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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2003

Commission File Number 000-22217

AMSURG CORP.

(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.

Yes [X] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [  ]

     As of August 13, 2003 there were outstanding 19,892,950 shares of the registrant’s Common Stock, no par value.

Table of Contents

Table of Contents to Form 10-Q for the Quarterly Period Ended June 30, 2003

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Part I

Item 1. Financial Statements

AmSurg Corp.
Consolidated Balance Sheets
June 30, 2003 (unaudited) and December 31, 2002
(Dollars in thousands)

See accompanying notes to the unaudited consolidated financial statements.

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Item 1.  Financial Statements — (continued)

AmSurg Corp.
Consolidated Statements of Earnings (unaudited)
Three Months and Six Months Ended June 30, 2003 and 2002
(In thousands, except earnings per common share)

See accompanying notes to the unaudited consolidated financial statements.

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Item 1.  Financial Statements — (continued)

AmSurg Corp.
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 2003 and 2002
(In thousands)

See accompanying notes to the unaudited consolidated financial statements.

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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% and up to 67% in certain instances, 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 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 is the general partner or member. Consolidation of such partnerships and LLCs is necessary as the Company has 51% or more of the financial interest, is the general partner or majority member with all the duties, rights and responsibilities thereof and is responsible for the day-to-day management of the partnership or LLC. The limited partner or minority member responsibilities 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 incurring debt which they, as physician limited partners or members, are required to guarantee on a pro rata basis based upon their respective ownership interests. Intercompany profits, transactions and balances have been eliminated. All subsidiaries and minority owners are herein referred to as partnerships and partners, respectively.

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 unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2002 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.

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, relationships with payors and procedure statistics. Accordingly, net accounts receivable at June 30, 2003 and December 31, 2002, reflect allowances for contractual adjustments of $26,499,000 and $25,451,000, respectively, and allowances for bad debt expense of $4,794,000 and $3,986,000, respectively.

(3) Revenue Recognition

Center revenues consist of the 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 payors including Medicare and Medicaid. During the six months ended June 30, 2003 and 2002, approximately 41% and 39%, respectively, of the Company’s revenues were derived from the provision of services to patients covered under Medicare and Medicaid. Concentration of credit risk with respect to other payors is limited due to the large number of such payors.

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Item 1.  Financial Statements — (continued)

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

(4) Stock-Based Compensation

The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. No stock-based employee compensation cost is reflected in net earnings for the three and six months ended June 30, 2003 and 2002. Disclosure in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to reflect the pro forma earnings per share as if the fair value of all stock-based awards on the date of grant are recognized over the vesting period is presented below.

The estimated weighted average fair values of the options granted at the date of grant using the Black-Scholes option pricing model as promulgated by SFAS No. 123 during the three and six months ended June 30, 2003 were $6.65 and $6.16 per share, respectively, and $6.94 per share during the three and six months ended June 30, 2002. In applying the Black-Scholes model, the Company assumed no dividends, an expected life for the options of four years, a forfeiture rate of 15% and an average risk free interest rate of 2.6% and 3.0% for the three and six months ended June 30, 2003, respectively, and 4.1% for the three and six months ended June 30, 2002. The Company also assumed a volatility rate of 46% for the three and six months ended June 30, 2003 and 2002. Had the Company used the Black-Scholes estimates to determine compensation expense for the options granted in the three and six months ended June 30, 2003 and 2002, net earnings and net earnings per share attributable to common shareholders would have been reduced to the following pro forma amounts (in thousands, except per share amounts):

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Item 1.  Financial Statements — (continued)

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

(5) Intangible Assets

Amortizable intangible assets at June 30, 2003 and December 31, 2002 consisted of the following (in thousands):

Estimated amortization of intangible assets for the remainder of 2003 and the following three years and thereafter is $163,000, $324,000, $323,000, $273,000 and $144,000, respectively.

The changes in the carrying amount of goodwill for the three and six months ended June 30, 2003 and 2002 are as follows (in thousands):

(6) Long-term Debt

The Company’s revolving credit facility as amended on March 4, 2003 permits the Company to borrow up to $100,000,000 to finance its acquisitions and development projects and stock repurchase program at an interest rate equal to, at the Company’s option, the prime rate or LIBOR plus a spread of 1.0% to 2.25% or a combination thereof, provides for a fee of 0.50% 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. At June 30, 2003, the Company had $42,500,000 outstanding under its revolving credit facility and was in compliance with all covenants.

(7) Shareholders’ Equity

In January 2003, the Company’s Board of Directors authorized a stock repurchase program which allows the Company to purchase up to $25,000,000 of its common stock through August 2004. As of June 30, 2003, the Company had purchased and retired 845,200 shares of the Company’s common stock at an aggregate purchase price of $21,243,000 under this program, which was funded primarily through borrowings under its credit facility.

(8) Acquisitions and Other Transactions

In the six months ended June 30, 2003, the Company, through a wholly owned subsidiary, acquired a majority interest in a physician practice-based surgery center. The amount paid for the acquisition and other acquisition costs was $9,730,000.

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Item 1.  Financial Statements — (continued)

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

(9) Commitments and Contingencies

The Company and its partnerships and LLCs 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 and LLCs. Management is not aware of any claims against it or its partnerships or LLCs which would have a material effect on the Company’s consolidated financial position or consolidated results of operations.

The Company or its wholly owned subsidiaries, as general partners in the limited partnerships, are responsible for all debts incurred but unpaid by the partnership. As manager of the operations of the partnership, the Company has the ability to limit its 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 or LLCs, the Company is obligated to purchase the physicians’ interests in the partnerships or LLCs. The purchase price to be paid in such event is determined by a predefined formula, as specified in the partnership or operating agreement.

(10) Subsequent Events

In July 2003, the Company, through wholly owned subsidiaries and in separate transactions, acquired majority interests in two physician practice-based surgery centers for approximately $13,500,000.

(11) Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 establishes accounting standards for recognition and measurement of liability for an asset retirement obligation and the associated retirement costs. This statement applies to all entities and to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The implementation of SFAS No. 143 did not have a material effect on the Company’s consolidated financial position or consolidated results of operations.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closings, or other exit or disposal activities. The provisions of this statement are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on the Company’s consolidated financial position or consolidated results of operations.

In November 2002, the FASB issued Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34.” The interpretation requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that obligation. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with separately identified consideration and guarantees issued without separately identified consideration. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material effect on the Company’s consolidated financial position or consolidated results of operations.

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Item 1.  Financial Statements — (continued)

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

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 addresses consolidation by business enterprises of variable interest entities that have certain characteristics. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company did not create or obtain an interest in any variable interest entities that contain the characteristics addressed in FIN 46 during the six months ended June 30, 2003.

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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 those relating 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, as well as other unknown risks and uncertainties:

	•		our ability to enter into partnership or operating agreements for new practice-based ambulatory surgery centers;
	•		our ability to identify suitable acquisition candidates and negotiate and close acquisition transactions, including centers under letter of intent;
	•		our ability to obtain the necessary financing or capital on terms satisfactory to us in order to execute our expansion strategy;
	•		our ability to generate and manage growth;
	•		our ability to contract with managed care payors on terms satisfactory to us for our existing centers and our centers that are currently under development;
	•		our ability to obtain and retain appropriate licensing approvals for our existing centers and centers currently under development;
	•		our ability to minimize start-up losses of our development centers;
	•		our ability to maintain favorable relations with our physician partners;
	•		changes in the medical staff at our centers;
	•		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 and Medicaid Services;
	•		risks of legislative or regulatory changes that would establish uniform rates for outpatient surgical services, regardless of setting;
	•		risks associated with our status as a general partner of the limited partnerships;
	•		our ability to maintain our technological capabilities in compliance with regulatory requirements;
	•		risks associated with the valuation and tax deductibility of goodwill, as well as potential losses on disposal of goodwill associated with a disposition of an individual center;
	•		risks of legislative or regulatory changes that would prohibit physician ownership in ambulatory surgery centers; and
	•		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.

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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 June 30, 2003, we owned a majority interest (51% or greater) in 107 surgery centers.

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 six months ended June 30, 2003 and 2002. 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.

Of the surgery centers in operation as of June 30, 2003, 61 centers perform gastrointestinal endoscopy procedures, 38 centers perform ophthalmology surgery procedures, three centers perform orthopedic procedures and five centers perform procedures in more than one specialty. The other partner or member in each 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 annual growth targets for 2003 include the acquisition or development of 12 to 15 surgery centers and the achievement of same-center revenue growth of 6% to 8%.

While we generally own 51% of the entities that own the surgery centers, and up to 67% in certain instances, our consolidated statements of operations 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 revenue is derived from facility fees charged for surgical procedures performed in our surgery centers. This fee varies depending on the procedure, but usually includes 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 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

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

regulations and the cost containment and utilization decisions of third-party payors. We derived approximately 41% and 39% of our revenues in the six months ended June 30, 2003 and 2002, respectively, from governmental healthcare programs, primarily Medicare. The Medicare program currently pays ambulatory surgery centers in accordance with predetermined fee schedules.

Critical Accounting Policies

A summary of significant accounting policies is disclosed in Note 1 to the Consolidated Financial Statements included in the 2002 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 the 2002 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, 2002.

Results of Operations

Our revenues are directly related to the number of procedures our surgery centers perform. Our overall growth in procedure volume is directly impacted by the increase in the number of surgery centers in operation through either acquisitions or development and the growth in procedure volume at existing centers. Procedure growth at any existing center may result from additional contracts entered into with third-party payors, marketing activities, increased market share of the associated medical practices of our physician partners, new physician partners and/or scheduling and operating efficiencies gained at the surgery center.

Expenses directly related to such procedures include clinical and administrative salaries and benefits, supply cost and other variable 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 more directly associated 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 which are more fixed in nature, such as lease expense, insurance premiums, legal fees, property taxes, utilities and depreciation and amortization.

Surgery center profits are shared by our minority partners in proportion to their individual ownership percentages and reflected in the aggregate as minority interest. 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.

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

The following table shows certain consolidated statements of earnings items expressed as a percentage of revenues for the three and six months ended June 30, 2003 and 2002:

Revenues increased $12.5 million and $25.3 million, or 20% and 21%, to $74.2 million and $145.3 million in the three and six months ended June 30, 2003, respectively, from $61.7 million and $120.0 million in the comparable 2002 periods, primarily due to the following two factors:

	•		Ten additional surgery centers in operation at June 30, 2003, primarily resulting from acquisitions, with an average number of centers in operation of 107 throughout the three and six months ended June 30, 2003, respectively, compared to 96 and 95 in the comparable 2002 periods, respectively; and
	•		Same-center procedure growth resulting in 6% and 7% revenue growth in the three and six months ended June 30, 2003, respectively (94 centers included in the same-center group).

Our same center revenue growth percentage was less than we have experienced in recent quarters primarily due to seven centers that are experiencing physician transition issues. For most of these centers, the related physician partners are actively recruiting replacement physicians, who we anticipate will utilize the respective centers.

Due to additional centers in operation and same-center procedure growth, procedure volume grew 17% to 135,280 and 18% to 265,164 in the three and six months ended June 30, 2003, respectively, over the 2002 comparable periods. In order to appropriately staff our surgery centers for these additional procedures, as well as provide appropriate corporate management for the additional centers in operation, salaries and benefits increased by 22% and 21% to $19.4 million and $37.9 million in the three and six months ended June 30, 2003, respectively, from $15.9 million and $31.2 million in the comparable 2002 periods.

Supply cost was $8.6 million and $16.9 million in the three and six months ended June 30, 2003, respectively, an increase of $1.4 million and $2.6 million, or 20% and 18%, respectively, over supply cost in the comparable 2002 periods. This increase resulted primarily from the additional procedure volume.

Other operating expenses increased $1.8 million, or 13%, to $15.4 million, in the three months ended June 30, 2003 over the comparable 2002 period and $4.2 million, or 16%, to $30.5 million, in the six months ended June 30, 2003

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

over the comparable 2002 period, primarily as a result of the additional surgery centers in operation and additional corporate overhead.

Depreciation and amortization expense increased $700,000 and $1.0 million, or 29% and 22%, in the three and six months ended June 30, 2003, respectively, over the comparable 2002 periods, primarily due to additional equipment and leasehold improvements at the additional surgery centers in operation.

We anticipate further increases in operating expenses in 2003, primarily due to additional start-up centers and acquired centers expected to be placed in operation, as well as insurance costs and scheduled property rent increases at our existing centers. Typically, a start-up center will incur start-up losses while under development and during its initial months of operations and will experience lower revenues and operating margins than an established center until its case load grows to a more optimal operating level, which generally is expected to occur within the 12 months after a center opens. At June 30, 2003, we had 12 centers under development and two centers that had been open for less than one year.

Minority interest in earnings in the three and six months ended June 30, 2003 increased $2.5 million and $5.6 million, or 20% and 23%, respectively, over the comparable 2002 periods, primarily as a result of minority partners’ interest in earnings at surgery centers recently added to operations and from increased same-center profitability. As a percentage of revenues, minority interest remained relatively flat between the 2003 and 2002 periods.

Interest expense increased $200,000 and $100,000, or 61% and 18%, in the three and six months ended June 30, 2003, respectively, from the comparable 2002 periods, primarily due to additional long-term debt outstanding during the 2003 periods.

We recognized income tax expense of $4.9 million and $9.6 million in the three and six months ended June 30, 2003, respectively, compared to $3.9 million and $7.5 million in the comparable 2002 periods. Our effective tax rate in both periods was 40% of net earnings before income taxes and differed from the federal statutory income tax rate of 35% primarily due to the impact of state income taxes.

Liquidity and Capital Resources

At June 30, 2003, we had working capital of $41.8 million compared to $31.5 million at June 30, 2002. Operating activities for the six months ended June 30, 2003 generated $20.0 million in cash flow from operations compared to $20.6 million in the comparable 2002 period. While net earnings contributed an additional $3.1 million to operating cash flow in the 2003 period over the 2002 period, cash flow from operations was relatively flat between the two periods, primarily because tax benefits received from exercises of stock options decreased $2.0 million in the 2003 period. Cash and cash equivalents at June 30, 2003 and 2002 were $13.0 million and $11.8 million, respectively.

During the six months ended June 30, 2003, we used approximately $9.7 million to acquire an interest in a surgery center and pay other acquisition costs. In addition, we made total capital expenditures of $7.5 million, including $1.9 million for new start-up surgery centers and $5.6 million for new or replacement property at existing centers and center renovations. We used our cash flow from operations to fund our acquisition and capital expenditures. We received approximately $500,000 from capital contributions from our minority partners to fund their proportionate share of development activity. At June 30, 2003, we and our partnerships and limited liability companies had unfunded construction and equipment purchase commitments for centers under development or under renovation of approximately $3.6 million, which we intend to fund through additional borrowings of long-term debt, operating cash flow and capital contributions by minority partners.

During the six months ended June 30, 2003, we had net borrowings on long-term debt of $16.9 million, primarily due to the stock repurchase program described below. At June 30, 2003, we had $42.5 million outstanding under our revolving credit facility, which permits us to borrow up to $100.0 million to finance our acquisition and development projects and stock repurchase program at a rate equal to, at our option, the prime rate or LIBOR plus a spread of 1.50% to 2.25%, depending upon borrowing levels. The loan agreement also provides for a fee of 0.50% of unused commitments. The loan agreement 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 June 30, 2003. Borrowings under the credit facility are due in March 2008 and are secured primarily by a pledge of the stock of our subsidiaries and our membership interests in the limited liability companies. We incurred approximately

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

$500,000 in deferred financing fees during the six months ended June 30, 2003, primarily associated with our credit facility.

During the six months ended June 30, 2003, we received approximately $1.1 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 $700,000.

In January 2003, our Board of Directors authorized a stock repurchase program that allows us to purchase up to $25.0 million of our common stock through August 2004. As of June 30, 2003, we had purchased and retired 845,200 shares of our common stock at an aggregate purchase price of $21.2 million under this program, which was funded primarily through borrowings under our credit facility.

A purchase price obligation of $1.3 million related to a prior year acquisition remains contingent at June 30, 2003, and is not currently reflected in our financial statements. We expect to fund that obligation, if it becomes due, with borrowings under our revolving credit facility or from operating cash flow.

In August 2002, the Office of Inspector General published its work plan for the 2003 fiscal year. The work plan identified several projects related to our industry, including a project identified as “Financial Arrangements Between Physicians and Ambulatory Surgical Centers.” This project is expected to focus on determining if physician ownership in ambulatory surgery centers affects utilization and the cost of outpatient surgeries. While we believe physician ownership of ambulatory surgery centers as structured within our partnerships and limited liability companies is in compliance with applicable law, there can be no assurance that the outcome of this work plan project, if completed, will not generate legislative or regulatory changes that would have an adverse impact on us or obligate us to purchase some or all of the minority interests of the physician entities affiliated with us as prescribed in our partnership and operating agreements.

Foregoing any significant adverse impact on our future operating results, we believe that our operating cash flow and borrowing capacity will provide us with adequate liquidity for the next five years to conduct our business and further implement our growth strategy.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 establishes accounting standards for recognition and measurement of liability for an asset retirement obligation and the associated retirement costs. This statement applies to all entities and to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal operation of a long-lived asset, except for certain obligations of lessees. The implementation of SFAS No. 143 did not have a material effect on our consolidated financial position or consolidated results of operations.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closings, or other exit or disposal activities. The provisions of this statement are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on our consolidated financial position or consolidated results of operations.

In November 2002, the FASB issued Interpretation No., or FIN, 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34.” The interpretation requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that obligation. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with separately identified consideration and guarantees issued without separately identified consideration. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees

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

issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material effect on our consolidated financial position or consolidated results of operations.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 addresses consolidation by business enterprises of variable interest entities that have certain characteristics. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We did not create or obtain an interest in any variable interest entities that contain the characteristics addressed in FIN 46 during the six months ended June 30, 2003.

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. 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 income or cash flows in 2003.

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 June 30, 2003. 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

There have not been any significant changes in our internal control over financial reporting or in other factors that could significantly affect this control subsequent to the date of our evaluation. There were no significant deficiencies or material weaknesses identified, and therefore no corrective actions were taken.

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Part II

Item 1. Legal Proceedings.

     Not applicable.

Item 2. Changes in 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.

     At our Annual Meeting of Shareholders held on May 22, 2003, the following members were elected to the Board of Directors by the vote set forth below:

     In addition to the foregoing directors, the following table sets forth the other members of the Board of Directors whose term of office continued after the Annual Meeting and the year in which his term expires:

     Also, the following proposals were considered and approved at the Annual Meeting of Shareholders by the votes set forth below:

Item 5. Other Information.

     Not applicable.

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Item 6. Exhibits and Reports on Form 8-K.

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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.

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