Amsurg (AMSG) 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2006

Commission File Number 000-22217

AMSURG CORP.

(Exact Name of Registrant as Specified in its Charter)

Tennessee (State or other jurisdiction of incorporation or organization)	62-1493316 (I.R.S. Employer Identification No.)
20 Burton Hills Boulevard Nashville, TN (Address of principal executive offices)	37215 (Zip code)

(615) 665-1283
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ     Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso      Noþ

     As of November 2, 2006 there were outstanding 29,922,289 shares of the registrant’s Common Stock, no par value.

Table of Contents to Form 10-Q for the Nine Months Ended September 30, 2006

Part I
	Item 1.	Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
	Item 4.	Controls and Procedures	19
Part II
	Item 1.	Legal Proceedings	19
	Item 1A.	Risk Factors	19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
	Item 3.	Defaults Upon Senior Securities	19
	Item 4.	Submission of Matters to a Vote of Security Holders	19
	Item 5.	Other Information	19
	Item 6.	Exhibits	19
	Signature		20
Ex-11 Earnings Per Share
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification
Ex-32.1 Section 906 Certification

i

Part I

Item 1. Financial Statements

AmSurg Corp.
Consolidated Balance Sheets
September 30, 2006 (unaudited) and December 31, 2005
(Dollars in thousands)

	September 30,			December 31,
	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	21,311		$	20,496
Accounts receivable, net of allowance of $5,905 and $6,189, respectively		52,718			46,387
Supplies inventory		5,898			5,336
Deferred income taxes		1,139			809
Prepaid and other current assets		14,460			14,644
Current assets held for sale		429			—
Total current assets		95,955			87,672
Long-term receivables and other assets		4,677			6,614
Property and equipment, net		87,742			83,254
Intangible assets, net		396,563			350,276
Long-term assets held for sale		339			—
Total assets	$	585,276		$	527,816
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	3,546		$	2,218
Accounts payable		8,517			10,413
Accrued salaries and benefits		12,259			8,201
Other accrued liabilities		2,387			5,768
Current liabilities held for sale		197			—
Total current liabilities		26,906			26,600
Long-term debt		131,969			106,044
Deferred income taxes		37,248			33,615
Other long-term liabilities		3,479			19,668
Minority interest		53,337			47,271
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued or outstanding		—			—
Shareholders’ equity:
Common stock, no par value, 70,000,000 shares authorized, 29,920,064 and 29,688,668 shares outstanding, respectively		141,912			131,856
Accumulated other comprehensive income, net of income taxes		(528	)		—
Retained earnings		190,953			162,762
Total shareholders’ equity		332,337			294,618
Total liabilities and shareholders’ equity	$	585,276		$	527,816

See accompanying notes to the unaudited consolidated financial statements.

1

Item 1. Financial Statements — (continued)

AmSurg Corp.
Consolidated Statements of Earnings (unaudited)
Three Months and Nine Months Ended September 30, 2006 and 2005
(In thousands, except earnings per share)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Revenues	$	114,188		$	98,410		$	345,674		$	285,846
Operating expenses:
Salaries and benefits		33,925			27,965			102,833			79,592
Supply cost		13,174			11,437			40,192			31,790
Other operating expenses		23,199			19,467			67,480			56,145
Depreciation and amortization		4,324			3,950			12,761			11,216
Total operating expenses		74,622			62,819			223,266			178,743
Operating income		39,566			35,591			122,408			107,103
Minority interest		22,185			19,445			70,431			58,398
Interest expense, net of interest income		1,924			1,098			5,669			2,837
Earnings from continuing operations before income taxes		15,457			15,048			46,308			45,868
Income tax expense		6,059			5,898			18,153			17,980
Net earnings from continuing operations		9,398			9,150			28,155			27,888
Discontinued operations:
Earnings (loss) from operations of discontinued interests in surgery centers, net of income tax expense (benefit)		20			(46	)		92			(208	)
Loss for disposition of discontinued interests in surgery centers, net of income tax benefit		(56	)		(743	)		(56	)		(986	)
Net (loss) earnings from discontinued operations		(36	)		(789	)		36			(1,194	)
Net earnings	$	9,362		$	8,361		$	28,191		$	26,694
Basic earnings per common share:
Net earnings from continuing operations	$	0.31		$	0.31		$	0.95		$	0.94
Net earnings	$	0.31		$	0.28		$	0.95		$	0.90
Diluted earnings per common share:
Net earnings from continuing operations	$	0.31		$	0.30		$	0.93		$	0.92
Net earnings	$	0.31		$	0.28		$	0.93		$	0.89
Weighted average number of shares and share equivalents outstanding:
Basic		29,875			29,625			29,787			29,538
Diluted		30,423			30,287			30,371			30,159

See accompanying notes to the unaudited consolidated financial statements.

2

Item 1. Financial Statements — (continued)

AmSurg Corp.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2006 and 2005
(In thousands)

	Nine Months Ended
	September 30,
	2006			2005
Cash flows from operating activities:
Net earnings	$	28,191		$	26,694
Adjustments to reconcile net earnings to net cash flows provided by operating activities:
Minority interest		70,431			58,398
Distributions to minority partners		(66,793	)		(55,701	)
Share-based compensation		5,513			—
Depreciation and amortization		12,761			11,216
Deferred income taxes		3,843			5,879
Excess tax benefit from share-based compensation		(1,052	)		—
Loss for dispositions of interest in surgery centers		91			1,621
Increase (decrease) in cash and cash equivalents, net of effects of acquisitions and dispositions, due to changes in:
Accounts receivable, net		(3,511	)		(4,143	)
Supplies inventory		(208	)		(391	)
Prepaid and other current assets		656			5,920
Accounts payable		(958	)		(35	)
Accrued expenses and other liabilities		5,595			2,651
Other, net		(362	)		(128	)
Net cash flows provided by operating activities		54,197			51,981
Cash flows from investing activities:
Acquisition of interests in surgery centers		(49,811	)		(44,123	)
Acquisition of property and equipment		(13,603	)		(19,150	)
Proceeds from sale of interests in surgery centers		597			2,400
Decrease in long-term receivables		1,943			2,295
Net cash flows used in investing activities		(60,874	)		(58,578	)
Cash flows from financing activities:
Proceeds from long-term borrowings		86,176			79,904
Repayment on long-term borrowings		(82,266	)		(70,743	)
Proceeds from issuance of common stock upon exercise of stock options		2,790			3,663
Proceeds from capital contributions by minority partners		139			1,235
Excess tax benefit from share-based compensation		1,052			—
Financing cost incurred		(399	)		(430	)
Net cash flows provided by financing activities		7,492			13,629
Net increase in cash and cash equivalents		815			7,032
Cash and cash equivalents, beginning of period		20,496			14,992
Cash and cash equivalents, end of period	$	21,311		$	22,024

See accompanying notes to the unaudited consolidated financial statements.

3

Item 1. Financial Statements — (continued)

AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements

(1) Basis of Presentation

AmSurg Corp. (the “Company”), through its wholly owned subsidiaries, owns majority interests, primarily 51%, in limited partnerships and limited liability companies (“LLCs”) which own and operate practice-based ambulatory surgery centers (“centers”). The Company also has majority ownership interests in other limited partnerships and LLCs formed to develop additional centers. The consolidated financial statements include the accounts of the Company and its subsidiaries and the majority owned limited partnerships and LLCs in which the Company’s wholly owned subsidiaries are the general partner or majority member. Consolidation of such limited partnerships and LLCs is necessary as the Company’s wholly owned subsidiaries have 51% or more of the financial interest, are the general partner or majority member with all the duties, rights and responsibilities thereof, are responsible for the day-to-day management of the limited partnerships and LLCs, and have control of the entities. The responsibilities of the Company’s minority partners (limited partners and minority members) are to supervise the delivery of medical services, with their rights being restricted to those that protect their financial interests, such as approval of the acquisition of significant assets or the incurrence of debt which they are required to guarantee on a pro rata basis based upon their respective ownership interests. Intercompany profits, transactions and balances have been eliminated. All limited partnerships and LLCs and minority partners are referred to herein collectively as partnerships and partners, respectively.

Surgery center profits and losses are allocated to the Company’s partners in proportion to their individual ownership percentages and reflected in the aggregate as minority interest. The partners of the Company’s surgery center partnerships typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each partner shares in the pre-tax earnings of the surgery center in which it is a partner. Accordingly, the minority interest in each of the Company’s partnerships is determined on a pre-tax basis and presented before earnings before income taxes in order to present that amount of earnings on which the Company must determine its tax expense. In addition, distributions from the Company’s partnerships are made to both the Company’s wholly owned subsidiaries and the partners on a pre-tax basis.

As described above, the Company is a holding company and its ability to service corporate debt is dependent upon distributions from its partnerships. Positive operating cash flows of individual centers are the sole source of cash used to make distributions to the Company’s wholly owned subsidiaries, as well as to the partners, which the Company is obligated to make on a monthly basis in accordance with each partnership’s partnership or operating agreement. Accordingly, distributions to the Company’s partners are included in the consolidated financial statements as a component of the Company’s cash flows from operating activities.

The Company operates in one reportable business segment, the ownership and operation of ambulatory surgery centers.

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2005 Annual Report on Form 10-K.

(2) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

4

Item 1. Financial Statements — (continued)

AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements — (continued)

The determination of contractual and bad debt allowances constitutes a significant estimate. Some of the factors considered by management in determining the amount of such allowances are the historical trends of the centers’ cash collections and contractual and bad debt write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics. Accordingly, net accounts receivable at September 30, 2006 and December 31, 2005 reflect allowances for contractual adjustments of $65,407,000 and $52,916,000, respectively, and allowances for bad debt expense of $5,905,000 and $6,189,000, respectively.

(3) Revenue Recognition

Center revenues consist of billing for the use of the centers’ facilities (the “facility fee”) directly to the patient or third-party payor, and in limited instances, billing for anesthesia services. Such revenues are recognized when the related surgical procedures are performed. Revenues exclude any amounts billed for physicians’ surgical services, which are billed separately by the physicians to the patient or third-party payor.

Revenues from centers are recognized on the date of service, net of estimated contractual allowances from third-party medical service payors including Medicare and Medicaid. During the nine months ended September 30, 2006 and 2005, the Company derived approximately 34% and 37%, respectively, of its revenues from Medicare and Medicaid. Concentration of credit risk with respect to other payors is limited due to the large number of such payors.

(4) Share-Based Compensation

In May 2006, the Company adopted the AmSurg Corp. 2006 Stock Incentive Plan. The Company also has options outstanding under the AmSurg Corp. 1997 Stock Incentive Plan, under which no additional options may be granted. Under these plans, the Company has granted non-qualified options to purchase shares of common stock to employees and outside directors from its authorized but unissued common stock. Options are granted at market value on the date of the grant and vest ratably over four years. Options have a term of 10 years from the date of grant. At September 30, 2006, 1,484,709 shares were authorized for grant and 1,404,184 shares were available for future option grants. Options outstanding and exercisable under these stock option plans as of September 30, 2006 and stock option activity for the nine months ended September 30, 2006 is summarized as follows:

						Weighted
						Average
				Weighted		Remaining		Aggregate
	Number			Average		Contractual		Intrinsic
	of			Exercise		Term		Value (1)
	Shares			Price		(in years)		(in thousands)
Outstanding at December 31, 2005		3,838,181		$	19.82		N/A		N/A
Options granted		1,089,032			21.45		N/A		N/A
Options exercised		(228,015	)		12.28		N/A	$	2,873
Options terminated		(141,450	)		24.13		N/A		N/A
Outstanding at September 30, 2006		4,557,748		$	20.45	7.3 years		$	13,326
Exercisable at September 30, 2006		2,555,667		$	18.72	6.4 years		$	11,175

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value received by the option holders on the exercise date or that would have been received by the option holders had all holders of outstanding options at September 30, 2006 exercised their options at the Company’s closing stock price on September 30, 2006.

5

Item 1. Financial Statements — (continued)

AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements — (continued)

Beginning January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment (Revised 2004).” This statement addresses the accounting for share-based payment transactions in which a company receives employee and non-employee services in exchange for the company’s equity instruments or liabilities that are based on the fair value of the company’s equity securities or may be settled by the issuance of these securities. SFAS No. 123R eliminates the ability to account for share-based compensation using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires that such transactions be accounted for using a fair value method. The Company adopted SFAS No. 123R using the modified prospective method, which does not require restatement of prior periods, and applies the Black-Scholes method of valuation in determining share-based compensation expense. The Company recorded share-based expense of $1,472,000 and $5,513,000 and a related tax benefit of $577,000 and $2,161,000 in the three and nine months ended September 30, 2006, respectively. Prior to 2006, the Company accounted for its stock option plans in accordance with the provisions of APB Opinion No. 25 and related interpretations. Under APB Opinion No. 25, compensation expense was recorded on the date of grant if the current market price of the underlying stock exceeded the exercise price.

SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under APB Opinion No. 25 and related interpretations. This requirement reduced our net operating cash flows and increased our financing cash flows by $1,052,000 for the nine months ended September 30, 2006.

As part of its SFAS No. 123R adoption, the Company examined concentrations of holdings, its historical patterns of option exercises and forfeitures as well as forward looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company identified three employee populations, consisting of senior executives, officers and all other recipients.

The expected volatility rate applied was estimated based on historical volatility. The expected term assumption applied is based on contractual terms, historical exercise and cancellation patterns and forward looking factors where present for each population identified. The risk-free interest rate used is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward looking factors for each population identified. As required under SFAS No. 123R, the Company will adjust the estimated forfeiture rate to its actual experience. The Company is precluded from paying dividends under its credit facility, and therefore, there is no expected dividend yield.

6

Item 1. Financial Statements — (continued)

AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements — (continued)

Applied assumptions for the three and nine months ended September 30, 2006 and applied assumptions and pro forma earnings and earnings per share for the three and nine months ended September 30, 2005, as if the fair value of all share-based awards on the date of grant are recognized over the vesting period by applying the Black-Scholes option pricing model, are presented below (dollars in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Applied assumptions:
Weighted average fair value of options at the date of grant	$	7.83		$	6.40		$	7.66		$	5.38
Dividends		—			—			—			—
Expected term/life of options in years		3.5			4.0			4.1			4.0
Forfeiture rate		13.5	%		15.0	%		11.2	%		15.0	%
Average risk-free interest rate		5.0	%		3.8	%		4.6	%		3.7	%
Volatility rate		37.1	%		37.8	%		37.7	%		33.3	%
Net earnings from continuing operations:
As reported	$	9,398		$	9,150		$	28,155		$	27,888
Pro forma total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		N/A			(819	)		N/A			(2,395	)
Pro forma		N/A		$	8,331			N/A		$	25,493
Net earnings:
As reported	$	9,362		$	8,361		$	28,191		$	26,694
Pro forma total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		N/A			(819	)		N/A			(2,395	)
Pro forma		N/A		$	7,542			N/A		$	24,299
Net earnings from continuing operations per common share:
Basic as reported	$	0.31		$	0.31		$	0.95		$	0.94
Basic pro forma		N/A		$	0.28			N/A		$	0.86
Diluted as reported	$	0.31		$	0.30		$	0.93		$	0.92
Diluted pro forma		N/A		$	0.28			N/A		$	0.85
Net earnings per common share:
Basic as reported	$	0.31		$	0.28		$	0.95		$	0.90
Basic pro forma		N/A		$	0.25			N/A		$	0.82
Diluted as reported	$	0.31		$	0.28		$	0.93		$	0.89
Diluted pro forma		N/A		$	0.25			N/A		$	0.81

As of September 30, 2006, the Company had total compensation cost of approximately $6,500,000 related to non-vested awards not yet recognized, which the Company expects to recognize systematically through 2010 and over a weighted-average period of 1.1 years.

7

Item 1. Financial Statements — (continued)

AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements — (continued)

(5) Acquisitions and Dispositions

During the nine months ended September 30, 2006, the Company, through wholly owned subsidiaries and in six separate transactions, acquired majority interests in seven ambulatory surgery centers. The aggregate amount paid for the acquisitions and other acquisition costs was $49,811,000. At September 30, 2006, the Company had contingent purchase price obligations relating to two of its 2006 acquisitions dependent upon final rulemaking by The Centers for Medicare and Medicaid Services related to a change in the rate setting methodology, payment rates, payment policies and the list of covered surgical procedures for ambulatory surgery centers. Until the final rules are effective, the Company will make bi-annual installment payments beginning July 2008 through December 2013 of a maximum aggregate amount of approximately $870,000.

During the three and nine months ended September 30, 2006, we classified the results of four surgery centers as discontinued operations. As of September 30, 2006, we had sold our interest in one of the surgery centers and the net assets of the remaining three were classified as held for sale. In October 2006, we completed the disposition of our interest in these remaining three surgery centers.

In 2005, we sold our interests in two surgery centers and one center was rendered non-operational by Hurricane Katrina and was abandoned. These centers’ results of operations and gains and losses associated with their dispositions have been classified as discontinued operations and the 2005 periods have been restated. The Company recognized an after tax loss for the disposition of discontinued interests in surgery centers of $56,000 for the three and nine months ended September 30, 2006 and $743,000 and $986,000 in the three and nine months ended September 30, 2005, respectively. The net earnings derived from the operations of the discontinued surgery centers for the three and nine months ended September 30, 2006 were $20,000 and $92,000, respectively and the net loss derived from the operations of the discontinued surgery centers for the three and nine months ended September 30, 2005 was $46,000 and $208,000, respectively. Results of operations of the combined discontinued surgery centers for the three and nine months ended September 30, 2006 and 2005 are as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006		2005
Revenues	$	897	$	1,480		$	3,000	$	5,389
Earnings (loss) before income taxes		34		(77	)		152		(342	)
Net earnings (loss)		20		(46	)		92		(208	)

(6) Intangible Assets

Amortizable intangible assets at September 30, 2006 and December 31, 2005 consisted of the following (in thousands):

	September 30, 2006						December 31, 2005
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
Deferred financing cost	$	2,482	$	1,448	$	1,034	$	2,083	$	1,304	$	779
Agreements not to compete		1,000		1,000		—		1,000		850		150
Total amortizable intangible assets	$	3,482	$	2,448	$	1,034	$	3,083	$	2,154	$	929

Estimated amortization of intangible assets for the remainder of 2006 and the following five years and thereafter is $54,000, $217,000, $217,000, $217,000, $216,000, $110,000 and $3,000, respectively.

8

Item 1. Financial Statements — (continued)

AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements — (continued)

The changes in the carrying amount of goodwill for the three and nine months ended September 30, 2006 and 2005 are as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Balance, beginning of period	$	371,362		$	298,069		$	347,424		$	267,759
Goodwill acquired during period		20,360			13,282			44,298			43,748
Goodwill disposed during period		(721	)		(65	)		(721	)		(221	)
Balance, end of period	$	391,001		$	311,286		$	391,001		$	311,286

At September 30, 2006 and December 31, 2005, other non-amortizable intangible assets related to non-compete arrangements were $4,528,000 and $1,923,000, respectively.

(7) Long-term Debt

The Company amended its revolving credit facility on July 28, 2006. The amended revolving credit facility permits the Company to borrow up to $200,000,000 to, among other things, finance its acquisition and development projects and any future stock repurchase programs at an interest rate equal to, at the Company’s option, the prime rate, or LIBOR plus 0.50% to 1.50%, or a combination thereof; provides for a fee of 0.15% to 0.30% of unused commitments; prohibits the payment of dividends; and contains certain covenants relating to the ratio of debt to net worth, operating performance and minimum net worth. Borrowings under the revolving credit facility mature in July 2011. At September 30, 2006, the Company had $123,300,000 outstanding under its revolving credit facility and was in compliance with all covenants.

The Company entered into an interest rate swap agreement in April 2006, the objective of which is to hedge exposure to the variability of the future expected cash flows attributable to the variable interest rate of a portion of the Company’s outstanding balance under its revolving credit facility. The interest rate swap has a notional amount of $50,000,000. The Company pays to the counterparty a fixed rate of 5.365% of the notional amount of the interest rate swap and receives a floating rate from the counterparty based on LIBOR. The interest rate swap matures in April 2011. In the opinion of management and as permitted by SFAS No. 133,“Accounting for Derivative Investments and Hedging Activities,”the interest rate swap (as a cash flow hedge) is a fully effective hedge. Payments or receipts of cash under the interest rate swap are shown as a part of operating cash flow, consistent with the interest expense incurred pursuant to the credit facility. The fair value of the swap of ($528,000), net of income taxes, is included as part of other long-term liabilities and represents the estimated amount the Company would have paid as of September 30, 2006 upon termination of the agreement based on a valuation obtained from the financial institution that is the counterparty to the interest rate swap agreement. The fair value of the interest rate swap decreased by $704,000 and $528,000, net of income taxes, during the three and nine months ended September 30, 2006, respectively, and, accordingly, accumulated other comprehensive income, net of income taxes, was ($528,000) at September 30, 2006.

(8) Commitments and Contingencies

The Company and its partnerships are insured with respect to medical malpractice risk on a claims-made basis. The Company also maintains insurance for general liability, director and officer liability and property. Certain policies are subject to deductibles. In addition to the insurance coverage provided, the Company indemnifies its officers and directors for actions taken on behalf of the Company and its partnerships. Management is not aware of any claims against it or its partnerships which would have a material financial impact.

The Company’s wholly owned subsidiaries, as general partners in the partnerships, are responsible for all debts incurred but unpaid by the partnerships. As manager of the operations of the partnership, the Company has the ability to limit potential liabilities by curtailing operations or taking other operating actions.

9

Item 1. Financial Statements — (continued)

AmSurg Corp.
Notes to the Unaudited Consolidated Financial Statements — (continued)

In the event of a change in current law, which would prohibit our minority partners’ current form of ownership in the partnerships, the Company would be obligated to purchase the minority partners’ interests in substantially all of the Company’s partnerships. The purchase price to be paid in such event would be determined by a predefined formula, as specified in the partnership or operating agreements. The Company believes the likelihood of a change in current law, which would trigger such purchases, was remote as of September 30, 2006.

(9) Recent Accounting Pronouncements

In June 2005, the Financial Accounting Standards Board (“FASB”) ratified the Emerging Issues Task Force (“EITF”) issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” EITF No. 04-5 provides a framework for determining whether a general partner controls, and should consolidate, a limited partnership or a similar entity. EITF No. 04-5 became effective for all limited partnerships formed after June 29, 2005 and for any limited partnerships in existence on June 29, 2005 that modify their partnership agreements after that date. EITF No. 04-5 became effective for all the Company’s partnerships on January 1, 2006. The adoption of the provisions of EITF No. 04-5 did not have a material effect on the Company’s consolidated financial position and consolidated results of operations.

In June 2006, the FASB issued FASB Interpretation (FIN) No. 48,“Accounting for Uncertainty in Income Taxes – an interpretation of SFAS No. 109,”which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes.”FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN No. 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for the Company beginning with the first quarter of 2008. The Company has not yet determined the impact of the adoption of SFAS No. 157 on its financial statements and note disclosures.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108 which provides guidance on materiality. SAB No. 108 states that registrants should use both a balance sheet and an income statement approach when quantifying and evaluating the materiality of a misstatement. In addition, SAB No. 108 contains guidance on correcting errors under the dual approach and provides transition guidance for correcting errors existing in prior years. The guidance in SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006 and will become effective for the Company as of December 31, 2006. The Company believes the adoption of SAB No. 108 will not have a material effect on its financial statements and note disclosures.

(10) Subsequent Events

Effective October 13, 2006, the Company through a wholly owned subsidiary, acquired a majority interest in an ambulatory surgery center for approximately $6,520,000.

In October 2006, the Company completed the sale of its majority interests in three surgery centers that were held for sale at September 30, 2006 and included in discontinued operations in all periods presented.

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains certain forward-looking statements (all statements other than with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described below, some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore there can be no assurance that the forward-looking statements included in this report will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events.

Forward-looking statements, and our liquidity, financial condition and results of operations, may be affected by the following risks and uncertainties and the other risks and uncertainties discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 under the caption “Business – Risk Factors,” as well as other unknown risks and uncertainties:

• the risk that payments from third-party payors may decrease or not increase as our costs increase;

• changes in the rate setting methodology, payment rates, payment policies and the list of covered surgical procedures for ambulatory surgery centers by the Centers for Medicare & Medicaid Services;

• our ability to maintain favorable relations with our physician partners;

• our ability to identify suitable acquisition and development candidates and negotiate and close transactions in a timely manner and on favorable terms;

• our ability to grow revenues at our existing centers;

• risks associated with weather and other factors that may affect our surgery centers located in Florida;

• our ability to manage the growth in our business;

• our ability to obtain the necessary financing or capital on terms satisfactory to us to execute our expansion strategy;

• our ability to compete for physician partners, managed care contracts, patients and strategic relationships;

• our ability to obtain and retain appropriate licensing approvals for our existing centers and centers currently under development and to comply with applicable laws;

• the risk of changes in legislation, regulations or regulatory interpretations that may negatively affect us;

• the risk of legislative or regulatory changes that would prohibit physician ownership in ambulatory surgery centers;

• risks associated with our status as a general partner of limited partnerships;

• our ability to obtain the necessary financing to fund the purchase of our physician partners’ minority interests in the event of a regulatory change that would require such a purchase; and

• risks associated with the valuation and tax deductibility of goodwill.

11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (continued)

Overview

We develop, acquire and operate practice-based ambulatory surgery centers in partnership with physician practice groups. As of September 30, 2006, we owned a majority interest (51% or greater) in 156 surgery centers, three of which were held for sale and included in discontinued operations. The following table presents the changes in the number of surgery centers in operation and centers under development and centers under letter of intent during the three and nine months ended September 30, 2006 and 2005. A center is deemed to be under development when a partnership or limited liability company has been formed with the physician group partner to develop the center.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Centers in operation, beginning of the period		153			140			149			128
New center acquisitions placed in operation		4			2			7			10
New development centers placed in operation		—			1			1			6
Centers sold		(1	)		(2	)		(1	)		(3	)
Centers in operation, end of the period		156			141			156			141
Centers under development, end of period		4			4			4			4
Development centers awaiting regulatory approval, end of period		3			—			3			—
Centers held for sale, end of period (1)		3			—			3			—
Average number of continuing centers in operation, during period		150			135			149			130
Centers under letter of intent, end of period		2			2			2			2

(1) In October 2006, we completed the disposition of these centers.

Of the continuing surgery centers in operation as of September 30, 2006, 101 centers perform gastrointestinal endoscopy procedures, 39 centers perform ophthalmology surgery procedures, five centers perform orthopedic procedures and eight centers perform procedures in more than one specialty. The other partner or member in each limited partnership or limited liability company is generally an entity owned by physicians who perform procedures at the center. We intend to expand primarily through the development and acquisition of additional practice-based ambulatory surgery centers in targeted surgical specialties and through future same-center growth. Our growth targets for 2006 include the acquisition or development of 12 to 15 additional surgery centers and the achievement of annual same-center revenue growth of 4% to 5%.

While we generally own 51% of the entities that own the surgery centers, our consolidated statements of earnings include 100% of the results of operations of the entities, reduced by the minority partners’ share of the net earnings or loss of the surgery center entities.

Sources of Revenues

Substantially all of our revenues are derived from facility fees charged for surgical procedures performed in our surgery centers. These fees vary depending on the procedure, but usually include all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications. Facility fees do not include the charges of the patient’s surgeon, anesthesiologist or other attending physicians, which are billed directly by the physicians. Our revenues are recorded net of estimated contractual allowances from third-party medical service payors.

Practice-based ambulatory surgery centers, such as those in which we own a majority interest, depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for services rendered to patients. The amount of payment a surgery center receives for its services may be adversely affected by market and cost factors, as well as other factors over which we have no control, including Medicare and Medicaid regulations and the cost containment and utilization decisions of third-party payors. We derived approximately 34% and 37% of our revenues in the nine months

12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (continued)

ended September 30, 2006 and 2005, respectively, from governmental healthcare programs, primarily Medicare, and the remainder from a wide mix of commercial payors and patient co-pays and deductibles. The Medicare program currently pays ambulatory surgery centers in accordance with predetermined fee schedules.

On February 8, 2006, the President signed into law the Deficit Reduction Act of 2005, which includes a provision that limits Medicare reimbursement for certain procedures performed at ambulatory surgery centers to the amounts paid to hospital outpatient departments under the Medicare outpatient department fee schedule for those procedures beginning in 2007. This act will negatively impact the reimbursement of after-cataract laser surgery procedures performed at our ophthalmology centers, the result of which will be an approximately $0.03 reduction in our net earnings per share for the 2007 fiscal year. We believe the after-cataract laser surgery procedure is the only procedure performed in significant numbers in our centers for which the current reimbursement rate exceeds the Medicare outpatient department fee schedule amount.

On August 8, 2006, the Centers for Medicare and Medicaid Services, or CMS, announced a proposed rule for revising the payment system for services provided in ambulatory surgery centers. The key points of the proposed rule as it relates to us are:

• CMS’s estimate that the revised ambulatory surgery center rates would be 62% of the corresponding rates of the Hospital Outpatient Prospective Payment System;

• a scheduled phase in of the revised rates over two years, beginning January 2, 2008;

• an annual increase in the ambulatory surgery center rates beginning in 2010 based on the consumer price index; and

• an expansion of the approved list of procedures that could safely be performed in an ambulatory surgery center.

CMS is accepting comments on the proposed rule through November 6, 2006 and has stated that it expects to finalize the rule in the spring of 2007, with an expected implementation date of January 1, 2008.

The proposed rule, as written, would result in a significant reduction in the reimbursement rates for gastroenterology procedures, which make up approximately 75% of the procedures performed by our surgery centers. There would also be reductions to the reimbursement of certain ophthalmology and pain procedures. Based on our 2006 procedure mix, payer mix and volumes, we estimate the proposed rule would reduce our net earnings per diluted share in 2008 by approximately $0.15 and our 2009 net earnings per diluted share by approximately $0.26.

Critical Accounting Policies

A summary of significant accounting policies is disclosed in our 2005 Annual Report on Form 10-K. Our critical accounting policies are further described under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2005 Annual Report on Form 10-K. There have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2005.

Results of Operations

Our revenues are directly related to the number of procedures our surgery centers perform. Our overall growth in procedure volume is impacted directly by the increase in the number of surgery centers in operation and the growth in procedure volume at existing centers. We increase our number of surgery centers through both acquisitions and developments. Procedure growth at any existing center may result from additional contracts entered into with third-party payors, increased market share of the associated medical practice of our physician partners, additional physicians utilizing the center and/or scheduling and operating efficiencies gained at the surgery center. A significant measurement of how much our revenues grow from year to year for existing centers is our same-center revenue percentage. We define our same-center group each year as those centers which contain full year-to-date operations in both comparable reporting periods, including the expansion of the number of operating centers within a partnership or limited liability company. We expect our annual same-center revenue growth to be 4% to 5% in 2006. Our 2006 same center group, comprised of 126 centers, had revenue growth of 4% and 5% respectively, in the three and nine months ended September 30, 2006. We primarily attribute the revenue growth to procedure growth, including significant same-center revenue growth at two large de novo centers that had start-up volume for the first half of 2005.

Expenses directly and indirectly related to procedures performed at our surgery centers include clinical and administrative salaries and benefits, supply cost and other operating expenses such as linen cost, repair and maintenance of equipment,

13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (continued)

billing fees and bad debt expense. The majority of our corporate salary and benefits cost is associated directly with the number of centers we own and manage and tends to grow in proportion to the growth of our centers in operation. Our centers and corporate offices also incur costs that are more fixed in nature, such as lease expense, legal fees, property taxes, utilities and depreciation and amortization.

Surgery center profits and losses are allocated to our minority partners in proportion to their individual ownership percentages and reflected in the aggregate as minority interest. The minority partners of our surgery center limited partnerships and limited liability companies typically are organized as limited partnerships or limited liability companies that are not subject to federal income tax. Each minority partner shares in the pre-tax earnings of the surgery center of which it is a minority partner. Accordingly, the minority interest in each of our surgery center limited partnerships and limited liability companies is determined on a pre-tax basis and presented before earnings before income taxes in order to present that amount of earnings on which we must determine our tax expense.

Our interest expense results primarily from our borrowings used to fund acquisition and development activity, as well as interest incurred on capital leases.

We file a consolidated federal income tax return and numerous state income tax returns with varying tax rates. Our income tax expense reflects the blending of these rates.

The following table shows certain statement of earnings items expressed as a percentage of revenues for the three and nine months ended September 30, 2006 and 2005:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
Salaries and benefits		29.7			28.4			29.7			27.8
Supply cost		11.5			11.6			11.6			11.1
Other operating expenses		20.3			19.8			19.6			19.7
Depreciation and amortization		3.9			4.0			3.7			3.9
Total operating expenses		65.4			63.8			64.6			62.5
Operating income		34.6			36.2			35.4			37.5
Minority interest		19.4			19.8			20.4			20.5
Interest expense, net of interest income		1.7			1.1			1.6			1.0
Earnings from continuing operations before income taxes		13.5			15.3			13.4			16.0
Income tax expense		5.3			6.0			5.2			6.3
Net earnings from continuing operations		8.2			9.3			8.2			9.7
Discontinued operations:
Earnings (loss) from operations of discontinued interests in surgery centers, net of income tax expense (benefit)		—			—			—			(0.1	)
Loss for disposition of discontinued interests in surgery centers, net of income tax benefit		—			(0.8	)		—			(0.3	)
Net (loss) earnings from discontinued operations		—			(0.8	)		—			(0.4	)
Net earnings		8.2	%		8.5	%		8.2	%		9.3	%

14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (continued)

Revenues increased $15.8 million and $59.8 million, or 16% and 21%, to $114.2 million and $345.7 million in the three and nine months ended September 30, 2006, respectively, from $98.4 million and $285.8 million in the comparable 2005 periods. The additional revenues resulted primarily from:

• 19 additional centers acquired or opened in 2005, which contributed $7.1 million and $33.2 million of additional revenues in the three and nine months ended September 30, 2006, respectively, due to having full periods of operations;

• $3.2 million and $14.9 million of revenue growth for the three and nine months ended September 30, 2006, respectively, recognized by the 126 centers in our 2006 same-center group, reflecting a 5% and 6% increase, respectively, primarily as a result of procedure growth; and

• seven centers acquired and one development center opened during the nine months ended September 30, 2006, which generated $5.5 million and $11.8 million in revenue during the three and nine months ended September 30, 2006, respectively.

Our procedures increased by 19,756 and 93,286, or 10% and 18%, to 207,953 and 635,760 in the three and nine months ended September 30, 2006, respectively, from 188,197 and 542,474 in the comparable 2005 periods. The difference between our revenue growth and our procedure growth was the result of an increase in our average revenue per procedure because of the increase in the number of orthopedic, eye and multi-specialty centers in operation since September 2005 and a change in the mix of procedures in our same-center group.

Staff at newly acquired and developed centers, as well as the additional staffing required at existing centers due to increased volume, resulted in a 17% and 20% increase in salaries and benefits at our surgery centers in the three and nine months ended September 30, 2006 compared to the comparable 2005 periods. We experienced a 40% and 82% increase in salaries and benefits at our corporate offices during the three and nine months ended September 30, 2006, respectively, over the 2005 comparable periods. The increase in corporate office salaries and benefits in the three and nine months ended September 30, 2006 was primarily due to share-based compensation expense of approximately $1.5 million and $5.5 million, respectively, related to the adoption of Statement of Financial Accounting Standards, or SFAS, No. 123R, “Share-Based Payment (Revised 2004),” effective January 1, 2006 (see Recent Accounting Pronouncements), increased employee incentive compensation expense for our corporate employees and expense associated with additional corporate employees needed to manage our additional centers in operation during the three and nine months ended September 30, 2006 over the comparable 2005 periods. Salaries and benefits increased in total by 21% and 29% to $33.9 million and $102.8 million in the three and nine months ended September 30, 2006, respectively, from $28.0 million and $79.6 million in the comparable 2005 periods. Salaries and benefits as a percentage of revenues increased during the three and nine months ended September 30, 2006 over the comparable 2005 periods due to the impact of share-based compensation expense. Based on our current estimates, we expect to incur additional share-based compensation expense of approximately $1.5 million during the fourth quarter of 2006.

Supply cost was $13.2 million and $40.2 million in the three and nine months ended September 30, 2006, respectively, an increase of $1.7 million and $8.4 million, or 15% and 26%, respectively, over supply cost in the comparable 2005 periods. This increase was the result of additional procedure volume. Our average supply cost per procedure during the three and nine months ended September 30, 2006 was $63, compared to $61 and $59, respectively, during the comparable 2005 periods. During the three and nine months ended September 30, 2006, certain surgery centers performed cataract procedures that included a reimbursable presbyopia correcting lens, which has a higher cost and increased our average cost per procedure during the 2006 periods as compared to the 2005 periods, during which these type of cataract procedures were not performed. In addition, the increase in the number of orthopedic and multi-specialty centers in operation since September 2005 resulted in an increase in supply cost per procedure due to the higher supply cost incurred at these types of centers.

15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (continued)

Other operating expenses increased $3.7 million, or 19%, to $23.2 million in the three months ended September 30, 2006 over the comparable 2005 period and $11.3 million, or 20%, to $67.5 million in the nine months ended September 30, 2006 over the comparable 2005 period. The additional expense in the 2006 periods resulted primarily from:

• 19 additional centers acquired or opened during 2005, which resulted in an increase of $1.4 million and $6.2 million in other operating expenses due to having a full period of operations in the three and nine months ended September 30, 2006, respectively;

• an increase of $1.0 million and $2.3 million in other operating expenses from our 2006 same-center group in the three and nine months ended September 30, 2006, respectively, resulting primarily from additional procedure volume and general inflationary cost increases; and

• seven centers acquired and one development center opened in the three and nine months ended September 30, 2006, which resulted in an increase in other operating expenses of $1.1 million and $2.4 million, respectively.

Depreciation and amortization expense increased $400,000 and $1.5 million, or 9% and 14%, in the three and nine months ended September 30, 2006, respectively, from the comparable 2005 periods, primarily as a result of centers acquired since September 2005 and the newly developed surgery centers in operation, which have a higher level of depreciation expense due to their construction costs.

We anticipate further increases in operating expenses in 2006, primarily due to additional start-up centers expected to be placed in operation and additional acquired centers. Typically, a start-up center will incur start-up losses while under development and during its initial months of operation and will experience lower revenues and operating margins than an established center. This typically continues until the case load at the center grows to a more normal operating level, which generally is expected to occur within 12 months after the center opens. At September 30, 2006, we had four centers under development, three additional development centers awaiting approval of certificates of need and two start-up centers that had been open for less than one year.

Minority interest in earnings from continuing operations before income taxes for the three and nine months ended September 30, 2006 increased $2.7 million and $12.0 million, or 14% and 21%, respectively, from the comparable 2005 periods, primarily as a result of minority partners’ interest in earnings at surgery centers recently added to operations. As a percentage of revenues, minority interest remained reasonably consistent between the 2006 and 2005 periods.

Interest expense increased approximately $800,000 and $2.8 million, or 75% and 100%, during the three and nine months ended September 30, 2006, respectively, over the comparable 2005 periods due to additional long-term debt outstanding as a result of acquisition activity, as well as an increase in interest rates. See – “Liquidity and Capital Resources.”

We recognized income tax expense from continuing operations of $6.1 million and $18.2 million in the three and nine months ended September 30, 2006, respectively, and $5.9 million and $18.0 million in the comparable 2005 periods. Our effective tax rate for the nine months ended September 30, 2006 and the comparable 2005 period was 39.2% of earnings before income taxes and differed from the federal statutory income tax rate of 35%, primarily due to the impact of state income taxes. Because we deduct goodwill amortization for tax purposes only, prior to 2006, a significant portion of our overall income tax expense was deferred, which results in a continuing increase in our deferred tax liability, which would only be due in part or in whole upon the disposition of a portion or all of our surgery centers. While we continue to recognize this increase in deferred tax liability, beginning in 2006 deferred tax assets established as a result of expensing share based compensation began to reduce the overall net increase in deferred taxes and net deferred tax liabilities.

During the three and nine months ended September 30, 2006, we classified the results of four surgery centers as discontinued operations. As of September 30, 2006, we had sold our interest in one of the surgery centers and the net assets of the remaining three were classified as held for sale. In October 2006, we completed the disposition of our interest in these remaining three surgery centers. In 2005, we sold our interests in two surgery centers and one center was rendered non-operational by Hurricane Katrina and was abandoned. These centers’ results of operations and gains and losses associated with their dispositions have been classified as discontinued operations and the 2005 periods have been restated. We recognized an after tax loss for the disposition of discontinued interests in surgery centers of $56,000 for the three and nine months ended September 30, 2006. The net earnings derived from the operations of the discontinued surgery centers for the three and nine months ended September 30, 2006 was $20,000 and $92,000, respectively and the net loss derived from the operations of the discontinued surgery centers for the three and nine months ended September 30, 2005 was $46,000 and $208,000, respectively.

16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (continued)

Liquidity and Capital Resources

At September 30, 2006, we had working capital of $69.0 million compared to $61.1 million at December 31, 2005. Operating activities for the nine months ended September 30, 2006 generated $54.2 million of cash flow from operations compared to $52.0 million in the comparable 2005 period. The increase in operating cash flow activity resulted primarily from higher net earnings as of September 30, 2006, excluding non-cash share-based compensation expense, compared to the 2005 period. Cash and cash equivalents at September 30, 2006 and December 31, 2005 were $21.3 million and $20.5 million, respectively.

The principal source of our operating cash flow is the collection of accounts receivable from governmental payors, commercial payors and individuals. Each of our surgery centers bills for services as delivered, either electronically or in paper form, usually within several days following the delivery of the procedure. Generally, unpaid amounts that are 30 days past due are rebilled based on a standard set of procedures. If amounts remain uncollected after 60 days, our surgery centers proceed with a series of late-notice notifications until amounts are either collected, contractually written-off in accordance with contracted rates or determined to be uncollectible, typically after 90 to 120 days. Receivables determined to be uncollectible are written off and such amounts are applied to our estimate of allowance for bad debts as previously established in accordance with our policy for allowance for bad debt expense. The amount of actual write-offs of account balances for each of our surgery centers is continuously compared to established allowances for bad debt to ensure that such allowances are adequate. At September 30, 2006 and December 31, 2005, our accounts receivable represented 43 and 37 days of revenue outstanding, respectively. The increase in our days outstanding is due in part to a CMS imposed delay in the reimbursement of Medicare claims to healthcare providers during the last two weeks of September 2006.

During the nine months ended September 30, 2006, we had total capital expenditures of $63.4 million, which included:

• $49.8 million for acquisitions of interests in three practice-based ambulatory surgery centers;

• $11.3 million for new or replacement property at existing surgery centers, including $800,000 in new capital leases; and

• $3.1 million for new start-up surgery centers.

Our cash flow from operations was sufficient to fund approximately 85% of our cash obligations for our acquisition and development activity, and we received approximately $139,000 from capital contributions by our minority partners to fund their proportionate share of development activity. At September 30, 2006, we had unfunded construction and equipment purchase commitments for centers under development or under renovation of approximately $300,000, which we intend to fund through additional borrowings of long-term debt, operating cash flow and capital contributions by minority partners.

During the nine months ended September 30, 2006, notes receivable decreased by approximately $1.9 million, primarily due to payments on a note receivable related to the sale of a surgery center in 2004. The note is secured by a pledge of a 51% ownership interest in the center, is guaranteed by the physician partners at the center and is due in installments through 2009. The balance of this note and our other notes receivable at September 30, 2006 was $7.1 million.

During the nine months ended September 30, 2006, we had net borrowings on long-term debt of $3.9 million and at September 30, 2006, we had $123.3 million outstanding under our revolving credit facility. In July 2006, we amended our credit facility to permit us to borrow up to $200 million to, among other things, finance our acquisition and development projects and any future stock repurchase programs at a rate equal to, at our option, the prime rate, LIBOR plus 0.50% to 1.50% or a combination thereof. The loan agreement provides for a fee of 0.15% to 0.30% of unused commitments, prohibits the payment of dividends and contains covenants relating to the ratio of debt to net worth, operating performance and minimum net worth. We were in compliance with all covenants at September 30, 2006. Borrowings under the revolving credit facility are due in July 2011 and are secured primarily by a pledge of the stock of our subsidiaries that serve as the general partners of our limited partnerships and our partnership and membership interests in the limited partnerships and limited liability companies.

During the nine months ended September 30, 2006, we received approximately $2.8 million from the exercise of options and issuance of common stock under our employee stock option plans. The tax benefit received from the exercise of those options was approximately $1.1 million.

At September 30, 2006, we had contingent purchase price obligations relating to two of our 2006 acquisitions dependent upon final rulemaking by CMS related to a change in the rate setting methodology, payment rates, payment policies and the

17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (continued)

list of covered surgical procedures for ambulatory surgery centers (see Sources of Revenues). Until the final rules are effective, we will make bi-annual installment payments beginning July 2008 through December 2013 of a maximum aggregate amount of approximately $870,000. We intend to fund these obligations through additional borrowings of long-term debt. These contingent liabilities are not reflected as liabilities in our consolidated balance sheet as of September 30, 2006 but are described in note 5 to the consolidated financial statements.

Recent Accounting Pronouncements

Effective January 1, 2006, we adopted SFAS No. 123R. This statement addresses the accounting for share-based payment transactions in which a company receives employee and non-employee services in exchange for the company’s equity instruments or liabilities that are based on the fair value of the company’s equity securities or may be settled by the issuance of these securities. SFAS No. 123R eliminates the ability to account for share-based compensation using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair value method. We adopted SFAS No. 123R using the modified prospective method and apply the Black-Scholes method of valuation in determining share-based compensation expense. We recorded share-based compensation cost of approximately $5.5 million in the nine months ended September 30, 2006.

In June 2005, the Financial Accounting Standards Board, or FASB, ratified the Emerging Issues Task Force, or EITF, issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” EITF No. 04-5 provides a framework for determining whether a general partner controls, and should consolidate, a limited partnership or a similar entity. EITF No. 04-5 became effective for all limited partnerships formed after June 29, 2005 and for any limited partnerships in existence on June 29, 2005 that modify their partnership agreements after that date. EITF No. 04-5 became effective for all our partnerships beginning January 1, 2006. The adoption of the provision of EITF No. 04-5 did not have a material effect on our consolidated financial position and consolidated results of operations.

In June 2006, the FASB issued FASB Interpretation, or FIN, No. 48,“Accounting for Uncertainty in Income Taxes – an interpretation of SFAS No. 109,”which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes.”FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN No. 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for us beginning with the first quarter of 2008. We have not yet determined the impact of the adoption of SFAS No. 157 on our financial statements and note disclosures.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin, or SAB No. 108 which provides guidance on materiality. SAB No. 108 states that registrants should use both a balance sheet and an income statement approach when quantifying and evaluating the materiality of a misstatement. In addition, SAB No. 108 contains guidance on correcting errors under the dual approach and provides transition guidance for correcting errors existing in prior years. The guidance in SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006 and will become effective for us as of December 31, 2006. We believe the adoption of SAB No. 108 will not have a material effect on our financial statements and note disclosures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We utilize a balanced mix of maturities along with both fixed-rate and variable-rate debt to manage our exposures to changes in interest rates. Our debt instruments are primarily indexed to the prime rate or LIBOR. We entered into an interest rate swap agreement in April 2006 in which $50.0 million of the principal amount outstanding under the revolving credit facility will bear interest at a fixed rate of 5.365% for the period from April 28, 2006 to April 28, 2011. Although there can be no assurances that interest rates will not change significantly, we do not expect changes in interest rates to have a material effect on our income or cash flows in 2006.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act) as of September 30, 2006. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures effectively and timely provide them with material information relating to our company and its consolidated subsidiaries required to be disclosed in the reports we file under the Exchange Act.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Part II

Item 1. Legal Proceedings.

Not applicable.

Item 1A. Risk Factors.

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

Exhibits

11	Earnings Per Share
31.1	Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a)
31.2	Certification of Senior Vice President, Chief Financial Officer and Secretary pursuant to Rule 13a-14(a)
32.1	Section 1350 Certification

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMSURG CORP.
Date: November 3, 2006	By:	/s/ Claire M. GulmiClaire M. Gulmi
		Executive Vice President and
		Chief Financial Officer of the Company
		(Principal Financial and Duly Authorized Officer)

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