Amsurg (AMSG) 10-Q 2007 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, 2007

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 filerþ     Accelerated filero      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 1, 2007 there were outstanding 31,079,356 shares of the registrant’s Common Stock, no par value.

Table of Contents to Form 10-Q for the Nine Months Ended September 30, 2007

Part I
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3. Quantitative and Qualitative Disclosures About Market Risk	17
Item 4. Controls and Procedures	17
Item 4T. Controls and Procedures	17
Part II
Item 1. Legal Proceedings	17
Item 1A. Risk Factors	17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3. Defaults Upon Senior Securities	17
Item 4. Submission of Matters to a Vote of Security Holders	17
Item 5. Other Information	17
Item 6. Exhibits	18
Signature	19
Ex-11 Earnings Per Share
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO & CFO

i

Part I

Item 1. Financial Statements

AmSurg Corp.
Consolidated Balance Sheets
September 30, 2007 (unaudited) and December 31, 2006
(Dollars in thousands)

	September 30,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	19,922		$	20,083
Accounts receivable, net of allowance of $7,429 and $6,628, respectively		60,415			51,546
Supplies inventory		6,248			6,183
Deferred income taxes		1,468			915
Prepaid and other current assets		16,745			15,276
Total current assets		104,798			94,003
Long-term receivables and other assets		2,763			4,091
Property and equipment, net		96,138			89,175
Intangible assets, net		483,597			402,763
Total assets	$	687,296		$	590,032
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	4,139		$	3,367
Accounts payable		10,876			11,098
Accrued salaries and benefits		13,780			11,534
Other accrued liabilities		2,736			1,413
Total current liabilities		31,531			27,412
Long-term debt		149,989			123,948
Deferred income taxes		41,205			39,350
Other long-term liabilities		12,812			3,873
Minority interest		58,523			52,341
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, 30,862,480 and 29,933,932 shares outstanding, respectively		164,136			143,077
Accumulated other comprehensive loss, net of income taxes		(752	)		(470	)
Retained earnings, net of ($634) cumulative adjustment to beginning retained earnings on January 1, 2007 for change in accounting for uncertainty in income taxes		229,852			200,501
Total shareholders’ equity		393,236			343,108
Total liabilities and shareholders’ equity	$	687,296		$	590,032

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, 2007 and 2006
(In thousands, except earnings per share)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues	$	132,103		$	113,546		$	390,198		$	343,260
Operating expenses:
Salaries and benefits		38,988			33,757			115,169			102,288
Supply cost		15,514			13,004			44,970			39,631
Other operating expenses		26,694			22,987			79,262			66,850
Depreciation and amortization		4,874			4,303			14,286			12,698
Total operating expenses		86,070			74,051			253,687			221,467
Operating income		46,033			39,495			136,511			121,793
Minority interest		26,003			22,137			77,292			70,117
Interest expense, net of interest income		2,215			1,924			6,899			5,669
Earnings from continuing operations before income taxes		17,815			15,434			52,320			46,007
Income tax expense		6,916			6,050			20,230			18,035
Net earnings from continuing operations		10,899			9,384			32,090			27,972
Discontinued operations:
(Loss) earnings from operations of discontinued interests in surgery centers, net of income tax (benefit) expense		(204	)		34			(73	)		275
Loss on disposal of discontinued interest in surgery centers, net of income tax benefit		(705	)		(56	)		(558	)		(56	)
Net (loss) earnings from discontinued operations		(909	)		(22	)		(631	)		219
Net earnings	$	9,990		$	9,362		$	31,459		$	28,191
Basic earnings per common share:
Net earnings from continuing operations	$	0.35		$	0.31		$	1.05		$	0.94
Net earnings	$	0.32		$	0.31		$	1.03		$	0.95
Diluted earnings per common share:
Net earnings from continuing operations	$	0.35		$	0.31		$	1.04		$	0.92
Net earnings	$	0.32		$	0.31		$	1.02		$	0.93
Weighted average number of shares and share equivalents outstanding:
Basic		30,778			29,875			30,455			29,787
Diluted		31,175			30,423			30,922			30,371

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, 2007 and 2006
(In thousands)

	Nine Months Ended
	September 30,
	2007			2006
Cash flows from operating activities:
Net earnings	$	31,459		$	28,191
Adjustments to reconcile net earnings to net cash flows provided by operating activities:
Minority interest		77,292			70,117
Distributions to minority partners		(75,305	)		(66,793	)
Share-based compensation		3,324			5,513
Depreciation and amortization		14,286			12,698
Deferred income taxes		6,180			3,843
Excess tax benefit from share-based compensation		(2,809	)		(1,052	)
Net loss on sale and impairment of long-lived assets		1,518			91
Decrease (increase) in cash and cash equivalents, net of effects of acquisitions and dispositions, due to changes in:
Accounts receivable, net		(4,598	)		(3,511	)
Supplies inventory		223			(208	)
Prepaid and other current assets		1,218			656
Accounts payable		(341	)		(958	)
Accrued expenses and other liabilities		4,398			5,595
Other, net		(282	)		15
Net cash flows provided by operating activities		56,563			54,197
Cash flows from investing activities:
Acquisition of interests in surgery centers		(84,769	)		(49,811	)
Acquisition of property and equipment		(16,533	)		(13,603	)
Proceeds from sale of surgery center		1,885			597
Decrease in long-term receivables		1,918			1,943
Net cash flows used in investing activities		(97,499	)		(60,874	)
Cash flows from financing activities:
Proceeds from long-term borrowings		91,264			86,176
Repayment on long-term borrowings		(66,897	)		(82,266	)
Proceeds from issuance of common stock upon exercise of stock options		13,452			2,790
Proceeds from capital contributions by minority partners		154			139
Excess tax benefit from share-based compensation		2,809			1,052
Financing cost incurred		(7	)		(399	)
Net cash flows provided by financing activities		40,775			7,492
Net (decrease) increase in cash and cash equivalents		(161	)		815
Cash and cash equivalents, beginning of period		20,083			20,496
Cash and cash equivalents, end of period	$	19,922		$	21,311

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 unaudited 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 as partnerships and partners, respectively.

Surgery center profits and losses are allocated to the Company’s partners in proportion to their 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 consolidated 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 unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2006 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, 2007 and December 31, 2006 reflect allowances for contractual adjustments of $70,329,000 and $63,721,000, respectively, and allowances for bad debt expense of $7,429,000 and $6,628,000, 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, 2007 and 2006, the Company derived approximately 33% and 34%, 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. Prior to 2007, granted options vested ratably over four years. Options granted in 2007 vest four years from the grant date. Options have a term of ten years from the date of grant. At September 30, 2007, 1,991,031 shares were authorized for grant and 1,497,221 shares were available for future option grants. Options outstanding and exercisable under these stock option plans as of September 30, 2007 and stock option activity for the nine months ended September 30, 2007 is summarized as follows:

						Weighted
						Average
				Weighted		Remaining
	Number			Average		Contractual
	of			Exercise		Term
	Shares			Price		(in years)
Outstanding at December 31, 2006		4,589,532		$	20.46		7.1
Options granted		360,293			22.81
Options exercised with aggregate intrinsic value of $7,639,000		(851,242	)		15.80
Options terminated		(176,288	)		23.16
Outstanding at September 30, 2007 with aggregate intrinsic value of $9,292,000		3,922,295		$	21.57		6.9
Exercisable at September 30, 2007 with aggregate intrinsic value of $8,139,000		1,387,922		$	20.58		6.0

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, 2007 exercised their options at the Company’s closing stock price on September 30, 2007.

5

Item 1. Financial Statements — (continued)

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

In the nine months ended September 30, 2007, the Company issued 75,322 shares of restricted stock to certain employees under the 2006 Stock Incentive Plan at a fair value of $22.84 per share, which vest four years from the date of grant for all employees then in service, and 4,473 shares of restricted stock to outside directors at a fair value of $23.49 per share, which vest over two years from the date of grant and are restricted from trading for five years from the date of grant. The fair value of restricted stock was determined based on the closing bid price of the Company’s common stock on the grant date. In addition, 2,489 shares of restricted stock issued to employees at a fair value of $22.84 per share were cancelled during the nine months ended September 30, 2007. At September 30, 2007, 76,942 shares of unvested restricted stock were outstanding, including 4,109 shares issued to outside directors.

The Company accounts for share-based payment transactions in which the 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 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, "Share-Based Payment (Revised 2004).” The Company recorded share-based expense of $1,052,000 and $1,472,000 in the three months ended September 30, 2007 and 2006, respectively, and $3,324,000 and $5,513,000 in the nine months ended September 30, 2007 and 2006, respectively.

The Company, using the Black-Scholes option pricing model for all stock option awards on the date of grant, applied the following assumptions (no awards were made during the three months ended September 30, 2007):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007			2006
Applied assumptions:
Weighted average fair value of options at the date of grant		—	$	7.8	3	$	8.6	1	$	7.6	6
Dividends		—		—			—			—
Expected term/life of options in years		—		3.5			4.8			4.1
Forfeiture rate		—		13.5	%		0.1	%		11.2	%
Average risk-free interest rate		—		5.0	%		4.8	%		4.6	%
Volatility rate		—		37.1	%		34.4	%		37.7	%

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 of employee 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 of employee 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.

(5) Acquisitions and Dispositions

During the nine months ended September 30, 2007, the Company, through five wholly owned subsidiaries and in 14 separate transactions, acquired majority interests in 15 physician practice-based surgery centers. The aggregate amount paid for the acquisition and other acquisition costs was approximately $84,769,000, which was funded primarily by borrowings under the Company’s credit facility.

At September 30, 2007, the Company had contingent purchase price obligations relating to seven acquisitions completed in 2006 and 2007. These obligations were dependent upon final rulemaking by The Centers for Medicare and Medicaid Services (“CMS”) related to a change in the rate setting methodology, payment rates, payment policies and the list of covered surgical procedures for ambulatory surgery centers. On July 16, 2007, CMS announced a final rule to be effective January 1, 2008 based on payment rates to be finalized in November 2007. As of September 30, 2007, the Company recognized additional purchase price payable of approximately $1,425,000 in other long-term

6

Item 1. Financial Statements — (continued)

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

liabilities related to the additional contingent purchase price payable that the Company estimates it will be required to pay once the rule is effective.

During 2007, the Company sold its interest in a surgery center and closed a surgery center, following management’s assessment of the limited growth opportunities at these centers. The results of operations of the centers have been classified as discontinued operations and the 2006 periods have been restated. Results of operations of the combined discontinued surgery centers for the three and nine months ended September 30, 2007 and 2006 are as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007			2006
Revenues	$	4		$	1,539	$	1,564		$	5,414
(Loss) earnings before income taxes		(335	)		57		(119	)		453
Net (loss) earnings		(204	)		34		(73	)		275

(6) Intangible Assets

Amortizable intangible assets at September 30, 2007 and December 31, 2006 consisted of the following (in thousands):

	September 30, 2007						December 31, 2006
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
Deferred financing cost	$	2,510	$	1,669	$	841	$	2,503	$	1,503	$	1,000
Agreements not to compete		1,000		1,000		—		1,000		1,000		—
Total amortizable intangible assets	$	3,510	$	2,669	$	841	$	3,503	$	2,503	$	1,000

Estimated amortization of intangible assets for the remainder of 2007 and the following five years is $57,000, $224,000, $224,000, $223,000, $112,000 and $1,000, respectively.

The changes in the carrying amount of goodwill for the three and nine months ended September 30, 2007 and 2006 are as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Balance, beginning of period	$	448,020		$	371,362		$	397,147		$	347,424
Goodwill acquired (adjusted) during period		27,910			20,360			79,834			44,298
Goodwill disposed during period		(207	)		(721	)		(1,258	)		(721	)
Balance, end of period	$	475,723		$	391,001		$	475,723		$	391,001

At September 30, 2007 and December 31, 2006, other non-amortizable intangible assets related to non-compete arrangements were $7,033,000 and $4,616,000, respectively.

7

Item 1. Financial Statements — (continued)

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

(7) Long-term Debt

The Company’s revolving credit facility, as amended on October 29, 2007, permits the Company to borrow up to $300,000,000 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, 2007, the Company had $139,500,000 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 swap had a negative fair value of $1,236,000, is included as part of other long-term liabilities and represents the estimated amount the Company would have paid as of September 30, 2007 upon termination of the agreement based on a valuation obtained from the financial institution that is the counterparty to the interest rate swap agreement. A decrease of $679,000 and $282,000, net of income taxes, in the fair value of the interest rate swap agreement was recognized in accumulated other comprehensive loss during the three and nine months ended September 30, 2007, respectively. A decrease of $704,000 and $528,000, net of income taxes, in the fair value of the interest rate swap agreement was recognized in accumulated other comprehensive loss during the three and nine months ended September 30, 2006, respectively.

(8) Impairment of Long-lived Assets

During the nine months ended September 30, 2007, the Company recorded in other operating expenses a charge of approximately $1,000,000 for an impairment of long-lived assets associated with real estate held and used by one of its surgery centers. The surgery center anticipates selling and relocating its facility by 2008, and the impairment charge was necessary in order to record the property while held and used at its fair value based on recent comparable property sales within the center’s market.

(9) Income Taxes

In June 2006, the Financial Accounting Standards Board (“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 adopted the provisions of FIN No. 48 on January 1, 2007. As of the adoption date, the Company had no unrecognized benefits that, if recognized, would affect its effective tax rate. Except for a cumulative adjustment in accordance with FIN No. 48, it is the Company’s policy to recognize interest accrued and penalties, if any, related to unrecognized benefits as income tax expense in its statement of earnings. Approximately $1,100,000 of accrued interest was established as a FIN No. 48 liability on January 1, 2007 through a tax affected adjustment to beginning retained earnings of $634,000. Additionally, as of January 1, 2007, the Company reclassified approximately $4,900,000 from long-term deferred tax liability to other long-term liabilities to reflect the amount of its tax-effected unrecognized benefits.

8

Item 1. Financial Statements — (continued)

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

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations for years prior to 2003. The Company does not expect significant changes to its tax positions or FIN No. 48 liability during the next twelve months.

(10) 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 the Company or its partnerships which would have a material financial impact.

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

In the event of a change in current law, which would prohibit the physicians’ current form of ownership in the partnerships, the Company would be obligated to purchase the physicians’ 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 each partnership or operating agreement. The Company believes the likelihood of a change in current law, which would trigger such purchases, was remote as of September 30, 2007.

(11) Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 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 February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities.”SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 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. 159 on its financial statements and note disclosures.

(12) Subsequent Events

In October 2007, the Company, through a wholly owned subsidiary and in separate transactions, acquired majority interests in three physician practice-based ambulatory surgery centers for approximately $11,800,000.

9

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, 2006 under “Item 1A. — Risk Factors,” as well as other unknown risks and uncertainties:

• changes in the reimbursement system for outpatient surgical procedures under the Medicare program;

• the risk that payments from third-party payors, including government healthcare programs, may decrease or not increase as our costs increase;

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

• our ability to acquire and develop additional surgery centers on favorable terms;

• our ability to grow revenues at our existing centers;

• our ability to manage the growth in our business;

• our ability to obtain sufficient capital resources to complete acquisitions and develop new surgery centers;

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

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

• our failure to comply with applicable laws and regulations;

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

• the risk of becoming subject to federal and state investigation;

• the risk of regulatory changes that may obligate us to buy out interests of physicians who are minority owners of our surgery centers;

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

• our legal responsibility to minority owners of our surgery centers, which may conflict with our interests and prevent us from acting solely in our best interests;

• risks associated with the write-off of the impaired portion of intangible assets; and

• risks associated with the tax deductibility of goodwill.

10

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

Overview

We develop, acquire and operate practice-based ambulatory surgery centers, or ASCs, in partnership with physician practice groups. As of September 30, 2007, we owned a majority interest (51% or greater) in 170 surgery centers. The following table presents the changes in the number of surgery centers in operation, under development and under letter of intent for the three and nine months ended September 30, 2007 and 2006. A center is deemed to be under development when a limited 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,
	2007			2006			2007			2006
Centers in operation, beginning of the period		165			153			156			149
New center acquisitions placed in operation		6			4			15			7
New development centers placed in operation		—			—			1			1
Centers disposed		(1	)		(1	)		(2	)		(1	)
Centers in operation, end of the period		170			156			170			156
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		167			150			167			149
Centers under letter of intent, end of period		3			2			3			2

(1) We completed the disposition in October 2006.

Of the continuing surgery centers in operation at September 30, 2007, 120 centers performed gastrointestinal endoscopy procedures, 37 centers performed ophthalmology surgery procedures, eight centers performed procedures in more than one specialty and five centers performed orthopedic procedures. 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 acquisition and development of additional practice-based ASCs in targeted surgical specialties and through future same-center growth. Our growth targets for 2007 include the acquisition or development of 20 to 22 surgery centers and the achievement of annual same-center revenue growth of 3% to 4%.

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 and, in limited instances, billing for anesthesia services. 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 adjustments from third-party medical service payors.

Practice-based ASCs, 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 33% and 34% of our revenues in the nine months

11

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

ended September 30, 2007 and 2006, 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 ASCs 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 ASCs to the amounts paid to hospital outpatient departments under the Medicare hospital outpatient department fee schedule for those procedures beginning in 2007. This Act negatively impacts the reimbursement of after-cataract laser surgery procedures performed at our ophthalmology ASCs, the result of which will be an approximately $0.03 reduction in our net earnings per diluted share for 2007.

On July 16, 2007, the Centers for Medicare and Medicaid Services, or CMS, announced a final rule to revise the payment system for services provided in ASCs. The key points of the final rule as it relates to us are:

• CMS’s estimate that the revised ASC rates would be 65% of the corresponding rates of the hospital outpatient prospective payment system;

• a scheduled phase in of the revised rates over four years, beginning January 1, 2008;

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

• an expansion of the list of procedures that can be performed in an ASC.

The final rule will 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, and certain ophthalmology and pain procedures. Based on our 2007 procedure mix, payor mix and volume, we estimate the proposed rule would reduce our net earnings per diluted share in 2008 by approximately $0.04 to $0.05 and our net earnings per diluted share in 2009 by approximately $0.04 to $0.05. After 2009, we believe the impact will be nominal.

Critical Accounting Policies

A summary of significant accounting policies is disclosed in our 2006 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 2006 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, 2006.

Results of Operations

Our revenues are directly related to the number of procedures performed at our surgery centers. 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 that contain full year-to-date operations in both comparable reporting periods, including the expansion of the number of operating centers within a limited partnership or limited liability company. We expect our annual same-center revenue growth to be 3% to 4% in 2007. Our 2007 same-center group, comprised of 145 centers, had revenue growth of 5% and 4% in the three and nine months ended September 30, 2007, respectively.

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, 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 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

12

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

limited liability companies typically are organized as general partnerships, 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, 2007 and 2006:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
Salaries and benefits		29.5			29.7			29.5			29.8
Supply cost		11.8			11.5			11.5			11.5
Other operating expenses		20.2			20.2			20.3			19.5
Depreciation and amortization		3.7			3.8			3.7			3.7
Total operating expenses		65.2			65.2			65.0			64.5
Operating income		34.8			34.8			35.0			35.5
Minority interest		19.7			19.5			19.8			20.4
Interest expense, net of interest income		1.6			1.7			1.8			1.7
Earnings from continuing operations before income taxes		13.5			13.6			13.4			13.4
Income tax expense		5.2			5.3			5.2			5.3
Net earnings from continuing operations		8.3			8.3			8.2			8.1
Net (loss) earnings from discontinued operations		(0.7	)		—			(0.1	)		0.1
Net earnings		7.6	%		8.3	%		8.1	%		8.2	%

Revenues increased $18.6 million and $46.9 million, or 16% and 14%, to $132.1 million and $390.2 million in the three and nine months ended September 30, 2007, respectively, from $113.5 million and $343.3 million in the comparable 2006 periods. The additional revenues resulted primarily from:

• 15 centers acquired in the nine months ended September 30, 2007, which generated $10.0 million and $21.6 million in revenues during the three and nine months ended September 30, 2007, respectively;

• eight centers acquired or opened throughout 2006, which generated $3.7 million and $15.8 million of additional revenues due to having a full period of operations in the three and nine months ended September 30, 2007, respectively; and

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

• $5.2 million and $9.3 million of revenue growth for the three and nine months ended September 30, 2007, respectively, recognized by our 2007 same-center group, reflecting a 5% and 4% increase, respectively, primarily as a result of procedure growth.

Our procedures increased by 39,831 and 89,553, or 19% and 14%, in the three and nine months ended September 30, 2007, respectively, to 246,939 and 721,953 in the three and nine months ended September 30, 2007, respectively, from 207,108 and 632,400 in the comparable 2006 periods. The difference between our revenue growth and our procedure growth was primarily the result of the 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 15% and 16% increase in salaries and benefits at our surgery centers in the three and nine months ended September 30, 2007, respectively, compared to the comparable 2006 periods. We experienced a 19% increase in salaries and benefits at our corporate offices during the three months ended September 30, 2007 over the comparable 2006 period. The increase in the corporate office salaries and benefits in the three months ended September 30, 2007 was primarily due to the additional corporate staff needed to manage our additional centers in operation during the period. Corporate salaries and benefits remained consistent in the nine months ended September 30, 2007, over the comparable 2006 period. In 2007, we began issuing fewer annual stock option awards, and issued restricted stock awards to employees for the first time. Those awards vest 100% on the fourth anniversary date of grant for all employees then in service. These changes resulted in a reduction in our share-based compensation expense in the three and nine months ended September 30, 2007 over the comparable 2006 periods thus offsetting the impact of additional corporate staff needed to manage our additional centers in operation. Salaries and benefits increased in total by 15% and 13% during the three and nine months ended September 30, 2007, respectively, to $39.0 million and $115.2 million from $33.8 million and $102.3 million in the comparable 2006 periods. Salaries and benefits as a percentage of revenues decreased during the three and nine months ended September 30, 2007 over the comparable 2006 periods due in part to the changes instituted in our share-based compensation.

Supply cost was $15.5 million and $45.0 million in the three and nine months ended September 30, 2007, respectively, an increase of $2.5 million and $5.3 million, or 19% and 13%, respectively, over supply cost in the comparable 2006 periods. This increase was primarily the result of additional procedure volume. During the three months ended September 30, 2007, our average supply cost per procedure remained unchanged compared to June 30, 2006. Our average supply cost per procedure decreased to $62 during the nine months ended September 30, 2007 compared to $63 in the comparable 2006 period. The increase in the number of gastroenterology surgery centers in operation in 2007 over 2006 resulted in a decrease in average supply cost per procedure due to the lower supply cost incurred at these types of centers.

Other operating expenses increased $3.7 million, or 16%, to $26.7 million in the three months ended September 30, 2007 over the comparable 2006 period and $12.4 million, or 19%, to $79.3 million in the nine months ended September 30, 2007 over the comparable 2006 period. The additional expense in the three and nine months ended September 30, 2007 resulted primarily from:

• an increase of $1.1 million and $5.0 million in other operating expenses from our 2007 same-center group in the three and nine months ended September 30, 2007, respectively, resulting primarily from additional procedure volume and general inflationary cost increases, as well as a $1.3 million impairment charge and property loss incurred in the nine-month period at a center that will be relocating its facility during 2008;

• 15 centers acquired during the three and nine months ended September 30, 2007, respectively, which resulted in an increase of $1.9 million and $3.8 million, respectively, in other operating expenses; and

• eight centers acquired or opened in 2006, which resulted in an increase of $500,000 and $2.2 million in other operating expenses due to having a full period of operations in the three and nine months ended September 30, 2007, respectively.

Depreciation and amortization expense increased $571,000 and $1.6 million, or 13%, in the three and nine months ended September 30, 2007, respectively, from the comparable 2006 periods, primarily as a result of centers acquired since September 30, 2006 and the newly developed surgery centers in operation, which have an initially higher level of depreciation expense due to their construction costs.

We anticipate further increases in operating expenses in 2007, primarily due to additional acquired centers and additional start-up centers expected to be placed in operation. Typically, a start-up center will incur start-up losses while under

14

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

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, 2007, we had four centers under development and three 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, 2007 increased $3.9 million and $7.2 million, or 17% and 10%, respectively, from the comparable 2006 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 in the three months ended September 30, 2007 from the comparable 2006 period. During the nine months ended September 30, 2007, minority interest as a percentage of revenues decreased to 19.8% from 20.4% in the comparable 2006 period as a result of lower same-center revenue growth and the impact of the impairment charge and property loss incurred at a center in the 2007 period.

Interest expense increased approximately $290,000 and $1.2 million during the three and nine months ended September 30, 2007, or 15% and 22%, respectively, over the comparable 2006 periods, primarily due to additional long-term debt outstanding during the three and nine months ended September 30, 2007 resulting from acquisition activity. See “ — Liquidity and Capital Resources.”

We recognized income tax expense from continuing operations of $6.9 million and $20.2 million in the three and nine months ended September 30, 2007, respectively, compared to $6.1 million and $18.0 million in the comparable 2006 periods. Our effective tax rate in the three and nine months ended September 30, 2007 was 38.8% and 38.7%, respectively, of earnings from continuing operations before income taxes, and differed from the federal statutory income tax rate of 35.0%, primarily due to the impact of state income taxes. Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48,“Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109,”or FIN No. 48, and recorded a cumulative reduction to beginning retained earnings of $634,000. In addition, during the three and nine months ended September 30, 2007, we incurred a tax benefit of $67,000 and additional income tax expense of $122,000, respectively, related to FIN No. 48. We estimate that the adoption of FIN No. 48 will result in additional income tax expense of approximately $224,000 for the full year ended December 31, 2007. In addition, we recognized an additional tax benefit of approximately $400,000 in the nine months ended September 30, 2007 associated with the recognition of a capital loss carryforward. We anticipate that our overall effective tax rate for the remainder of 2007 will be approximately 39.2% of earnings from continuing operations. Because we deduct goodwill amortization for tax purposes only, our deferred tax liability continues to increase, which would only be due in part or in whole upon the disposition of a portion or all of our surgery centers.

During 2007, we sold our ownership interest in a surgery center and closed a surgery center. The results of operation of the centers have been classified as discontinued operations in all periods present. The net loss derived from the operations and disposition of the discontinued surgery centers in the three and nine months ended September 30, 2007 was $909,000 and $631,000, respectively.

Liquidity and Capital Resources

At September 30, 2007, we had working capital of $73.3 million compared to $66.6 million at December 31, 2006. Operating activities for the nine months ended September 30, 2007 generated $56.6 million in cash flow from operations compared to $54.2 million in the nine months ended September 30, 2006. The increase in operating cash flow activity resulted primarily from higher net earnings as of September 30, 2007, compared to the 2006 period. Cash and cash equivalents at September 30, 2007 and December 31, 2006 were $19.9 million and $20.1 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. 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

15

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

ensure that such allowances are adequate. At September 30, 2007 and December 31, 2006, our accounts receivable represented 38 and 40 days of revenue outstanding, respectively.

During the nine months ended September 30, 2007, we had total capital expenditures of $101.9 million, which included:

• $84.8 million for acquisitions of interests in practice-based ASCs;

• $13.4 million for new or replacement property at existing surgery centers, including $590,000 in new capital leases; and

• $3.7 million for surgery centers under development.

Our cash flow from operations was approximately 56% of our cash payments for acquisition and development activity, and we received approximately $154,000 from capital contributions of our minority partners to fund their proportionate share of development activity. At September 30, 2007, we had unfunded construction and equipment purchase commitments for centers under development or under renovation of approximately $6.2 million, 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, 2007, notes receivables 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 at September 30, 2007 was $4.8 million.

During the nine months ended September 30, 2007, we had net borrowings on long-term debt of $24.4 million. At September 30, 2007, we had $139.5 million outstanding under our revolving credit facility. We expanded our credit facility on October 29, 2007 to increase our maximum borrowing capacity from $200 million to $300 million. We may use our credit facility 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, 2007. 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, 2007, we received approximately $13.5 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 $2.8 million.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board, or FASB, issued FIN No. 48 which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement of Financial Accounting Standards, or 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. Upon adoption of FIN No. 48, we established a tax reserve of approximately $634,000 through a cumulative reduction to beginning retained earnings and expect to add to the tax reserve through income tax expense approximately $224,000 by the end of fiscal 2007.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 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 February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities.”SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007

16

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

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. 159 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. Interest rate changes would result in gains or losses in the market value of our debt portfolio due to differences in market interest rates and the rates at the inception of the debt agreements. Based upon our indebtedness at September 30, 2007, a 100 basis point interest rate change would impact the pre-tax net income and cash flow by approximately $900,000 annually. 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 2007.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our chief executive officer and chief financial officer, we conducted an evaluation 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 the Exchange Act) as of September 30, 2007. Based on that evaluation, our chief executive officer (principal executive officer) and chief financial officer (principal accounting officer) have concluded that our disclosure controls and procedures are effective to allow timely decisions regarding disclosure of material information required to be included in our periodic reports.

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.

Item 4T.Controls and Procedures.

     Not applicable.

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.

17

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 Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a)
32.1	Section 1350 Certification

18

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 2, 2007	By:	/s/ Claire M. Gulmi
		Claire M. Gulmi
		Executive Vice President and Chief Financial Officer (Principal Financial, Accounting and Duly Authorized Officer)

19