very disappointed that the situation has come about.

Many of you know Steve, he has been with the company for 18 years and has served the company in many roles. He has for many years been the controller of the company and in that capacity has had direct oversight responsibility for all of the company's accounting functions. I'll ask Steve to review the results of the full year and the fourth quarter of 2002.

Thank you, Alan.

Driven by what we believe to be industry leading growth and admissions to our hospitals, UHS recorded approximately 15% growth in revenues for both the full year and the fourth quarter of 2002. Admissions to our acute care hospitals owned for more than a year, increased 6.9% for the full year, and a robust 7.9% in the fourth quarter. Admissions to the behavioral health hospitals owned for more than a year increased 6.4% for all of 2002 and 7.7% in the fourth quarter. Pricing trends remain satisfactory with our acute care hospitals recording a 4.6% increase in revenue per patient day for the full year and an improved 6.6% increased in revenue for adjusted patient day in the fourth quarter. Our behavioral health facility has experienced a 1.1% revenue increase for adjusted patient day for the full year and an increase of 1.6% in the fourth quarter.

Earnings before depreciation and amortization, interest and tax, or EBITDA were $435 million for the full year and $111 million for the fourth quarter. Comparisons to last year's EBITDA and earnings results are made difficult by the couple of unusual or non-recurring charges recorded last year to recognize the potential increase in malpractice liability exposures, the expenses related to the company's successful refinancing and early termination of a debt obligation and the related early termination of interest rate swaps. We have included a chart with the press release last night that helps reconcile these items and will help make these comparisons easier.

When we make these comparisons, we calculate that EBITDA increased 17% for the year, and 23% for the fourth quarter. Net income and diluted earnings per share for the full year were $175 million and $2.74 respectively, while net income and diluted EPS for the fourth quarter were $44 million and 69 cents. Included in the fourth quarter and full year results is a $2 million pretax gain or 2 cents per share from the sale of the building. Again, last year's special items complicate comparisons to the prior year, but the way we make the adjustments,, we calculate net income increased 19% for the year and the quarter and diluted EPS increased 18% for the year and 20% for the quarter.

Cash flow from operations for the year was $333 million, an increase of 12% from prior year. With this cash flow, we made $196 million of capital expenditures, purchased 1.7 million UHS shares for $77 million, and made net debt repayments of $67 million. At year-end, the company's ratio of debt to total capital was 43% down from 47%, at the beginning of the year. And the ratio of debt to EBITDA was $1.58 improved from $1.95 at the beginning of the year. Obviously, UHS's strong earnings and cash flow continue to improve the financial strength of the company and allowed us to repurchase approximately 2.8% of the shares that we had outstanding at the beginning of 2002.

During the past few years, UHS has invested heavily in its existing communities and in acquisitions. While not all of these investments are yet mature, we are pleased to continue to record an increasing return on capital invested. There are many ways to measure return on capital. In this context, I'm using a simple net income divided by the sum of long term debt and shareholders' equity. On this basis our return on total capital increased to 10.8% in 2002 from 9.6% in 2001, after adjusting for the non-operating items in net income in both years.

UHS continues to focus on investing its capital where it can earn a fair return, and we anticipate earning a higher return on capital in 2003 than we did in 2002. The operating margins of our acute care hospitals were again pressured by rapidly rising labor expense and the expense of implantable cardiology and orthopedic devices. We define operating margins as earnings before depreciation, amortization, rent, interest, minority interests and taxes divided by net revenues. The operating margin for the acute care hospitals owned more than a year was 17.5% for the full year and 17.6% for the fourth quarter. This was a slight decline for the full year, but an encouraging 80 basis points increase from the fourth quarter of 2001.

Even though pricing trends are not as favorable in the behavioral health business as in the acute care business, operating margins improved for the full year and fourth quarter for those hospitals we owned for more than a year to 20.3% for the year, and 20.8% for the quarter. The behavioral health hospitals are showing success in offsetting their softer pricing environment by spreading their fixed costs across their continuing increasing number of patient days.

Alan will now discuss the recent activities and outlook.

Thank you, Steve.

We are pleased with the strong results recorded in 2002, and are looking forward to another solid year in 2003. Let me bring you up to date on a few of our projects. As you probably know, we successfully opened the new George Washington University Hospital in Washington, D.C., in late August. We have been very satisfied with the growth in patients served and revenues and are looking forward to improving margin performance in 2003, and beyond for this major hospital. In early January, we opened the new tower at our Auburn Regional Medical Center, just south of Seattle. This project like George Washington was completed on budget, and opened to great enthusiasm by the community, the medical staff and our employees. Auburn has been for a long time one of the UHS's solid hospital franchises, and we are pleased to have been able to make this substantial investment in this attractive, growing community.

UHS will spend about $225 million, or a little more on capital expenditures in 2003. The three largest projects have been under way for some time. In the late third quarter, or early fourth quarter, we will open a 90 bed addition to the northwest Texas hospital in Amarillo. Also in this time frame, we will open our new 176-bed hospital in the southwest area of Las Vegas. Las Vegas continues to be among the nation's fastest growing city, and we are pleased that we will have the first hospital in the rapidly developing area of Las Vegas. Then very late in 2003, or early 2004, we will open a 120-bed Lakewood (ph) Ranch Hospital in Manatee County, Florida, where we already operate the leading hospital. In addition to the three large projects, we have under way, half a dozen or more projects of $5 million or more, at hospitals in Shallmet (ph), Louisiana, Akin (ph), South Carolina, Wellington (ph), Florida, and the other Las Vegas hospital, Summerland (ph) and Valley.

We continue to look selectively for acquisitions where we think our skills and knowledge can improve the quality of care and financial viability of the hospital. In January, for instance, we purchased the Northstar (ph) Behavioral Health System in Anchorage, Alaska, and our company in France purchased hospitals in Carcarson (ph) and Metz (ph). We are currently reviewing additional acquisition opportunities in our acute care, behavioral health and French operations, and are hopeful that we will be able to conclude a few of these transactions in the coming months. However, we currently do not expect to complete any new acquisitions in the first quarter of 2003.

We are encouraged by the recent discussions in Washington concerning Medicare pricing for fiscal year 2004 that begins October 1, 2003. Legislators and the administration of CMS all seem to realize that hospitals are still suffering from rapidly rising labor expense and the cost of new, implantable technologies. The current indications are that hospitals will probably receive a satisfactory, not generous, but satisfactory price increase of approximately 2.75% for fiscal 2004. A recent decision by CMS should return to us a couple of million dollars of our outlier revenue.

We are also pleased to see the ongoing efforts in Washington, and in certain states to implement caps and other restrictions on the exploding cost of malpractice that is threatening the entire health care system. As you may know, I have been particularly involved in malpractice reform on behalf of hospitals and on many physicians nationwide whose very existence is threatened by the scourge of unwanted malpractice claims and run away verdicts.

A few weeks ago, we offered earnings guidance for 2003 of between $3.10 and $3.20 per share on revenues of 3.5 to 3.6 billion. This year, like every other year we will face some difficult challenges in achieving our goals. However, UHS has highly regarded hospitals in growing communities and benefits from the efforts of over 30,000 dedicated, trained personnel across the country. By anticipating and supporting the needs of our patients and their physicians, we expect another record year and success in 2003.

Steve, Kirk, and I would be pleased to respond to questions at this time.

At this time, I'd like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for a moment to compile the Q & A roster.

The first question comes from Darren Lehrich.

Good morning, everyone. I just want to try to better understand the circumstances around Kirk's departure and would like to know what exactly the issues raised by KPMG. Were they more process oriented, and, Kirk, I wanted to get your perspective as to whether or not the issues may have related at all into, you know, your view regarding the certifications required by Sarbanes and Oxley? I have a follow-up.

Darren, the issues -- I'm not sure what you mean by process related. I want to make clear what I'm meaning when I talk. So, I think you're right and I think we agree on process related in that this has nothing to do with UHS's financial statements, either current ones or prior ones. This situation has everything to do with a conversation that I started with KPMG and continued for a while, maybe a little bit too long, about the new environment in which audit firms and companies and CEOs and CFOs and new certificate signings, this environment is changing rapidly both for officers of companies and for audit firms. And it, as you suggest, has everything to do with how companies and their officers and audit firms are supposed to interact with each other in this current environment. This is not an easy time for any of these players. It's not an easy time for audit firms. It's not an easy time for companies or officers to understand on whom we can rely for various sources of expertise and it is strictly the nature of this philosophical conversation that we have been having and really has nothing whatsoever to do with the UHS business and financial statements.

Okay. Then, I guess just to maybe follow on here, it sounds like you've got real comfort in your own financial process and controls, and I don't want to put you out on a limb here, but are you suggesting that KPMG's audit process at all was something that you had concern with? And maybe just comment there on that side of the equation.

I have -- let me state very clearly a couple of things here. I have absolutely no concern about UHS's process for gathering information both financial and otherwise that go into our financial statements and into our other disclosure statements. Nor do I have any problem with the way in which KPMG conducts their business. Their business is changing as well. I think, you know, other than a couple of personal things that have cropped up here, I think KPMG performs its task in a very professional manner. I have no specific concerns at all about the way in which KPMG performs its audit function.

Okay. Maybe I'll just ask you one operating question here, although I have a feeling you're going to get more on the first issue. Just can you comment on the Las Vegas market performance. It looks like the minority interest line was down 30% year over year. I know there's a few things that go in there, but I'm assuming that Vegas still remains sort of the volatile piece of that line. Can you just give us your feel for that, please?

The overall -- the Vegas performance has been very good, very strong in the fourth quarter. Revenues and admissions in that market are particularly strong. The issues that are affecting that minority interest line have to do with some accounting clean-up and some activity in the smaller joint ventures that have a minority interest like our surgery center businesses, which were off a little bit in the quarter.

When you say accounting clean up, just help me understand what you mean by that?

Yeah. In the prior year, fourth quarter, in '01, we had some catch-up adjustments in the Vegas market that impacted the minority interest in the fourth quarter of '01, so it distorts the comparison a little bit.

Thanks.

You're welcome.

Your next question comes from Adam Feinstein.

Great. Thank you. Certainly very important issue here, so sorry to keep flushing it out here, Kirk, but just have to ask a couple more things here. Just your views on the responsibilities, I'm not certain what exactly, you know, those views are. It would be helpful to hear that. Secondly, it's just the thing about the extra teeth required of the CFO. It's silly for lack of a better word, to even imply that you would not be, you know, considered an expert, so just having an issue with that comment and just maybe any follow-up and Alan, if you have any perspective as well from the board level.

Let me start out with --there was a disagreement here that perhaps at another time would have been less important, and I think it just sort of got rolling and got out of control, and in this environment, we wound up where we are. I don't know what else we could say other than that. Kirk, do you want to add anything to that?

I realize all of this may sound kind of odd and mysterious to people trying to figure out what's going on. I think it's fair to say that it may sound a little bit that way to Alan and me, we're living through this week. The nature of the responsibilities that I have been discussing with KPMG is really related to -- I wasn't challenging or raising any concerns about the way in which they're performing their function. These are philosophical questions about whether or not a company and its officers have the right to rely on opinions or have some sort of ability to rely on the expertise and under what circumstances. You know, this is not a live fire exercise. There was no specific example that was at the core of any of these conversations. This was strictly related to what -- strictly related to what technical expertise should sit on what side of the desk and how do we react to each other.

Make up just a quick follow-up. As KPMG signed off on the year-end audit yet. I know that the process is still maybe ongoing, but any clarity there? Thank you.

As is their historical practice, KPMG signed off simultaneously with the press release.

Great. Thank you.

The next question comes from John Hindelong.

Kirk, on behalf of most of us on the line, thanks for your help over the years. This is a disappointment what's here, but not to beat a dead horse, the comment was made, there was a disagreement, I'm wondering if the disagreement is one where -- let's say, Alan in your position, you might have backed the CFO rather than the auditors. I wonder if you would give any thought to that. You're the boss. I'm wondering if this disagreement was such that the guidance that you have given us, I assume that you have --reaffirmed that -- the details that might change in the numbers as we look forward to '03 and going forward?

John, the issue was not related to something which is in any way going to change anymore of our guidance. It is not related to anything financial. It's related -- Kirk has called it a philosophical difference. There's a lot of discussions between Kirk and KPMG in that area. They have, as Steve mentioned, they have signed off on the financials. There's nothing in the past or current that is any kind of a problem. This was a -- this was a disagreement that might have been a smaller disagreement and it got into a larger disagreement. You know, it's an unfortunate situation.

Did you consider changing auditors or -

Changing auditors at the point that we were a practical impossibility. We felt for the stockholders and for the position of the company, changing auditors -- I wouldn't say midstream, I would say as you are reaching the other shore is just not a practical possibility.

Kirk, would you have signed off on statements?

Yes, I would have.

Okay. Good luck, Kirk.

Thank you, John.

Your next question comes from Gary Lieberman (ph).

Thanks. Good morning. I guess let's keep beating on a dead horse. Can you discuss a little bit, Kirk, the details that you had in KPMG? What's not clear to me what was in the communication that came back with KPMG to say that they could not rely on your representation. So, what color can you give us additionally in those communications and maybe if you could -- I don't know if the time line would help, but I think that's the piece of the puzzle here that is certainly still is not clear to me.

I don't know that either Alan or I can expand upon what we have already described. I mean, the communications that we have already discussed and described are about as far as they went. There's nothing more. There's no secret little message hidden away. Alan and I are describing exactly the content of these sorts of conversations. I guess I -- if I were more imaginative, I would think of different words to say the exact same thing, but in the end it's the exact same thing that I would be saying, so I won't waste your time.

My follow-up to that would be that it seems, you know -- it just -- it's a leap for me to understand what's in that communication that would ruffle KPMG's feathers so much that you couldn't sit around a table and say, you know, here's really what we were trying to raise. There are not any larger issues here, so why can't we all sort of get along going forward.

Let me mention something on that, Gary, I don't know what else we can say beyond the fact that in this environment, and in whatever pressures are brought to bear on accounting firms, I mean, you can understand what's been going on in the industry. I am not privy to what goes on internally at accounting firms. I think there's a lot of pressure on everyone in this investment community, and in companies, and this is an unfortunate result of part of that.

Just one final follow-up. Is there the possibility since it sounds like you, Alan, are very supportive of Kirk that at some point in the future, you guys would consider switching auditing firms and perhaps have Kirk rejoin the company?

We have not thought about that situation. So, management has made no such recommendations or really thought of that process. The audit committee retains the auditors, and we have made no recommendation to them, and I am not aware that they are considering that change.

Thank you very much.

Your next question comes from Peter Costa.

I certainly want to reiterate the last point and get to a couple other issues. First off, the first question you are not changing any guidance forward-looking at this point in time, is that correct?

That's correct.

Okay. The second point, Kirk, would you now certify, you said that you would do it at a later point in time, would you still certify it, if you were to come back to the company?

Peter, I -- am not going to be coming back to the company, so I'm getting a little mixed up with all of the suppositions as to how you do something that is not going to happen. Let me boil it down to present tense. I have no concern or no problems about the financial results of your release last night. I would certify and sign those statements as of year-end 2002.

And the audit was a clean audit, they're signing off and it's a clean audit, is that correct, Alan?

Yes. The audit is clean.

You know, I certified the September 30 statements.

Okay. If I were still CFO, I would certify the December 31, 2002 statements. We expect the audit to be clean. KPMG has not brought any concerns to our attention. I haven't seen the artwork yet but you will see an annual report that looks very similar to every other annual report without any extra comments by the outside audit firm. It's going to be a perfectly normal year-end audit report.

Is there a representative from KPMG in the room now?

No.

They're not here to talk about any of the issues that they saw?

No. They're not here. It's our conference. They're not here. But they have been working with us, and we have -- we have their clean opinion.

Well, for what it's worth, I think the street is telling you that they have more confidence in Kirk and since KPMG didn't find anything in their audit, it strikes me that you are making a decision here siding with KPMG that is not perhaps what's in the best interests from the shareholder point of view.

Peter, could I just comment on that? I mean, this is a very different situation that I don't know has occurred before. The board and Alan were in a position early this week --public companies have to get out public audited financial statements during a certain period of time. This -- I assume this -- Alan promises me, this was not an easy process for him to go through. I assume this was not an easy decision for the audit committee or Alan or anybody else. There was no time to consider alternative accounting firms, alternative audit processes. As Alan said a moment ago, I guess I would use a basketball analogy rather than the boat landing on the opposite shore, but the time clock was running out. There's not much -- there's not much that was available because just of the normal course of events and the timing.

All right. Thank you.

Your next question comes from Ted Antoye.

I don't have a question, but Kirk, screw 'em all and walk away with your head high. I loved doing business with you. If you want to work with us, you have a spot right here. See you, buddy.

Thank you, Ed.

The next question comes from Gary Taylor.

Hi. I just had a follow-up. I guess it's kind of been covered by now, but I was just looking for the actual requirements as you see -- the SEC requires you to file the audited financials within 90 days of the quarter being closed. But can you -- I'm sorry to press on this, but can you explain why changing auditors and filing the audit late was a practical impossibility. Why wasn't that -- I just -- I'm not sure why that wasn't an option. I just wanted you to expand on that.

Changing auditors to our understanding would involve number one, throwing the question of the integrity of the numbers of the company, not only for this year, but for prior periods up in the air. There would be a cloud over the company, and its financials. In then environment -- in this environment, people are conditioned to all kinds of things happening. And that was not the case in the company. Not with these financials and not with the financials prior. Then considering the period of time that would take to retain another group, if we had, come to that conclusion and getting them up to speed and getting them to become familiar with the company, we have been with this company for over 20 years -- the company is almost 25 years old, and we have been with the predecessor company and this company, this firm for that period of time. So, we all felt it was a practical impossibility regarding damage to the company and going forward, and damage to the shareholders, and damage to reputation of the company and our ability to do business in our markets. Just a whole host of things. As Kirk pointed out, this was not an easy decision.

Right. Well, I guess, you know, given that you had a 24-year relationship with Arthur Andersen and this is KPMG's first year, I guess where I think myself and others are struggling is, you know, given Kirk's 16 years of service, and his credibility, his visibility, his integrity with the street, it just seems -- it just seems unusual that you know, this would have been the alternative chosen, because for some people, obviously, the whole question of the numbers and everything is called into question under this scenario anyway. The only other thing I just wanted to follow up on, Kirk, you have historically since the Sarbanes Oxley was passed, you have on a quarterly and retroactively certified the financials. Is it fair to characterize the issues with KPMG as just an acceleration of the philosophical differences that you have, because you have been historical willing to sign off on these?

I'm not sure about the physics of your question, acceleration of -- I have signed off on every statement ever since I became CFO. I would sign off on these statements if I were still CFO. I have no problems with any of our past or current statements whatsoever. In the process of this conversation that I was having with KPMG during the fall, I relied on technical expert accounting advice from KPMG to understand certain issues. They then in their normal process asked me to certify the advice that I think came from them in the first place, and I -- I perhaps in another time, I wouldn't have been so confused, but I'm not exactly sure about the process of me certifying advice that came from somebody else in the first place. You know, there is nothing wrong with that advice. I'm not aware of there being any errors in the questions. This is strictly a process sort of a thing. There's nothing here. There's nothing here of any real nature. It's an interesting philosophical debate, but there is nothing beyond it.

Right. There's one question about the quarter, kind of moving away from this. Supply expense, which we track per adjusted patient day had jumped almost 13% year over year according to my calculations, kind of ahead of a 5% to 6% run rate. Was there anything in particular on the supply side that would have caused that to move up?

Other than the -- you know, as we have mentioned in our conversations, the increasing --increasing pressure on these high cost cardiology and orthopedic supply, there's a little bit of distortion with the fourth quarter of '01 because we had actual favorable inventory adjustments in the fourth quarter of '01, making the comparison look a little bit unfavorable, but other than that nothing -- nothing specific to distort this quarter.

Okay. Thanks.

Your next question comes from Billy German (ph).

I just had actually a quick question. I have gotten quite a bit of understanding related to Kirk. I wish Kirk the best of luck, and congratulations on the quarter to the company. I think it's a good quarter, and I'm happy that everybody is signing off. One quick question I did have is in the managed care sector, Medicare, etc., you mentioned that you were pleased with what was going on for '04 for Medicare increases at 2.75%, what kind of estimates are you putting in for managed care increases for the same time periods, and also any exposure to Medicare? Thank you. I'm sorry, Medicaid.

About 15% of the company is -- of the company's overall revenues come from Medicaid or managed Medicaid. Obviously in various states across the country, as you all know, most states budgets are under increasing budget pressure for a variety of reasons. So that there is some uncertainty, but it is a relatively small portion of our business, and -- and offset, as you alluded to by the fact that we expect less than 3% in Medicare price increases and around the country, we are expecting managed care pricing increases in still -- still in the 6% to 8% range.

Thank you.

Welcome.

Your next question comes from Kemp Dolliver.

Thanks. Good morning. I am going to start off on the dead horse issue quickly. Why is this a situation that essentially started off with the auditor and then kind of boomerangs back around to the board as opposed to something that at least board or senior manage management would have been aware of going on. Maybe that's the case, it just seems that you're essentially either this is going on, and KPMG, you know, put you into a corner, or in terms of making a decision, or just a little bit of color on that in terms of who was -- how this evolved into terms of either the board or Alan Miller's involvement. Thank you.

There was a communication. There was ongoing discussion, and at one point, it came to a conclusion on their part, which we did not agree with fully. And as I mentioned, we know they're under certain pressures. There are pressures in this community, that they are operating in, and whatever. And it came about a very short time ago, and we made what choices we had to make.

Thank you. Just on the quarter itself. Or actually on the outlook. There have been reports that you are looking at a hospital system or small hospital system in California. Any details that you can provide regarding the status of that conversation?

No. I don't think we want to get into any details on that. It's still ongoing.

Thank you.

Your next question comes from A.J. Rice.

Hi, everybody. Kirk, to you, good luck in the future. First of all, just one last question on the issues with the auditors. It sounds like there was some previous process that, you know, that the auditors had done something, and you felt like they were asking you to sort of sign off on their work and guarantee their work before they could move forward. The fact that you couldn't do that, but you now have certified the statement, does that mean that someone else in the company took your place in the company and was willing to sign off on it, is that what we should interpret?

A.J.let me clarify. I think you said that -- you typify, what you said at the beginning is close enough to being the process. I think you said that I did not sign off or did not certify. That is not true. All of the statements in the history of this company have been attested to, signed off, certified, whatever the verb is, by the CFO. I did so in September. That -- you know, every statement has been and as I just said, I -- were I CFO, I would sign off on the at the same times at year-end. Steve will be signing off as CFO. I mean, there really is not any change in the -

Right. I know. Probably bad choice of words. It sounded like to me that KPMG did work for you guy, and sort 1/2 a backhanded way, you are being asked -- sort of in a backhanded way. KPMG asked you to give them reps on their work. And you didn't want to. And they said they need that to move forward here, and is that the right characterization of what you are describing, and if you weren't willing to do it, does that mean that somebody else in the company did it for you.

I was willing to do it. You are typifing some of the issues accurately. Exactly what you are using is one of the philosophical questions that KPMG and I have been discuss, you're right. I did sign off. I did certify. I was unwilling to do something. Now Steve is willing to do something that I thought was improper or inappropriate in some way. That is not the case.

Okay.

I signed off, I would sign off. Steve is going to sign off. There is no change in that.

Just the other thing on the timing. The part of it where they came back and said, well, we're sort of at an impasse, we need to move forward and do -- sort of bring the whole decision process to a head, is that -- you're saying that that happened, you know, this week, basically? That's when the whole process came to head, or is it something that you guys have seen that you were at an impasse here for several months?

No, no, no. This came -- you're exactly right, it came to a head this week. Although this has been a long week, he guess it was this week, the very beginning of this week. So, you're exactly right.

Okay. Just a couple of quick things away from the issue, I guess. Obviously, last night it sounds like Congress passed the funding for the rest of 2003, and one of the things that they have done is give a little bit of money to hospitals in markets of less than 1 million people. Have you guys looked at that, and is that a significant benefit you to in any way?

That affects about half of our acute care hospitals. We estimate that the benefit to us and I'm sure as you know, that benefit starts -- it's a six month benefit at the moment, a one-time benefit starting in April to be between 2 million and $3 million.

$2 million to $3 million. How about, I think Alan mentioned about the outliar, now that you have the final rule, do you think that you might have a more favorable situation it sounds like. Maybe can you expand on that.

In all fairness, we have not had a chance to digest the final rule. But we -- we certainly think that as Alan mentioned in his remark, it will be at least a couple of million dollars that he had mentioned benefits.

Okay. And then the final question I had is I think Alan mentioned there was no -- you probably weren't likely to be a an acquisition at least in the first quarter. Obviously, you know, with the straight -- extraneous news today of the stocks going to be under pressure, any thoughts about share repurchase moving forward from here? I know that you have options in the past.

We have an authorization to buy. I don't know what the stock is doing. I have been busy on the phone, as you know, A.J.

Right.

We'll look and see. We do have an authorization that's still outstanding.

Okay. Okay. Thanks.

Your next question comes from Charles Lynch.

Thanks. I think maybe one piece that's missing as we try to dig through this issue, I guess this is directed to you, Kirk, is you know, interest was a philosophical issue raised regarding your comfort in relying on KPMG on a technical issue, yet having to certify and put some of the legal responsibility on your shoulders regarding the veracity of their opinion. Yet you know, as we deal with that, weigh come to the point now where you -- we come to the point now that you have made comments that you are comfortable in certifying the annual results for 2002. I guess the question that I have is partially a technical one.

As this went through the process and entered the process between yourselves and KPMG, were there -- you know, we're at the point now, for example, where a person of the stature of Alan Greenspan is technically not qualified to be on the auditing committee of a corporation now, was there anything related to educational background, having a CPA, anything like that, technically that KPMG brought up related to their willingness to rely on you to certify results and rely on you on the financial aspects of the company's management?

Alan -- Alan participated in the conversations over the post -- most recent time period of KPMG. I was not party to the conversations. So, I don't know whether or not anything like that was brought up.

Okay. Thank you.

Your next question comes from Jerry Kumatos (ph).

Yes. Hi. I wanted to continue along the lines of the previous questioning, and just sort of try to figure out -- by the way, Alan, the stock is down almost 20%. I just wanted to let you know that.

Thank you.

And to see what you were going to do in terms of share repurchase, and secondly, if there was a question -- I guess to try to circle back to Kirk's initial comments about how there was an issue surrounding a certain -- a certain technical issue, why couldn't Kirk get a third opinion that would in essence cover him on his opinion so that there wouldn't be any issue of KPMG providing consulting services, perhaps, and then asking Kirk to certify their consulting services. It sounds like that is what was going on here.

Jerry, that is not exactly what was going on. It's perfectly natural for all of us to try to understand what is a new, novel experience. As we delve deeper, we are making something much more complex than it really was.

I had no discomfort with the work done by KPMG. I did not suspect anything that they had been telling us was wrong or improper in any way. We did not have a specific issue. This was not a live fire exercise where I had expressed specific concern about any specific accounting or technical issue this resolved --revolved around the nature of expertise and reliance upon expertise, but this was a theoretical conversation not a specific conversation. So, you know, trying to look at it a bunch of different ways is a perfectly natural -- I can tell you that Alan and I have been looking at it a bunch of different ways this week. But that's adding complexity to something that really wasn't all that complex.

Okay. Okay. Well, I mean, for it's very difficult for us to figure this out. I hope that you understand that. We're all facing this. We're saying either KPMG is not following a procedure that you don't agree with, or vice versa. I don't understand how it can be just a philosophical discussion. That's not credible to me.

Well, let me try to help you.

Yes.

I also object to the part that it might not be credible, because we're telling you everything that we possibly can about this issue. Kirk described it as philosophical, I think that's correct. It's not technical. It's not an issue of the financials. Kirk, and they -- it was indeed a philosophical discussion about responsibilities and I think probably relates to Kirk's analytical abilities which are not average. Had this discussion and I think, I mean, not speaking for them, it made them uncomfortable.

I'm just asking you to clarify which side of average do you think my abilities are?

Well, you know, we have been with the stock -

Above or below average?

We have been in the stock primarily because of Kirk's expertise.

Repeat your question. We were having a discussion. Kirk wants to make sure that I say that his abilities are much above average.

Well, so -- if -- then you get down to the point of an auditor coming in and expressing discomfort with philosophical discussions. That's not their role as an auditor. We're not interested in their comfort or discomfort in philosophical discussions. They have a job to do.

They have done their job.

No, they didn't, because they meddled in the management of the company. That's the bottom line.

I wouldn't describe it exactly that way.

Well, that's what's happened.

That -

I know -

That may be a result, but that's not exactly what happened. We had our choices to make as well.

Okay.

Your next question comes from Michael Weisberg (ph).

Yeah. First let me say this is a terrible blow to the company, and its credibility and terrible loss to all of us who have enjoyed talking to Kirk for his expertise. Kirk, if you were willing to sign off -- again, I hate to keep doing this -- you were willing to sign off on the documents, it was some representations that you had to make or reliances that you had to make in the process of doing that that caused the conflict?

I'm sorry, that last part again, Michael? I think I understood what you said. It's hard to understand. I'm going to ask you to repeat it to make sure that communications are clear as possible.

You were willing to sign off on these -- my understanding from talking to other people, you had a philosophical problem with the whole concept of being required to sign off an documents as the CFO. Is that correct?

That's not really correct. I understand my responsibilities as a CFO. The statements of the -- are owned by the management of the company. I have always known that. I know that today. I am prepared to he accept that responsibility. So, you know, I don't think that that's -- that was not really the issue as to whose statements they were.

Obviously auditors and company management had the exact same goal of making sure that the statements are exactly in tune with GAAP and meet the disclosure rules. The conversation maybe we're hung up on the word philosophical. I don't know what conversation it was. But as Alan and I have been describing. It related to whether or not a company and its officers can rely on the expertise resident in the external audit firm, the independent audit firm, where expertise should be, what expertise should exist where. Maybe in hindsight I will think that these issues were made a little more complex than they should have been made. I think it's an important principle to sort out, given the current environment. I'm sure that KPMG does as well. I don't really -- I might disagree with their opinion, about me personally, but I -- I don't disagree with the work that they have done or their --the professional way in which they have conducted the audit. I don't see anything wrong in with the way in which they conducted the audit.

I felt discomfort in the process of having to rely on their acumen for the background in order for you to sign -- to sign off on the documents the way that you have to?

Yes. I am not sure that I would use the word discomfort. It's an open issue as to if a company relies on an outside expert, or uses an outside expert to help do certain calculations, and is there some sort of implied warranty, what sort of reliance account company make on that sort of help that is in the ordinary course of business.

Did you, Kirk, sign off on the full year statements or did Steve?

They actually are not signed off yet. Steve will.

So, you will not be signing off. Steve will be signing off on the full year fourth quarter and full year?

That's right.

But you would have?

I certainly would have if I were CFO, but Steve will be because he is now CFO.

I see. Great. We will miss you, Kirk.

Thank you, Michael.

Your next question comes from Hugh Covington (ph).

I have two questions. First one for Alan, and second one for Kirk. Alan, are you advising the listeners there are absolutely no discrepancy agreements concerning the accuracy and fairness of Universal Health services financial numbers over the past two years?

Yes. That's -- okay.

I thank you for stating it.

Second question to Kirk. This difference is obviously a lot bigger than management expected it to be.

That's also true.

Yes.

And we see that in the value of the stock. Alan, you indicated that you did not want to change auditors because you were concerned with the way it would be perceived in the marketplace, and in the press, and at the hospitals and the service and so on down the line. Of course, this complexity is going to make the press --they're going to love this. And Kirk, I would encourage you to move this, quote, unquote, philosophical difference into the accounting board and get some clarification on this. Because this is going to be a topic where other CFO's are going to also probably feel uncomfortable, if I'm correct, in understanding what you said where you relied on the numbers that the other organization developed.

I agree with your opinion that this is a topic that is relevant to today's environment. I -

All right.

I -- to me, it's an important principle.

Yes.

KPMG, in its ordinary course, the routine is in the ordinary course of every quarterly report every annual process that any audit firm goes through, any audit firm is going to ask the management of the company for a representation letter. There are certain technical things that a company -- that companies rely on their outside auditors for. I thought it was appropriate to ask the outside auditor for a representation letter on those topics that we had relied on them.

Certainly.

They -- they are not in, and I don't know really the answer. This is an evolving area. I don't know if they're prevented by law, but they were not in a position to provide --I wouldn't be surprised if no audit firm has never provided a representation letter to management, but KPMG was not in a position to provide a representation letter --.

Sure

And because I was informing them that -- of this circular process where -

Right.

I was relying on their representations to me, and therefore my representation to them was really their own representation to themselves or something. Those weren't the exact words, but it's this circular, who is saying what to whom about whose expertise is kind of the heart of the issue. They can't take the -- they can't take a representation from themselves and the way that I believe, although, again, I have not been party to direct conversations to KPMG on this point. They have been conversing with others in the company. But I believe part of the problem was that, you know, they can't take a representation from themselves, and the way in which I was constructing the thought process, that's what it looked like to them.

Yeah. Yeah. Well, I appreciate the clarification. I wish you the best of luck. I think, you know, over time, the company will get rid of this dark cloud, but I think that if you could post it over on the accounting board, make it their problem, not Universal's problem. I think that would be helpful. Thank you for the time.

Thank you.

Your next question comes from Abe Fronstein (ph).

Same horse, same stick. It's unclear what sort of process or procedure in audit that would require you to rely on the representation from the auditor. It seems to me that the audit process checks what the company prepared. Was there a consulting procedure advice on tax issues of some sort in which you wanted to rely on them, or was this strictly related to the audit?

No, in the normal course of an auditor doing his job, management puts together financial statements and applies GAAP to the various transactions and issues. The auditor checks that arithmetic and makes sure the way in way the management has done the calculations is also in the accordance with their understanding of GAAP. Some of the calculations and the more recent pronouncements are getting ever more complex. Some of these calculations are really hard to do. And it was related to some of the more recent issue, some of the more recent pronouncements that I was turning to KPMG for some representation that that their experts or they had the right guys doublechecking our work. I have no reason to believe they didn't.

That's not an audit function. That's an advisory function. You're saying they wouldn't supply a certification of an advisory function. That's not an audit function that you are talking about.

We may be splitting hairs here. I'm not a CPA. I don't know.

We're not splitting hairs. The question here is whether the -- this auditor is willing to say that your procedures are correct within the established guidelines and a-- or they want you to say that you have filed the proper procedures. It's a clear difference of opinion. This is not an academic issue as the last person suggested, a web site issue.

I'm sorry. We must be confusing you a little bit.

Confusing the whole world. The stock is getting killed. Confusing more than me. I you should have. Let's have the specifics. What is the difference about? What was the issue that there was a difference about?

That's -

It's on the brass tacks. Put it on the table.

There was no specific issue. There was no specific difference.

Well, then you said -- you just said it was. There was something about a GAAP calculation. It was either specific or it is not. It is impossible for to us accept the idea that there was this -- this was a theoretical difference about who's responsible for the financial documents.

That is not a theory. We are responsible for the financial documents.

Well, then what was it that they didn't want do?

They were uncomfortable responding to my request for a representation letter -

What did you want them to represent specifically? Please tell us so we can judge whether you are being reasonable or they're being reasonable.

I don't know if there's a lot of reason-ness on either side the things have accelerated. I made a specific request. Ways raising the issue that -- I don't know if I maid a specific request. I was raising the issue. We count on them.

Count on them for what? That's what we're asking. Count on them specifically.

Have you ever worked inside a company.

Of course, I have. I'm probably older than you.

You are old, in that case.

I am. Old enough to know bullshit when I hear it.

That's a little offensive, isn't it?

Well, you're asking us to believe a totally bizarre explanation. And I don't know which is more offensive.

I don't discount the use of your adjective bizarre. I would agree with that.

I just -- I think specifics are in order to clarify. I'll end my question there. Thank you.

All right. Appreciate it.

Your next question comes from Charles Taff (ph).

Mr. Hafe, your line is now open.

Your next question comes from Nicole Viglusi (ph).

Ms Viglusi, your line is now open.

Go to the next question, your next question comes from Aran Kumar (ph).

Quick question. When are the auditors going to actually sign the official opinion? I know they signed off on the earnings release, but in terms of when the opinion is actually going to be given to you, and when are you going to publish your annual report and file your 10K?

We will publish our annual report and file our 10K in the same time frame that we always have, shortly before, you know, at the end of March, or shortly before the deadline. The auditors' opinion will be dated of yesterday when they signed off, and it will be very much consistent with what you are accustomed to seeing.

Right. Though, in terms of their opinion, there's going to be no questions on prior statements or prior accounting issues that Arthur Andersen had done in the past, and also the -- one of the questions that came up in terms of the representation -- has management provided representation remember letter to the auditors having worked in an audit firm, a big one for several years. I know that we always used to get a letter from management at the end of the audit on the representation of 108 or 20 different items required and the accounting rules?

Yes. We will provide a representation letter.

Okay. Thank you.

You're welcome.

Your next question comes from Greg Solomon (ph).

Hi. I'll just echo everyone in saying, you know, thanks, Kirk, for everything and we'll miss you. Alan, just wanted to ask a quick question. At the end of your prepared comment, you said the 3.10 to 3.20 EPS that you had been guiding to. You faced difficult challenges in reaching the goals in any year. Does that mean that you are coming off of that, are there any other risks now than there were a couple of months ago when you talked about it?

No. We're not coming off of it. I think we just wanted to point out that when we reach it, we wanted an appropriate applause and so we're telling you that there's difficulties in every industry, but we have done real well over the year, and we are -- we are reaffirming that guidance.

Then if I could, you know, jump on the same thing. Abe was asking a question, and Kirk, you started to answer it, and it might have been repeated something that you said earlier, but you were saying, KPMG was uncomfortable lettering a --giving a letter. Can you finish your thought? I think you got cut off.

The nature of the conversations between KPMG and may have been regarding whether or not whether a company can rely on an outside company's expertise and whether a company, the same way an auditor receive as representation letter from management, the representation letter I have been signing ever since I have been CFO, Steve has been signing, will sign, and the issue I raised was whether or not KPMG should also provide maybe not the same letter, but the same conceptual representation letter to management for the audit function work that they perform as an independent auditor.

What changed now? Did you ask for this from Arthur Andersen when they were your auditors the year before?

No. I guess what changed was that I can't remember them all, but I guess the environment has changed quite a bit starting with Enron. The relationships between auditors and their clients and companies and officers of companies, and this whole environment is a whole lot different than it was two years ago. People -- maybe not people. I am searching, was searching for some clarification as to what the new roles and responsibilities are between outside audit firms and companies and managements of companies.

Then if I could take that one step further, I can totally understand everything that you are saying. But in what was kind of disclosed in your press release regarding this issue, it sounded as if it was KPMG that couldn't rely on the CFO's, you know, representation. So, you're saying it was KPMG, you wanted a KPMG letter, the way it came out to us was, you know, you not giving KPMG something.

I think it may have been what I was trying to communicate earlier, it's this circular nature of retelling KPMG they do important work for us. I rely on KPMG, and I'm comfortable with their work. I'm providing representations to them in the ordinary course. Again, I have not communicated directly with KPMG on these matters. So, I -- I can't posit to them specific understanding of the communications that I have been having, but I --dy think it is difficult for both sides exactly to know how to sort out who's relying on whom and whose representations starts this process. I he think KPMG may have had some difficulties thinking that in some way they were being asked to rely on representation from themselves or something like that. I'm not really sure.

Let me help with this. I have the last word on, it perhaps. I think that because of the discussions, KPMG may have come to a conclusion there were reservations on the part of Kirk that was prompting this conversation. And we tried to them that that was not the case, but they were concerned about a -- a reservation somewhere in that conversation. And that was their interpretation, I suspect, and that was not the case with regard to the financials of the company, which represents what we have been doing all year. With the prior financials. And that -- that is I think how this situation came to a conclusion.

Okay. That clarifies it. Thank you, and again, Kirk, you know, you have been a pleasure to work with.

Thank you.

Your next question comes from Bob Rice (ph).

Hello.

Hello, Bob.

Hey, how are you?

I just wanted to understand, circumstance, is there no possibility that you would be associated with the company in any capacity, like, you know, either in a consulting basis or investor basis or somehow? Obviously, it's an issue where you unfortunately, had to have principles and Arthur Andersen didn't have those. Is there any reason why you couldn't be associated with the company on a consulting basis?

I think it's a little bit --my own current emotional state, still adjusting to the situation.

30 days from now. Have we cut off our nose to spite our face?

I think it's unfair to say that Andersen, first of all, it's KPMG, did not have principles. They have principle, too. This is not an easy issue for anybody to exactly understand. So, you know, I have my principles. I'm concerned about certain important issues. I don't think that KPMG doubts the importance of the issues. And they have a principle to --principled approach to the way they have to run their business as well.

We paid them a ton of money to enhance our credibility. Judging by the $600 million loss we have today, you cannot argue that. Some of the shareholders might address that in a derivative action against KPMG to discover what exactly they're concerned about, because what I'm worried about is what do we pay them for. That may be the issue when it comes down to it. What work do they do to justify the money? I'm suspecting if you went over to Tenet that the stock would be up four or five points.

Here we have the most credible CFO, and the auditor making a statement, and we're getting shortchanged here, I'm feeling, and if you had to take 30 days off, you know, would you come back, you know, in some capacity because, I'm afraid somebody else is going to hire you away? I mean, this is an investment that we had all partially reflecting you. You know, and obviously, Alan, but you're Alan's partner. I'm wondering whether you would -- you know, or is the auditor going to stand in the way of that. Or is the auditor -- I know Alan hated to -- the shareholders had to run the company, but now if the auditor's trying to run the company, I want it know that, because I don't know if I want to invest in KPMG.

I would not interpret that KPMG is running the company. That's extrapolating. KPMG is not running the company or dictating policies or hiring and firing policies. That's a bit of an extrapolation based on my understanding of KPMG's communication to the audit creditee and Alan. Frankly, this week has been full of activity and emotion. We have all been working, Steve and Alan and I have been working to understand the situation. Alan and I have had virtually no conversation whatsoever about my future. I do not anticipate that I will have any future role with the company.

You're also -- what are you president of the -- the REIT is down 20%, too. Is there any to be concerned about there?

There is nothing to be concerned about. I -- I was president. Alan is now president. He has been chairman and CEO. He will take over my president's title at the Reap. Chick Boyle (ph) who has been in charge of the accounting and financial statements takes over the CFO tight. He has been doing all of the accounting. He will continue to do all of the accounting there. I will be disappearing at the Reap as well. There is no issue at the Receipt reap. I would sign the statements and provide the representations just as willingly as I would at UHS.

People are having trouble. It's impossible to understand. Just the way that you lay it out because you have this very valuable image. And why not go along with things? I know you're not that kind of a personality, and you're very principled person, and then leave? People are having trouble understanding that. That's why the stock is reflecting what it is in light of Tenet and other things in your industry. Will the company ever have this perception, the glow it had for yours that may be -- maybe not. So, what have we done here? And you know, what are you doing for yourself? My concern is that, you know, this is all the shareholders' apparently are standing up for I. I want to make sure that my CEO is standing up for you, to the extent that he can, recognizing what's in the best interests of his investment and our investment, and if in fact you want to have nothing more to do with the company, that is of concern. Because you put so much time into it.

I intend to remain here through this transition period. I'm not cutting and running. I'm not leave being the conference call and hopping in my car and running to the airport. I'm going to be here to make sure that the transition is smooth and successful. This is a very odd situation, and it's easy to focus on this. I believe Bob, in a day or so, people are going to go back to focusing on the rest of what we were discussing today, which is very strong performance for the company in 2002. A very bright outlook for this company. We have got a lot of solid people here. We have terrific franchises. The cash flow is well above our needs for our own cap ex and provides the company a great opportunity to continue to invest profitably for the future. It's a difficult time. I'm a couple days ahead of you in processing through the kind of chalk of the -- shock of the new world we're living in. But my guess is in a couple of days all of you will get to the point where I am, and, you know, things will be moving forward again.

Luckily, the shareholders get to vote on the auditors so we'll have a point of view next year about this.

Your next question comes from Debra Lawson.

Hi. I was just wondering, the term communications, if they were written communications or just verbal communications?

They were both.

And if they're written. Typically, I mean, I know this isn't exactly the same situation but typically, what we have seen historically is when there's a dispute with an auditor of some sort that the communications are filed in an 8K or something like that. Will we be able to see those things eventually?

Whatever is appropriate to be filed would be filed, but if it's in a private communication within the company, I -- I don't know. I don't think so.

Thanks.

The next question comes from Ken Marks (ph).

This is Joe Garner here for Ken Marks from Emerald. A couple of questions. I guess the first question would be you can talk about the process of how the decision was made regarding Kirk's departure. And then I guess why look at this given this difference here? With someone who's provided so much value to the company over time. Why not change the auditors rather than change the CFO?

I think that question was answered earlier, but I'll cover it again. Changing auditors is not a simple process. Changing CFO's is not a simple process either. There's a calculation with regard to not only the short term impact on the company, but also our ability to go forward, at what point, and the business that we're doing current currently, and very tough decision was made. Circumstance will no longer --is no longer the CFO.

It just seems that as far as being in the best interests of the shareholders, that the blow of this Angement departure would appear to be a greater blow than to have pursued another path in resolving the problem. That's the question and concern that we have.

We may have a different of opinion on that. I'm not pleased with the whole situation as stated. But we'll have to go forward. Decisions are made. That's where we are at the moment, Joe.

Thank you.

Your next question comes from Roger May (ph).

My question has been answered. Thank you.

Your next question comes from Frank Morgan (ph).

Good morning. I apologize in case this has been asked. I got cut off of the call. Kirk, you used your basketball analogy and said that time was running off. You also said that you would have signed off on the financial statements. I don't know what the big time rush here was. Couldn't you have signed off on the financial statements, and worked this out over a longer period of time to figure out if it was another option available to you?

I think the issue, Frank, was that the KPMG felt that it was in a position that it had to express discomfort relying on my signature. I believe that stemmed -- again, I have not been party to direct conversations. So, forgive me if I'm putting words into KPMG's mouth. I was not a direct party to these conversations. But I believe KPMG's sense of discomfort about relying on my be signature didn't have anything to do with the financial statements, per se, or anything to do perhaps with me per se, but had something to do with my perception that I was relying on KPMG in making my representation to them, and this sort of circular who's representing what to whom, I believe -- although, I'm not sure, I believe was part of the issue that KPMG was uncomfortable with.

Okay. Just as a suggestion, I think it would be good if you could have a follow-up call and perhaps have KPMG on the call, and maybe give some more specifics on this whole issue of exactly what it was, but I think it would be very enlightening to most people to hear from them as well, and then finally, I'll direct the question over to Steve. What makes you comfortable with signs off on the documents now with the new processes that KPMG requires? Thank you.

Well -

Excuse me, Steve.

I have no discomfort with the current process, nor with the statements. So, Steve can answer the question for himself, but I don't want to leave the impression that somehow I was uncomfortable with the process, or the quality or veracity or integrity of the statements. Steve has some sort of lower standard or something like that. That is not the case. I'm sorry, Steve.

I was simply going to answer the question the same way. Kirk has said over and over again in the call that he was willing to certify, has certified the last couple of quarters, would have certified to the end of the year. To me, the process has not changed at all. I was willing to do exactly what he was willing to do.

Sounds like they're basically willing to rely on your signature and they weren't willing to rely on Kirk's signature?

Yes.

They interpreted the conversations to develop a reservation on Kirk's part. Which he is not -- he is stating is not there. They interpreted that as a reservation, and having such --having then determined there was some kind of a reservation, they felt uncomfortable.

Mm-hmm.

And that is -- I mean, that's the situation. Once they felt uncomfortable, then certain things flowed from that.

So, with regard to my suggestion of a follow-up wall where they participate, would you be open to that?

I doubt they would want to do such a thing. I'm not going to speak for them, but I doubt they would want to do such a thing?

Mm-hmm. Did you expect the market it react as violently as it did, when you thought through the process of options of how do we go from here. In your heart, did you think that you would see the stock down 8.5 points?

We have to do what we have to do. When people recognize that the company's strength is there, that our financials are accurate and that there is no question about the financials, the view of the company will be consistently what it has been.

Thank you.

The next question is from Lori Price.

I wanted to follow up one more time on the issue surrounding the circumstances that led to Kirk's departure and just ask, is it possible or is it reasonable to assume that in the wake of the growing paranoia and uncertainty in the environment that KPMG viewed the written communication that followed the oral communications from Kirk as a smoking gun in their file, and that that's why they pushed 11TH hour to have Kirk removed, or else not sign off on the audit?

I don't think we can really give you an opinion on what went on, what the thinking is of KPMG.

Okay. Can I just also ask one more time, forgetting about what circumstance's intentions or desires are right now, is there anything that KPMG has said or, you know, anything along those lines that would prevent from you hiring Kirk in another capacity in the future?

No. Not at all.

Thank you.

Your next question comes from Ken Weakley.

Thank you. First, circumstance, I have never thought of you as a dead horse, so I guess start off differently than most. Alan, is it fair to say that if KPMG came you to in June and July, and made the same presentation to you that maybe the decision would have been different? In other words, is this strictly a function of timing? The decision that you had to make?

Ken, you're addressing that to Alan on behalf of the company, I assume.

Yes.

Yeah. It's hard to speculate on what -

Would you ask your question. Alan was writing a note to himself during the question. It sounded like the question was being directed to me.

Alan, I was asking, is it fair to say that is KPMG came to you and the audit committee, say last summer, or in other words, another way of saying it is if your fiscal year was in June instead of December, hence, you know, would you had been making perhaps a different decision now, and that the only reason this decision really is occurring now is because of the timing and the need for a full audit on the full-year numbers?

That's a very large part of it. I don't know how else to answer it. I can't, I mean, situations evolve as they evolve and decision had to be made and this is not something that we welcome. So.

Clearly, KPMG knew what they were doing when they came Monday, knowing that they were putting you in a potion where you had very little options. That seems fair to say. Kirk, I was wondering, when you wrote this letter, did you talk it over with Alan or with anyone else at the company or did you send it just on your own?

I did not talk it over with Alan or anyone else in the company or outside the company.

So you just thought of this really on your own and OK. And then lastly, just I guess in retrospect now Alan, why not, why didn't you consider creating a new position for Kirk given his obvious importance and given your long-term relationship like either Vice-Chairman or whatever, you know, at the company? Is there any particular reason or it's all happened so fast?

There's no particular reason, but having had our long relationship and being in a position where CFO is as important as it is, it's just hard to contemplate a position but, I mean that's the best reasoning I can give you for where we are at the moment.

OK, thank you.

Your next question comes from Eric Woodworth (ph).

Yes, a follow-up comment is that, I think a big part of the vacuum in the stock, and I've only been following you for about a year, is simply that there's a lack of specifics over what the issue exactly was, and I think it would be very helpful to lay it out on the table as soon as possible, so that people can understand much more specifically what this accounting, philosophical accounting issue is all about. Thank you.

Eric, that's what we've been trying to do honestly. This conversation that I started with KPMG was not, I didn't know how interesting it was going to get. You know, I certainly didn't anticipate this outcome, and there is no specific issue. It has nothing, in a way, it almost has nothing to do with the company. If I had been at another company with another audit firm, I probably would have been having the same conversation. In a way, I was certainly communicating to KPMG in my role as CFO of UHS, but I think I would have had the same curiosity about this, what I think is an important principle, regardless of where I would have been. It's not really a UHS specific issue in my mind.

Your next question comes from Greg Powers (ph).

Hi Kirk. I just wanted to say it's been a privilege and an honor to work with you for more than 10 years, and you know, I, knowing you the way I do, and I know I'm pontificating here, but knowing you the way I do and having watched Bill Esry (ph) and Ron LeMay (ph) get burned down at Sprint on the advice of VNY, I understand your thought process. I don't want to turn it into a eulogy, but you're going to be missed in a lot of dimensions. Be well my friend.

Thank you.

Your next question comes from Eric Lusara (ph).

All of my questions and comments, particularly relating, my long relationship with Kirk have been mentioned. So thanks.

Thank you Eric.

That was nice.

Your next question comes from Rick Johnson (ph).

Yes, hi, I just want to echo all those last comments and say thank you to Kirk for all his work and all his diligent answering of my pestering questions over the year, and I think all shareholders or virtually all shareholders on this call would say that, you know, the auditors are the ones that should be gone here, not you Kirk. Over and out.

Thank you Rick. It's kind of early where you are. You're up early this morning.

Oh I was here on the start of this call.

That was a long time ago.

Yes, yes it was. I guess you guys are about ready to get off.

Your next question comes from Jason Yuins (ph).

Hi Kirk, I'm just going to reiterate what everyone else said in believing that you're one of the highest quality individuals in the industry and I think we're all extremely sorry to see this happen.

I just had two questions, maybe you could help me with. In six months or a year when we look back on this, is there any reason to believe from knowing what we know now that we're going to say, wow we should have known this, this negative or positive thing?

Want to make a side bet of a personal nature? I'm willing. My bet is that I would win my side of the bet and it would be money off of you to make that bet. I can't imagine nothing in my forecast that anything else is going to be developing here that is going to cause concern about this company.

Let me ask, I know it's already been said that if you changed auditors, delayed your 10-K filing and reporting date and endured the kind of stock market volatility, that you would have emerged with a clean bill of health.

But let me kind of rephrase that and ask that a different way. Kind of if we as individual, as institutional investors gave the management of UHS a mandate by voting out the auditors, is there anything that would prevent Kirk from coming back in some capacity?

I don't want to comment on that and I don't want to encourage any votes one way or the other.

But is there anything that would prevent, just answer that question, is there anything that would prevent Kirk from coming back, if there was that mandate?

It's speculation. I don't want to mislead you. We have no action against Kirk, or we have nothing, I don't even want to use any other words. No.

OK, that's all I had. Thank you so much.

Your next question comes from Kemp Dolliver.

I, I doubt this letter is sitting in front of you that you'd be willing to read it to us, but is it fair to say that essentially this communication was direct in saying that you've relied on KPMG to, in a general sense, for technical accounting advice, and in I guess, same light that your provide them with representations that they rely on that you've thought it would be a good idea for them to do the same for you, you know, given the changing environment. Would that be a fair representation of that letter if you were to read it to us?

You're right. The letter's not in front of me. I can't remember my specific phrasing, but the concepts you're saying are close to the concepts in that letter Kemp.

All right. Thanks very much.

Your next question comes from Peter Costa. Mr. Costa, your line is now open.

He spoke earlier.

OK. Your next question comes from Charles Taff.

Charles Taff; Hi, thanks. Question, is there anybody that was a former outside auditor on UHS's Board of Directors right now?

No.

and I understand that changing auditors is a complicated matter, as you mentioned Alan, but from the advice that you received on the legal side, from your UHS legal consultants, did they give you the advice that the request that Kirk was asking for or the letter that he was asking for, from KPMG that UHS would not be able to get that letter from virtually any auditing firm out there, so it put you in a situation where you had to let him go, because of the request that he was asking for?

We did not seek any opinions on anything like that. So that question remains unanswered.

OK. Well it just seems as an editorial comment, in light of the fact that you didn't get that advice and possibly could have switched auditors, that, you know, I respect your, or your operating management Alan, and I think you have done a great job with this company and other companies. But I believe that you have made a mistake here. You know, Kirk has navigated investors through many issues with this company, Puerto Rico, Med Mow (ph), EBITDA margins and he has calmed what seems to be at times a very neurotic type of investing community, and I just believe that you made a bad decision here, and I've looked to Kirk many times in the past few years to help explain this story, that's been a very strong story, but at times, has had some clouds over it.

So just for that comment I want to say thanks Kirk, and you will be missed.

Thank you Charles.

Your next question comes from Andrew Bhak.

Good morning. Thank you. As the issue came to a head, I just want to make sure that I'm clear of the stance of KPMG as it was put forth to you Alan and the Board and the Company, which was based on the text in the press release that they could no longer rely on representations made by Mr. Gorman, the CFO. Is that really the essence of it? I'm still a little confused, because as all these issues come to a head, it seems as though there's some other type of disagreement and it seems like it's an odd brinkmanship to a resulted in this decision. I'm just not exactly clear on what KPMG's issue was or why they took exception to any stance that Kirk may have presented, when he was willing to sign off on the financials. Thank you.

I think that the conversations resulted in them coming to a conclusion that there ere reservations in Kirk's mind, non-specific. Kirk has mentioned it's philosophical; it's not related to any particular issue; it's not related to an accounting issue. It was philosophical. They felt there were reservations there and they felt that those reservations were such that they couldn't accept them.

They could not accept them ...

They could not accept Kirk's signature because of perceived reservations that he might have had. He assured them that he did not have reservations with regard to the company's operations, our financials, our prior period financials, and that's what occurred.

OK, all right, well Kirk, thanks very much for all your efforts with us and best of luck.

Thank you Andrew.

Your next question comes from Darren Lehrich.

Thanks, just real briefly, this conversation is coming pretty circular in and of itself, but Kirk, maybe just a hypothetical question in the hope that it enlightens us.

Would your philosophical differences or views preclude you from serving as an officer of any public company? And I think, you know, I'm just kind of keying into a comment you made before and my sense is that this you know, obviously, it's philosophical, but perhaps less so related to specific UHS and more a function of just the role as a chief financial officer of a public company.

The conversation is getting circular Darren. I think you've got us started a little over an hour-and-a-half ago. The, you know, I really haven't thought about what I do next. I don't know, I would certainly hope that in some fashion serving as a financial officer of another great company is not precluded from my future. If I can find another company as good as UHS, that might be a pretty good job. But I really haven't, you know, in the two days that Alan and Steve and I have been scrambling around to try to deal with this situation, I really haven't thought at all about what next steps I will be taking.

I'm going to be here for a while to make sure this transition period works.

Well it would seem to be that, you know, based on what you're saying that you may very well have this same kind of philosophical difference with any auditor, you know, regardless of what company you're at. So I'm just not clear on how that gets resolved over the longer term, save, you know, some kind of repeal of the laws that may have contributed to the environment that we're in. But I guess, you know, you've answered the question. So it's been a pleasure working with you and thank you.

Thanks Darren.

Your next question comes from Jerry Kumatos. Mr. Komatos, your line is now open.

Yes, hello. Just, I was wondering, if I go back to thinking about this, and I'm sort of thinking about the fact that within my own company, I have two outside accounting firms. One does the accounting and one does the auditing. And auditing is a pretty specific word. It means listening and observing and it's very passive.

So it sounds like Kirk had a philosophical difference with the involvement that KPMG may have had in actually generating some of the accounting procedures and, and perhaps some of those accounting procedures should have been done by a different entity, either internal or some separate accounting firm.

So, when that started to occur to Kirk, at some point during '02, why weren't other accountants brought in to provide either the accounting or a third opinion if you will that would have provided much more comfort to Kirk during that process? I mean, correct me if I'm wrong, but I think that's exactly what some of the issues were.

You're off a bit Jerry. I have no problems, I have no awareness of any issues that I should have personally, Steve should have as the existing CFO, Alan should have. I'm not aware of any issues or guidance or help related to KPMG's work with the company.

But you definitely have issues with the fact that they as an auditor are doing accounting work, right?

No, then I would be doing accounting work. They, as an auditor, are doing auditing work. We, like any company, turn to our outside auditor to help us understand the increasing torrent of accounting pronouncements. But that's just normal course relationship between any company and its auditor.

They provide opinions, but by the same token, an auditor, by its definition should not be doing the actual accounting work and setting up the actual accounts.

You're absolutely right and KPMG does not do that here and never has.

Then why did you start to feel uncomfortable about certifying your financial statements before they were auditing them?

I never felt uncomfortable about representing that our financial statements are true in every respect. I have done so every quarter since I don't know, going way back, I would have no concern about providing my signature to any such document now. I've never had that concern.

You didn't have that concern, but you had that concern vis-à-vis waiting first for certification from KPMG concerning some of the work that they had done. So I mean, you did say that earlier in the conference call.

If I misspoke, I apologize. Let me say it this way. If I were still CFO, and if I did not have any other pieces of paper from KPMG regarding the year-end numbers of 2002, if I did not have any representation letter from KPMG, I would still sign the year-end statements.

OK, but they became, but there was a letter that started a process where they became concerned that perhaps you weren't or felt uncomfortable about that, and then they started feeling uncomfortable about you, something along those lines.

Yes, in my opinion, they may, they being people not directly party to the conversations that I've been having with some of the local guys, I think other people at KPMG may simply have misinterpreted some of the communications we've had.

OK. Again, you know, I vote for you to be President if that's possible. It seems that it would be, I mean, you were actually acting largely as a COO of the company if you will.

Jerry, that really wasn't true.

You were doing a lot, the structures that you were setting up in various hospitals allowed each to act as its own CFO, so you were combining the two functions from what I understood.

No, what you're saying is absolutely incorrect. Kirk was a financial executive, represented the company to financial community, did all the work on the financing of the company, was never involved in active operations of Chief Operating Officer, no operations actually at all, and I can't imagine how you came to that interpretation.

OK.

We have a head of the Behavioral Health Division. We have a head of the Acute Care Division, Ed French (ph) and Debbie Osteen (ph) and while Kirk has worked closely with them, Kirk was never in charge of operations.

OK. Thank you very much.

You're welcome.

Operator, how are we doing, we almost done do you think?

Yes, sir, you have two questions left.

All right, we have two to go.

OK, your next question comes from Thomas Konduck (ph).

Yes, hi. Have you or KPMG consulted with any regulatory agencies or any trade organizations? Have you notified them regarding the philosophical differences, which you had with the KPMG?

No we have not. We have not, nor should we, nor could we even consider how to go about it.

OK, and do you plan to reveal the specific communications that prompted KPMG's reservations regarding Kirk's signature.

We have fully described as best we can a situation that evolved that we, Kirk certainly and we did not anticipate. We have described it very accurately, as it could be described briefly. We've been on the phone for two hours talking largely about that. So I think we've described it every which way, and I don't believe there's anything further we could say about it.

OK, I get the sense then that there's nothing here that would bespeak some type of inquiry by any regulatory agency regarding your financials, past of present?

Absolutely not. We have an audited opinion from a big four firm. No there's absolutely nothing here beyond what you've heard, and I don't know if you've been on the whole call, but people have questioned us whether there's any reservations about the numbers or whether there's anything that will following the future or whether anything happened in the past that has to be recertified, and the answer's no, absolutely not.

OK, thank you very much.

Your next question comes from Shawn Lanoff (ph).

Alan I'm sorry to hear about your problems this morning, but if, I assume that Kirk asked KPMG to certify that the way he accounted for something was correct and that refused to do it saying that's your job to make that decision? Is that a fair assumption of what happened?

No that's not really true. I never had any specific issue in mind in any of this conversation that I've been having with KPMG since last fall or late summer, I can't even remember when I started this.

There was never a specific transaction I asked them to review. There was never a specific issue. This was not any sort of live, take a look at this, are we doing this right, that's, this was a broader contextual, I've used the word philosophical, I don't know exactly what that means perhaps, but this was not related to any specific transaction. I have no concerns about the way in which we as management of the company put together the financials. This didn't point KPMG to question, I was not questioning the way in which any of our numbers have been compiled.

Thank you.

At this time, there are no further questions sir.

Thank you very much. Thank you all. Thank you Liwana.

Sir, this concludes today's Universal Health conference call. You may now disconnect.