Form 10-K

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CQi43gSRb/A9CHvsLDiVEf3I/0ERdZZEN6JDE6rcshJDeQN/8JEQuLmXgyKKFPHq MZhZF+xDQWsRo0D3tSbrUw== 0001193125-06-122767.txt : 20060601 0001193125-06-122767.hdr.sgml : 20060601 20060601154958 ACCESSION NUMBER: 0001193125-06-122767 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060601 DATE AS OF CHANGE: 20060601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINCARE HOLDINGS INC CENTRAL INDEX KEY: 0001003472 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 061110906 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14160 FILM NUMBER: 06880065 BUSINESS ADDRESS: STREET 1: 22 SHELTER ROCK LANE CITY: DANBURY STATE: CT ZIP: 06810 BUSINESS PHONE: 2037988988 MAIL ADDRESS: STREET 1: 22 SHELTER ROCK LANE STREET 2: 22 SHELTER ROCK LANE CITY: DANBURY STATE: CT ZIP: 06810 FORMER COMPANY: FORMER CONFORMED NAME: HELPMATE ROBOTICS INC DATE OF NAME CHANGE: 19951115 10-K 1 d10k.htm FORM 10-K Form 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2005

Commission File Number 0-22462

PAINCARE HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


Florida		06-1110906
(State or other jurisdiction of incorporation organization)		(I.R.S. Employer Identification No.)

1030 N. Orange Avenue, Suite 105, Orlando, Florida		32801
(address of principal executive offices)		(zip code)

(407) 367-0944

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, $.0001 par value		American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x.

Indicate by checkmark if the registrant is not required to file report pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x.

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. x

Indicate by checkmark 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”), an accelerated filer, or a non-accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the Common Stock outstanding and held by non-affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant, based upon the closing sale price of the Common Stock on the American Stock Exchange on May 26, 2006, was approximately $91.0 million.

As of May 26, 2006, the number of common shares outstanding was: 64,050,365.

DOCUMENTS INCORPORATED BY REFERENCE

None.

FORWARD-LOOKING STATEMENTS

The terms “PainCare,” “Company,” “we,” “our,” and “us” refer to PainCare Holdings, Inc. and its consolidated subsidiaries unless the context suggests otherwise.

This annual report contains and may incorporate by reference “forward-looking” statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Such statements can be identified by the use of forward-looking terminology such as “may,” “will,” “believe,” “intend,” “expect,” “anticipate,” “estimate,” “continue,” or other similar words. Variations on those or similar words, or the negatives of such words, also may indicate forward-looking statements.

These forward-looking statements, which may include statements regarding our future financial performance or results of operations, including expected revenue growth, cash flow growth, future expenses, future operating margins and other future or expected performance, are subject to the following risks:

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the acquisition of businesses or the launch of new lines of business, which could increase operating expenses and dilute operating margins;

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the inability to attract new patients by our owned practices, the managed practices and the limited management practices;

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increased competition, which could lead to negative pressure on our pricing and the need for increased marketing;

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the inability to maintain, establish or renew relationships with physician practices, whether due to competition or other factors;

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the inability to comply with regulatory requirements governing our owned practices, the managed practices and the limited management practices;

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that projected operating efficiencies will not be achieved due to implementation difficulties or contractual spending commitments that cannot be reduced; and

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to the general risks associated with our businesses.

In addition to the risks and uncertainties discussed above you can find additional information concerning risks and uncertainties that would cause actual results to differ materially from those projected or suggested in the forward-looking statements in this annual report under the section “Risk Factors.” The forward-looking statements contained in this annual report represent our judgment as of the date of this annual report, and you should not unduly rely on such statements.

Unless otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this annual report. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in the filing may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements.

TABLE OF CONTENTS


PART I

Item 1.	Business	1
Item 1 A.	Risk Factors	20
Item 1 B.	Unresolved Staff Comments	33
Item 2.	Properties	34
Item 3.	Legal Proceedings	35
Item 4.	Submission of Matters to a Vote of Security Holders	35

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
Item 6.	Selected Consolidated Financial Data	39
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 8.	Financial Statements and Supplementary Data	47
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	48
Item 9A.	Controls and Procedures	48
Item 9B.	Other Information	51

PART III

Item 10.	Directors and Executive Officers of the Registrant	51
Item 11.	Executive Compensation	55
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	61
Item 13.	Certain Relationships and Related Transactions	63
Item 14.	Principal Accountant Fees and Services	63

PART IV

Item 15.	Exhibits and Financial Statement Schedules	64

SIGNATURES		66

PART I

ITEM 1. BUSINESS

Overview

PainCare Holdings, Inc. is a health care services company focused on the treatment of pain. Through our 21 pain-focused physician practices and 9 outpatient surgery centers, we offer pain management, minimally invasive spine surgery and ancillary services, including orthopedic rehabilitation, electrodiagnostic medicine, intra-articular joint injections and diagnostic imaging services. Our physicians are trained in specialties such as interventional pain management, orthopedics or physiatry, and utilize the latest medical technologies, clinical practices and equipment to offer cost-effective pain relief.

We have grown our business through a combination of organic growth and acquisitions of complementary physician practices and outpatient surgery centers. Since November 2004, we have acquired 7 physician practices and 6 surgery centers. To grow our physician practice revenue, our strategy is to acquire or enter into management agreements with profitable, well-established physician practices and expand the range of services they offer. For practices we have acquired, we survey the acquired practice and determine whether to expand the scope of services provided by the practice, including adding additional specialists such as physicians certified in pain management, neurosurgery, orthopedics or physiatry. By providing these additional services within the practice, we believe each practice can improve clinical outcomes, shorten treatment time and improve its profitability.

In contrast to historical physician practice management business models that forced the implementation of common information technology systems, such as shared billing and collection, clinical data and electronic health record systems, we deploy only those resources necessary to support the growth of additional services. Changes to information technology systems are kept to a minimum, and changes to billing and collection procedures are also minimized. As a result, we strive to achieve minimal disruption in the practice’s operations while at the same time facilitating the growth of the practice from within.

Our growth strategy for outpatient surgery centers is to identify profitable, high volume centers which provide pain management and orthopedic procedures. Many surgical procedures for the treatment of pain can be performed outside a traditional hospital setting, which we believe represents a cost-effective and convenient alternative for patients and health care payors. We believe that our surgery centers offer the latest orthopedic and interventional pain management technology and anesthetic techniques, contributing to improved clinical outcomes and patient satisfaction, in addition to growing our revenue.

We also have relationships with physician practices that we do not own, but provide limited management services to, such as in-house physical therapy, electrodiagnostic services and intra-articular joint injection programs. With these additional resources, the physician practice itself is able to offer a broader range of services to its patient base.

According to a joint monograph published by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) and the National Pharmaceutical Council, each year an estimated 25 million Americans experience acute pain due to injury or surgery and another 50 million suffer chronic pain. As the “baby boom” population ages, the number of people who will require treatment for pain from back disorders, degenerative joint diseases, rheumatologic conditions, visceral diseases and cancer is expected to rise. A 2004 study by the American Chronic Pain Association found that among those with chronic back pain, 56% of 18-34 year olds, 50% of 35-64 year olds, and 49% of 65+ year olds reported that their back was the source of the most pain. Inadequate control of pain interferes with the pain sufferer’s ability to carry out activities of daily living, such as work, and may result in psychological impairment as well. According to the same source, the annual cost to Americans of pain suffering is estimated at $100 billion each year.

The medical community’s awareness of the need for pain management has been increasing in recent years. In 1996, the American Pain Society proposed that pain was the fifth vital sign, in addition to pulse, blood pressure, body temperature and respiration, and the Veterans Health Administration has adopted pain as the fifth vital sign in their national pain management strategy. In 2001, JCAHO published standards that incorporated pain management into the standards for accredited health care providers. The JCAHO standards stress patients’ rights to appropriate assessment and management of pain, and require the treatment of pain along with the underlying disease or disorder. As a result, we believe that pain management is growing in significance as a medical specialty, which we believe will result in an increased demand for pain treatment.

We have relationships with 64 physician practices and ambulatory surgery centers. Through our subsidiaries, we operate three types of practice arrangements:

•

We employ licensed physicians in 7 practices which we own;

•

We have acquired the non-medical assets and we provide general management services to 14 physician practices;

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We provide limited management services to 34 physician practices in areas such as in-house physical therapy, electrodiagnostic services and intra-articular joint injection programs.

We have acquired and operate 9 outpatient surgery centers.

Business Strategy

Our objective is to become the leading provider of specialty pain care services in North America. To grow our practices, we intend to:

•

Focus on pain treatment. All of our operations to date have been specifically focused in the area of pain treatment. We intend to continue to focus on the treatment of pain through acquisition, management, and the provision of services to practices that serve the pain treatment market.

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Deploy additional services to grow physician practices. We intend to enhance the capacity of our practices for organic growth by increasing the range of services offered by our practices. By deploying additional physicians and equipment, we can perform in-house those necessary procedures and services that would ordinarily be referred to other providers, which we believe can result in higher quality care and increased revenues to our practices.

•

Acquire profitable, well-established physician practices and surgery centers. We utilize a highly disciplined approach to evaluating acquisitions of additional practices and surgery centers. We have an extensive, multi-point due diligence evaluation process that we perform prior to acquisition, including such criteria as clinical quality, physician reputation, profitability and procedure and revenue growth rates. We intend to only acquire practices and surgery centers that we believe to be well-established with the capacity for future profitability and organic growth.

•

technologies and by providing the latest, state-of-the-art equipment. For example, we deploy MedX rehabilitation equipment to orthopedic rehabilitation facilities, which has demonstrated the ability to improve patient outcomes.

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Develop additional services to enhance practice profitability. As the needs of our practices warrant we will develop additional programs to support their organic growth. For example, we may deploy imaging modalities such as mobile MRI equipment, or additional services such as in-office pharmaceutical dispensing, in order to provide a complete pain treatment program. In January 2005, we introduced a new program, called the Intra-Articular Joint Program, which is a nonsurgical treatment for knee pain and stiffness caused by osteoarthritis.

Our Executive Offices

Our principal executive offices are located at 1030 North Orange Avenue, Suite 105, Orlando, Florida 32801, and our telephone number is (407) 367-0944. Our website is located at www.paincareholdings.com. Our website address is included as an inactive textual reference only.

Recent Developments

Acquisitions

Since our founding in 2000, we have completed twenty-one practice acquisitions, nine surgery center acquisitions and purchased a majority interest in one healthcare services company. The following acquisitions (all managed unless indicated otherwise) have been completed since January 1, 2005:


Name and Nature of Business	Effective Date of Purchase	Purchase Price
Colorado Pain Specialists, PC., an interventional pain management practice located in Colorado	April 13, 2005	$2,125,000 in cash and 653,698 shares of common stock, plus contingent payments of up to $4,250,000 in cash and common stock if certain performance goals are met.

PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center., a fully accredited ambulatory surgical center located in Lake Worth, Florida	May 12, 2005	$6,930,940 in cash and 324,520 shares of common stock for a 67.5% ownership interest.

PSHS Beta Partners, Ltd. d/b/a Gables Surgical Center, a fully accredited ambulatory surgical center located in Miami, Florida	August 1, 2005	$3,282,304 in cash and 868,624 shares of common stock, plus promissory notes totaling $1,536,952, due one year from the closing date, for a 73% ownership interest.

Piedmont Center for Spinal Disorders, P.C., an orthopedic spine surgery practice located in Danville, Virginia	August 9, 2005	$1,000,000 in cash and 263,400 shares of PainCare’s common stock, plus contingent payments of up to $2,000,000 in cash and common stock if certain performance goals are met.

Floyd O. Ring, Jr., M.D., P.C., an pain management physician practice located in Denver, Colorado	October 3, 2005	$1,250,000 in cash and 349,162 shares of PainCare’s common stock, plus contingent payments of up to $2,500,000 in cash and common stock if certain performance goals are met.

Christopher J. Centeno, M.D., P.C. and Therapeutic Management, Inc., collectively doing business as The Centeno Clinic, a pain management physician practice located in Denver, Colorado.	October 14, 2005	$3,750,000 in cash and 1,132,931 shares of PainCare’s common stock, plus contingent payments of up to $7,500,000 in cash and common stock if certain performance goals are met.


Center for Pain Management ASC, LLC, a fully accredited ambulatory surgical center with four locations in Maryland.	January 3, 2006	$3,750,000 in cash and 1,021,942 shares of common stock, plus promissory notes totaling $7,500,000 in principal, due one year from the closing date.

REC, Inc. & CareFirst Medical Associates, P.A., co-located pain management and orthopedic rehabilitation practices located in Whitehouse, Texas.	January 6, 2006	$625,000 in cash and 191,131 shares of PainCare’s common stock, plus contingent payments of up to $1,250,000 in cash and common stock if certain performance goals are met.

Desert Pain Medicine Group, a pain management physician practice with three locations in California.	January 20, 2006	$1,500,000 in cash and 471,698 shares of PainCare’s common stock, plus contingent payments of up to $3,000,000 in cash and common stock if certain performance goals are met.

Amphora, LLC, an intraoperative monitoring company based in Denver, Colorado, serving medical institutions throughout Colorado, Wyoming, Arizona and Nebraska	February 1, 2006	PainCare purchased a 60% ownership interest and paid $3,250,000 in cash and 1,035,032 shares of PainCare’s common stock, plus contingent payments of up to $8,500,000 in cash and common stock if certain performance goals are met.

Industry Background

Acute and Chronic Pain

According to a joint monograph published by JCAHO and the National Pharmaceutical Council, each year an estimated 25 million Americans experience acute pain due to injury or surgery and another 50 million suffer chronic pain. As the “baby boom” population ages, the number of people who will require treatment for pain from back disorders, degenerative joint diseases, rheumatologic conditions, visceral diseases and cancer is expected to rise. Inadequate control of pain interferes with the pain sufferer’s ability to carry out activities of daily living, and may result in psychological impairment as well. According to the same source, the annual cost to Americans of pain suffering is estimated at $100 billion each year. Depending on the nature of the underlying disorder, the type of pain, severity and frequency of occurrence can vary widely. Common types of acute pain are associated with illnesses, surgical procedures, injuries, burns, or obstetrical pain related to labor and delivery. Common types of chronic pain include back pain, often localized in the lower back or neck regions, arthritis pain and headache or migraine. Chronic pain is also associated with degenerative diseases such as cancer.

Clinical awareness of the need for pain management has been increasing in recent years. In 1996, the American Pain Society proposed that pain was the fifth vital sign, in addition to pulse, blood pressure, body temperature and respiration, and the Veterans Health Administration has adopted pain as the fifth vital sign in their national pain management strategy. In 2001, JCAHO published standards that incorporated pain management into the standards for accredited health care providers. The JCAHO standards stress patients’ rights to appropriate assessment and management of pain, and require the treatment of pain along with the underlying disease or disorder. As a result, we believe that pain management is growing in significance as a medical specialty, which will result in an increased demand for pain treatment.

Clinical Approaches to Pain Treatment

The standard of care for treatment of chronic or acute pain may vary greatly depending on the underlying cause of the patient’s pain. A patient who is suffering from pain generally receives a clinical assessment, including a review of the patient’s medical history, to attempt to determine the cause of the patient’s pain.

Diagnosis. To assist in determining the pain’s origin, the physician may employ one or more imaging modalities, such as x-ray, computed tomography or CT scan, or magnetic resonance imagery or MRI. In addition, the physician may order an electrodiagnostic medical consultation, which can be helpful to establish an accurate diagnosis of a clinical problem that suggests neuromuscular disorder. Electrodiagnosis involves the placement of electrodes in proximity to the patient’s nervous system, and the application of electrical pulses that stimulate nerve function. By identifying those nerves that are generating the pain response, the physician can more accurately determine the cause of the patient’s pain and determine the appropriate treatment.

Pain Management. Pain management has emerged as a separate specialty in medicine. Methods used to treat chronic or acute pain are continually evolving. Some of the more common approaches to the treatment of pain include the following:

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Analgesics. Pharmaceutical treatments for pain include nonopioid analgesics, including nonsteriodial anti-inflammatory drugs, or NSAIDS, such as aspirin and acetaminophen, opioid analgesics, such as morphine, and other drugs that have analgesic properties that are useful in treating pain, such as certain antiepileptic and antidepressant drugs;

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Diagnostic Injection. Injection of anesthetics and anti-inflammatory agents directly into the area surrounding the pain generating nerve can relieve pain symptoms and often allow the nerve area to heal and repair itself. These injections, often referred to as “epidural or facet blocks,” allow the pain specialist to identify the specific anatomic structure that is generating the pain response;

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Implantable Pumps. Implantable pain pumps are devices inserted in the patient’s body that deliver a constant dose of anesthetic to a particular region of the body. The pain specialist can alter the level of anesthetic delivered depending on patient need. Implantable pumps are often used to treat cancer pain or severe back pain;

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Neuromodulation Devices. Neuromodulation devices such as implantable stimulators or pumps are used to treat chronic pain by altering nervous system activity either electrically or pharmacologically; and

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Radio Frequency Nerve Ablation. RF Nerve Ablation is a procedure used to temporarily deactivate minor nerves around the spine by heating surrounding tissue with a special probe to deactivate the pain generating nerve fibers.

Orthopedic Rehabilitation. One of the most frequent causes of chronic pain is injury or disease affecting the spine. Orthopedic rehabilitation is often the first approach to the treatment of back pain, and is frequently used following surgical treatment to post-operatively restore the patient’s muscle function. Depending on the underlying cause of the patient’s back pain and its severity, the physician may recommend orthopedic rehabilitation, which may include:

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Hot and cold packs;

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Electric stimulation or electrotherapy;

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Massage;

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Exercise;

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Ultrasound therapy; and

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Physical therapy sessions, utilizing specialized orthopedic rehabilitation equipment.

Inpatient Spine Surgery. If the patient does not respond to orthopedic rehabilitation, or if the extent of the disease or injury is too great, the physician may elect surgical treatment for back pain. Traditional surgical treatments for back pain include surgeries such as:

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Spinal fusion, which involves fusing one or more vertebrae together using screws, rods or grafts;

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Anterior discectomy, which involves removal of a spinal disc;

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Anterior corpectomy, which involves removing a portion of the entire vertebra or disc; and

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Laminectomy, where a portion of the entire vertebra is removed to repair a disc, access the spinal cord or relieve degeneration of the spine.

These techniques are typically performed in an inpatient hospital setting, and involve exposing a large area of the patient’s spine. Following the operation, a long recovery period with extensive rehabilitation is typically required.

Minimally Invasive Surgery. In contrast to traditional open surgery approaches, minimally invasive surgery techniques have been developed that require only a small incision and the use of endoscopic instruments to perform the operation. Some of the minimally invasive surgical treatments for back pain include:

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Discogram, a diagnostic procedure that involves injecting a dye into the disc of the spine, and using an x-ray to determine whether the disc has been damaged;

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Intra-Discal Electro-Thermal Annuloplasty or IDET, which is used to treat patients with pain due to disc herniations in the lower back. Using an x-ray for guidance, a small thermal catheter is inserted into the herniated disc and gradually heated, raising the temperature inside the disc. The heat contracts and thickens the protein of the disc wall as well as deactivating many of the nerve endings responsible for the pain in the damaged disc;

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Percutaneous Discectomy, which employs a mechanical or laser-based probe inserted into a herniated spinal disc, which removes material from the disc to relieve pressure and associated pain;

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Nucleoplasty, for the treatment of pain from mildly herniated discs causing pressure on adjacent nerve roots. Using an x-ray for guidance, a needle and specialized device are inserted into the herniated disc applying heat to remove the excess tissue and seal the disc; and

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Kyphoplasty, which is used to treat vertebral compression fractures associated with osteoporosis. Again using an x-ray for guidance, the bone is drilled and a balloon is inserted and inflated in the fracture area. The space created by the balloon is filled with orthopedic cement, binding the fracture and relieving pain.

We believe that there are many advantages to minimally invasive surgery over traditional open surgery, including shorter time involved, reduced cost and faster patient recovery and return to normal activities.

Growth of Existing Practices

To grow revenue, we assist our owned and managed practices with the addition of selected specialty physicians and treatment services. This permits the practice to offer in house additional services that would previously be referred out to other providers. As a result, we believe that the treating physician is better able to monitor the patient, and respond to any specific treatment needs more rapidly and

effectively than if the patient were using an outside provider. We believe that this approach results in the opportunity for improved clinical outcomes, shortened treatment times and increased revenue to the physician practice.

In our experience, physicians operating high-growth, busy practices often have limited time and resources to evaluate the potential impact of the deployment of additional services and equipment. Even if the physician has obvious demand for additional services, it can be time-consuming and costly to locate, qualify, negotiate with and incorporate additional specialists into the existing practice. Further, the time and resources required to physically expand the practice, through purchase or lease of additional real estate, design and construction of new facilities, and the acquisition and deployment of capital-intensive equipment are often significant barriers to growth for the practicing physician. Our approach is to relieve the physician of the administrative burdens associated with expanding the practice, which we believe allows the physician to focus more effectively on patient care, while creating opportunities for the physician’s practice to support organic growth.

Additional Physician Services

Depending on the size, growth profile and type of physician practice, we may deploy additional specialists certified in pain management, neurosurgery, orthopedics or physiatry. For example, with regard to an existing orthopedic surgery practice, we may add an additional spine surgeon to handle additional patients, and deploy an interventional pain management specialist to perform pain management procedures. Our objective is to offer complementary services to the physicians existing patient bases based on current trends.

We currently own and operate nine outpatient surgery centers which are located within physician offices. By providing these centers within the physician office, we are able to charge a technical fee for procedures performed on our premises, in addition to the professional fee charged by the physician. As needed, we will construct outpatient surgery centers or individual procedure rooms within our practice offices to enable outpatient procedures to be performed. We believe that such facilities are well suited to pain management and minimally invasive surgical procedures, and represent a lower-cost alternative to inpatient or dedicated surgery center facilities.

Ancillary Services

Orthopedic Rehabilitation Services. We have a program for the deployment of orthopedic rehabilitation services to the physician practice that facilitates advanced strength testing and restoration of function within the physician office environment. As needed, we will establish an in-house, fully staffed and provisioned rehabilitation clinic, with additional physiatrists, physical therapists or technicians as practice requirements dictate. We provide all supplies and equipment necessary for the operation of the clinic including state-of-the-art MedX equipment. MedX equipment has been clinically and academically demonstrated to be efficacious in rehabilitating patients. We believe that by providing orthopedic rehabilitation services in-house, the physician is better able to monitor the patient’s progress toward recovery, which contributes to improved clinical outcomes.

Electrodiagnostic Services. We also have a program for the deployment of an electrodiagnostic medicine program as a direct extension of the neurologic portion of the physical examination. We provide electrodiagnostic equipment, supplies, and technicians to perform procedures, and arrange for physician over-read and review of results. We believe that by performing these procedures in-house, we have the potential to enhance accuracy and time to diagnosis.

Diagnostic Imagery. We deploy magnetic resonance imagery, or MRI, technology to selected facilities. We believe that providing diagnostic imagery technology to pain management practices will be more convenient for patients and allow physicians to better diagnose and treat acute and chronic pain.

Intra-Articular Joint Program. In January 2005, we unveiled a new proprietary ancillary service designed to address severe knee pain and stiffness caused by osteoarthritis, which currently affects over 21 million Americans. The intra-articular joint program, will be integrated into the service offerings provided by each suitable physician practice in our national healthcare organization. In addition, the intra-articular joint program will be marketed nationally to non-affiliated physician practice groups under a limited management agreement, similar to our proprietary orthopedic rehabilitation and electro diagnostic medicine programs. The intra-articular joint program is a proprietary, technologically advanced, non-operative knee treatment protocol that combines a five to six week series of strategically targeted injections of Hyalgan - the first FDA-approved hyaluronan therapy to treat osteoarthritis knee pain in the United States, with synergistic orthopedic rehabilitation procedures specifically designed to strengthen blood flow to the knee.

Real Estate Services. To support the growth of our physician practices, we provide real estate services to practices which require additional office space or a specialty installation such as a fluoroscopy suite or in-office procedure room. Our services include:

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Locating additional office space within the practice’s local area;

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Negotiation of purchase or lease terms;

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Analysis of building codes, architectural requirements and design services; and

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Construction management services.

We believe that by providing these real estate services to our practices, the physicians can devote more time to the clinical aspects of the practices, enhancing the quality of care delivered and the profitability of the practices.

Recent Developments

Intraoperative Monitoring. In addition to our core business as set forth above, we also provide advanced Intraoperative Monitoring (IOM) and interpretation services to hospitals and surgeons through a majority-owned subsidiary Amphora. During surgical procedures, IOM is used to continuously assess the functional integrity of a patient’s nervous system, identify neural structures in the operative field, and avoid damage to those structures. In this regard, IOM offers protection of neural tissues and organs (brain, spinal cord and peripheral nerves) during surgery. By measuring spontaneous or elicited (evoked) electrical signals produced by the nervous system or attached muscle groups during surgery, impending injury or nerve irritation can be detected. This offers an opportunity to intervene and prevent permanent injury. IOM has been shown to be effective in reducing operative neurological complications in several types of surgeries, and is best documented in spinal surgeries for protection of the spinal cord. IOM has also shown to be highly effective in ENT craniofacial, orthopedic, and cardio- and cerebro-vascular surgeries.

Our Operations

We have acquired and operate seven physician practices which are wholly-owned subsidiaries of ours and we have acquired the non-medical assets and provide management services to fourteen physician practices, in addition to acquiring a total of nine outpatient surgery centers.

Each practice is focused on treatment of acute or chronic pain. Services provided in our practices include pain management, minimally invasive spine surgery, orthopedic rehabilitation, electro diagnostic medicine and diagnostic imagery, with each practice offering a differing mix of specific services while remaining focused on pain treatment. The following table is a list of our owned practices (“O”), managed practices (“M”) and outpatient surgery centers, including the original specialty of these practices and the services that we have added to them after we acquired the non-medical assets and entered into management agreements with them.


Practice Name	Location	Effective Date of Transaction	Initial Specialty	Added Service(s)
Rothbart Pain Management Clinic, Inc. (O)	Toronto, Canada	December 1, 2000	Pain Management	Additional Physicians

Advanced Orthopedics of South Florida II, Inc. (O)	Lake Worth, FL	January 1, 2001	Orthopedic Surgery	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Additional Physicians, Intra- Articular Joint

Pain and Rehabilitation Network, Inc. (O)	Orange Park, FL	December 12, 2002	Pain Management	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Additional Physicians, Intra- Articular Joint, (2) Additional Locations

Medical Rehabilitation Specialists II, Inc. (O)	Tallahassee, FL	May 16, 2003	Pain Management	Orthopedic Rehabilitation, Additional Building Space

Associated Physicians Group (M)	O’Fallon, IL	August 6, 2003	Orthopedic Rehabilitation	Orthopedic Rehabilitation, Intra- Articular Joint, Additional Physicians, (1) Additional Location

Spine & Pain Center, P.C. (M)	Bismarck, ND	December 23, 2003	Pain Management	Orthopedic Rehabilitation, Intra- Articular Joint

Health Care Center of Tampa, Inc. (O)	Lakeland, FL	December 30, 2003	Pain Management	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Intra-Articular Joint Program

Bone & Joint Surgical Clinic, Inc. (O)	Houma, LA	December 31, 2003	Orthopedic Surgery	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Additional Building Space, Intra-Articular Joint

Kenneth M. Alo, M.D., P.A. (M)	Houston, TX	December 31, 2003	Pain Management	Electrodiagnostic Medicine

Denver Pain Management, P.C. (M)	Denver, CO	April 29, 2004	Pain Management	Orthopedic Rehabilitaion, Electrodiagnostic Medicine, Intra-Articular Joint, Additional Physician

Georgia Pain Physicians, P.C. (M)	Atlanta, GA	May 25, 2004	Pain Management	Fellowship Program, Additional Physician

Georgia Surgical Centers, Inc. (O)	Atlanta, GA	May 25, 2004	Three Ambulatory Surgical Centers	N/A

Dynamic Rehabilitation Centers (M)	Detroit, MI	June 1, 2004	Orthopedic Rehabilitation	Orthopedic Rehabilitation, Intra- Articular Joint

Rick Taylor, D.O., P.A. (M)	Palestine, TX	June 7, 2004	Pain Management	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Diagnostic Imaging, Intra-Articular Joint, Additional Physicians, (1) Additional Location

Benjamin Zolper, M.D., Inc. (O)	Bangor, ME	July 1, 2004	Pain Management	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Office Expansion, Additional NP & PT

The Center for Pain Management (M)	Baltimore, MD	December 1, 2004	Pain Management	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Intra-Articular Joint, Additional PA & PT

Colorado Pain Specialists, P.C. (M)	Denver, CO	April 15, 2005	Pain Management	Electrodiagnostic Medicine, Intra-Articular Joint, Additional PA

PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center (O)	Lake Worth, FL	May 12, 2005	One Ambulatory Surgical Center	N/A


PSHS Beta Partners, Ltd. d/b/a Gables Surgical Center (O)	Miami, FL	August 1, 2005	One Ambulatory Surgical Center	N/A

Piedmont Center for Spinal Disorders, P.C. (M)	Danville, VA	August 9, 2005	Orthopedic Surgery	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Intra-Articular Joint, Additional Physician

Floyd O. Ring, Jr., M.D., P.C. (M)	Denver, CO	October 3, 2005	Pain Management	(1) Additional Location, Additional Physician

Christopher J. Centeno, M.D., P.C. & Therapeutic Management, Inc. (M)	Denver, CO	October 14, 2005	Pain Management	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Intra-Articular Joint, Additional PA

The Center for Pain Management ASC, LLC (M)	Baltimore, MD	January 3, 2006	Four Ambulatory Surgical Centers	N/A

REC, Inc. & CareFirst Medical Associates (M)	Whitehouse, TX	January 6, 2006	Pain Management	Orthopedic Rehabilitation, Electrodiagnostic Medicine, Intra-Articular Joint

Desert Pain Medicine Group (M)	Palm Springs, CA	January 20, 2006	Pain Management	Intra-Articular Joint

In addition to our 7 owned practices and 14 managed practices, we provide limited management services and equipment to 34 other practices throughout the country, including orthopedic rehabilitation, electrodiagnostic services and intra-articular joint therapy and equipment. We also own majority interest in nine surgery centers and an intraoperative monitoring company.

Operations Management

When we acquire or enter into a management agreement with a practice, we focus on integrating the practice with our operations. We have an eight-member team that is charged with facilitating a smooth transition after closing. Our integration team, in coordination with our consultants, legal counsel and independent accountants, works with the existing practice administrators and staff to perform such functions as:

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Applying for provider numbers from Medicare and other health care payors to ensure continuity of reimbursement;

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Performing a complete post-transaction audit of the practice accounting records; and

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Developing detailed budgets for operating performance with physicians, which are based on historical operating performance.

Once initial integration is complete, our integration team works with the physician and practice administrators to develop a plan for the implementation of additional physician services and ancillary services. For example, our integration and real estate personnel may devise a plan for the addition of an interventional pain management specialist to the practice, and develop and implement a detailed plan for the addition of a fluoroscopy suite to support minimally invasive surgical treatments that require x-ray guidance.

Following the integration and deployment of additional services, our integration team assists PainCare’s management in monitoring the practice and ensuring that performance targets are met. If the practice’s growth needs warrant, the integration team may be deployed to provide additional services or assist the practice in achieving its growth targets.

In contrast to historical physician practice management business models that required the implementation of common information technology systems, such as shared billing and collection,

clinical data and electronic health record systems, we deploy only those resources necessary to support the growth of additional services. Changes to information technology systems are kept to a minimum, and changes to billing and collection procedures are also minimized, subject to our legal, oversight and reporting requirements.

Business Strategy

Our objective is to become the leading provider of specialty pain care services in North America. To grow our practices, we intend to:

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Utilize advanced medical technologies. Many of our physicians are thought leaders in their respective fields, and employ the latest clinical techniques and medical technologies for the treatment of pain. We intend to support the use of new technology in pain treatment through the deployment of additional specialized physicians who are familiar with these techniques and technologies and by providing the latest, state-of-the-art equipment. For example, we deploy MedX rehabilitation equipment to orthopedic rehabilitation facilities, which has demonstrated the ability to improve patient outcomes.

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Business Development and Acquisitions

As part of our growth strategy, we intend to continue our acquisition program in which we seek to acquire practices that have the capacity for growth through the addition of specialized physicians and ancillary services.

We have a dedicated three-person business development team headed by our President. The team identifies candidates for acquisition, management, and our ancillary services programs. We seek to acquire or manage practices that meet our criteria, including reputation and quality of physicians, specialty mix, opportunities for growth and level of competition in the local market.

Our team utilizes their extensive industry contacts, as well as referrals from our current physicians and other sources, to identify, contact and develop potential acquisition candidates.

The business development team attends industry conferences, physician trade shows and medical education seminars, and maintains active relationships in the physician community. Another key source of business development opportunities are references from PainCare’s practicing physicians, many of whom are leaders in the areas of pain management and minimally invasive spine surgery.

We carefully evaluate each of our acquisition opportunities through an extensive due diligence process to determine which practices have the greatest potential for growth and profitability improvement under our operating structure. The acquisition team seeks to identify specific opportunities to enhance a practice’s productivity post-acquisition. For example, the due diligence team may determine that an existing pain center could benefit from the addition of an orthopedic rehabilitation facility. Our team may also identify opportunities to recruit additional physicians to increase the practice’s revenues and profitability.

In addition to evaluating the growth and profitability potential of a practice, we utilize the services of an independent outside consulting firm experienced with physician practice operations. Our consultants perform an extensive review of the practice’s operations, including, but not limited to, the following:

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Physician background checks;

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Verification of physician licensing;

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Ability of physicians to participate in the Medicare program;

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Interviews with all practice employees and staff;

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Review of key financial indicators for practice operations;

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Analysis of billed charges;

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Analysis of revenue, revenue growth and payor mix;

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Review of accounts receivable, aging of receivables and collection efforts;

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Review of operating costs such as staffing costs, overhead and leases;

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Analysis of referral patterns; and

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Comparison of practice operating metrics to objective standards published by the Medical Group Management Association.

In addition to our consultants, we also employ outside legal counsel and special healthcare counsel to assist us in evaluating acquisition candidates. We also utilize the services of an independent accounting firm to assist us in review of the candidate with respect to financial and accounting matters. Finally, physicians and key practice employees are interviewed by members of PainCare management to determine operational compatibility and shared vision for success.

Competition

The health care industry, in general, and the markets for orthopedic, rehabilitation and minimally invasive surgery services in particular, are highly competitive. Our owned, managed and limited management practices compete with other physicians and rehabilitation clinics who may be better established or have greater recognition in a particular community than the physicians in our practices. Our

practices also compete against hospitals and large health care companies, such as HealthSouth, Inc. and U.S. Physical Therapy, Inc., with respect to orthopedic and rehabilitation services, and Symbion and AmSurg Corp, with respect to out-patient surgery centers. These hospitals and companies have established operating histories and greater financial resources than us. In addition, we expect competition to increase, particularly in the market for rehabilitation services, as consolidation of the therapy industry continues through the acquisition by hospitals and large health care companies of physician-owned and other privately owned therapy practices. We will also compete with our competitors in connection with acquisition opportunities.

Relationships with Physician Practices

We provide our services through physician practices with which we have one of three types of relationships:

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Owned practices, which are wholly-owned subsidiaries of PainCare Holdings, Inc.

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Managed practices, in states that prohibit the corporate practice of medicine; and

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Limited management practices, which are medical practices where we provide certain management services and equipment pursuant to specific contractual agreements.

In a typical owned practice, we acquire all of the assets of a physician practice from the owner physicians. We establish a wholly-owned subsidiary to own and operate this practice. We enter into employment agreements with the selling physicians, usually for a five year term, which provide for base compensation and incentive compensation based upon increases in operating earnings. These contracts are subject to earlier termination in certain circumstances. The physicians are subject to confidentiality and non-competition provisions that typically run for two years following the termination of the physician’s employment agreement.

In a typical managed practice, we acquire all of the non-medical assets of a physician practice from the owner physicians and then enter into a management agreement with the physicians to manage the practice for a fee. The management agreement is usually for a 40 year term and is generally only subject to termination by the physician if we breach the agreement and fail to cure the breach upon at least 30 days’ written notice from the physicians.

In a typical limited management practice, we agree to provide a physician practice with orthopedic rehabilitation or electrodiagnostic services and equipment under a management agreement that is usually for an initial term of five years with two five year renewal options on our part. We provide the equipment, supplies and our management expertise, and the practice provides the space, personnel, billing and collection services. We receive a percentage of the practice’s collections from the service being managed by us.

Regulatory Environment

General

Our practices are subject to substantial federal, state and local government health care laws and regulations. In addition, laws and regulations are constantly changing and may impose additional requirements. These changes could have the effect of impeding our ability to continue to do business or reduce our opportunities to continue to grow.

Every state imposes licensing requirements on individual physicians and health care facilities. In addition, federal and state laws regulate HMOs and other managed care organizations. Many states require regulatory approval, including certificates of need, before establishing certain types of health care facilities, including surgery centers, or offering certain services.

Many states in which we do business have corporate practice of medicine laws which prohibit us from owning practices or exercising control over the medical judgments or decisions of physicians. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. In those states, we acquire the non-medical assets of these practices and enter into long-term management agreements with these managed practices and with respect to our limited management practices, we enter into shorter term limited management agreements. Under those agreements, we provide management services and other items to the practices in exchange for a service fee. We structure our relationships with the practices in a manner that we believe keeps us from engaging in the corporate practice of medicine or exercising control over the medical judgments or decisions of the practices or their physicians. Nevertheless, state regulatory authorities or other parties could assert that our agreements violate these laws.

The laws of many states prohibit physicians from splitting fees with non-physicians (or other physicians). These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. The relationship between us on the one hand, and the managed practices and limited management practices, on the other hand, may raise issues in some states with fee splitting prohibitions. Although we have attempted to structure our contracts with the managed practices and the limited management practices in a manner that keeps us from violating prohibitions on fee splitting, state regulatory authorities or other parties may assert that we are engaged in practices that constitute fee-splitting. This would have a material adverse effect on us.

Medicare and Medicaid Participation

A substantial portion of our revenues are expected to continue to be received through third-party reimbursement programs, including state and federal programs, primarily Medicare as well as Medicaid, and private health insurance programs. Medicare is a federally funded and administered health insurance program, primarily for individuals entitled to social security benefits who are 65 or older or who are disabled. Medicaid is a health insurance program jointly funded by state and federal governments that provides medical assistance to qualifying low income persons.

To participate in the Medicare program and receive Medicare payment, the owned practices, managed practices and limited management practices must comply with regulations promulgated by the Department of Health and Human Services. The requirements for certification under Medicare and Medicaid are subject to change and, in order to remain qualified for these programs, the practices may have to make changes from time to time in equipment, personnel or services. Although we believe these practices will continue to participate in these reimbursement programs, we cannot assure you that these practices will continue to qualify for participation.

Medicare Fraud and Abuse

The anti-kickback provisions of the Social Security Act (the "Anti-Kickback Statute") prohibit anyone from knowingly and willfully (a) soliciting or receiving any remuneration in return for referrals for items and services reimbursable under most federal health care programs; or (b) offering or paying any remuneration to induce a person to make referrals for items and services reimbursable under most federal health care programs. The prohibited remuneration may be paid directly or indirectly, overtly or covertly, in cash or in kind.

Violation of the Anti-Kickback Statute is a felony, and criminal conviction results in a fine of not more than $25,000, imprisonment for not more than five years, or both. Further, the Secretary of the Department of Health and Human Services has the authority to exclude violators from all federal health care programs and/or impose civil monetary penalties of $50,000 for each violation and assess damages of not more than three times the total amount of remuneration offered, paid, solicited or received.

As the result of a congressional mandate, the Office of the Inspector General (OIG) of the Department of Health and Human Services promulgated regulations specifying certain payment practices which the OIG determined to be at minimal risk for abuse. The OIG named these payment practices “Safe Harbors.” If a payment arrangement fits within a safe harbor, it will be deemed not to violate the Anti-Kickback Statute. Merely because a payment arrangement does not comply with all of the elements of any Safe Harbor, however, does not mean that the parties to the payment arrangement are violating the Anti-Kickback Statute.

We receive fees under our agreements with the managed practices and the limited management practices for management and administrative services and equipment and supplies. We do not believe we are in a position to make or influence referrals of patients or services reimbursed under Medicare, Medicaid or other governmental programs. Because the provisions of the Anti-Kickback Statute are broadly worded and have been broadly interpreted by federal courts, however, it is possible that the government could take the position that we, as a result of our ownership of the owned practices, and as a result of our relationships with the limited management practices and the managed practices, will be subject, directly and indirectly, to the Anti-Kickback Statute.

With respect to the managed practices and the limited management practices, we provide general management services and limited management services, respectively. In return for those services, we receive compensation. The OIG has concluded that, depending on the facts of each particular arrangement, management arrangements may be subject to the Anti-Kickback Statute. In particular, an advisory opinion published by the OIG in 1998 (98-4) concluded that in a proposed management services arrangement where a management company was required to negotiate managed care contracts on behalf of the practice, the proposed arrangement could constitute prohibited remuneration where the management company would be reimbursed its costs and paid a percentage of net practice revenues.

Our management agreements with the managed practices and the limited management practices differ from the management agreement analyzed in Advisory Opinion 98-4. Significantly, we believe we are not in a position to generate referrals for the managed practices or the limited management practices. In fact, our management agreements do not require us to negotiate managed care contracts on behalf of the managed practices or the limited management practices, or to provide marketing, advertising, public relation services or practice expansion services to those practices. Because we do not undertake to generate referrals for the managed practices or the limited management practices, and the services provided to these practices differ in scope from those provided under Advisory Opinion 98-4, we believe that our management agreements with the managed practices and limited management practices do not violate the Anti-Kickback Statute. Nevertheless, although we believe we have structured our management agreements in such a manner as not to violate the Anti-Kickback Statute, we cannot guarantee that a regulator would not conclude that the compensation to us under the management agreements constitutes prohibited remuneration. In such event, our operations would be materially adversely affected.

The relationship between the physicians employed by the owned practices and the owned practices is subject to the Anti-Kickback Statute as well because the employed physicians refer Medicare patients to the owned practices and the employed physicians receive compensation from the owned practices for services rendered on behalf of the owned practices. Nevertheless, there is a Safe Harbor for compensation paid pursuant to a bona fide employment relationship. Therefore, it is our position that the owned practices’ arrangements with their respective employed physicians do not violate the Anti-Kickback Statute. Nevertheless, if the relationship between the owned practices and their physician employees is determined not to be a bona fide employment relationship, this could have a material adverse effect on us.

Our agreements with the limited management practices may also raise different Anti-Kickback concerns. In April of 2003, the OIG issued a Special Advisory Bulletin which addressed contractual joint ventures where a health care provider in one line of business (“Owner”) expands into a related health care business by contracting with an existing provider of a related item or service (“Manager”) to provide the new item or service to the Owner’s existing patient population. In those arrangements, the Manager not only manages the new line of business, but may also supply it with inventory, employees, space, billing and other services. In other words, the Owner contracts out substantially the entire operation of the related line of business to the Manager, receiving in return the profits of the business as remuneration for its federal program referrals to the new line of business.

According to the OIG, contractual joint ventures have the following characteristics: (i) the establishment of a new line of business; (ii) a captive referral base; (iii) the Owner lacks business risk; (iv) the Manager is a competitor or would-be competitor of the Owner’s new line of business; (v) the scope of services provided by the Manager is extremely broad, with the manager providing: day to day management; billing; equipment; personnel; office space; training; health care items, supplies and services; (vi) the practical effect of the arrangement is to enable the Owner to bill insurers and patients for business otherwise provided by the Manager; (vii) the parties agree to a non-compete clause barring the Owner from providing items or services to any patient other than those coming from Owner and/or barring the Manager from providing services in its own right to the Owner’s patients.

We have attempted to draft our agreements with the limited management practices in a manner that takes into account the concerns in the Special Advisory Bulletin. Specifically, under our arrangements, the limited management practice takes business risk. It is financially responsible for the following costs: the space required to provide the services; employment costs of the personnel providing the services and intake personnel; and billing and collections. We do not reimburse the limited management practice for any of these costs. We provide solely equipment, supplies and our management expertise. In one of our limited management business lines we do not even provide the equipment. In return for these items and services, we receive a percentage of the limited management practice’s collections from the services being managed by us that is consistent with the fair market value of our services. Consequently, we believe that the limited management practice is not being compensated for or to induce its referrals.

Although we believe that our arrangements with the limited management practices do not violate the Anti-Kickback Statute for the reasons specified above, we cannot guarantee that our arrangements will be free from scrutiny by the OIG or that the OIG would not conclude that these arrangements violate the Anti-Kickback Statute. In a recent OIG Advisory Opinion No. 4-17, the OIG declined to issue a favorable opinion on a limited lease/management arrangement involving physician office-based pathology laboratory services. Although we believe that our limited management arrangements are distinguishable from the facts in Advisory Opinion No. 4-17, this opinion illustrates how broadly the OIG is applying its contractual joint venture analysis. In the event the OIG were to conclude that our limited management arrangements violate the Anti-Kickback Statute, this would have a material adverse effect on us.

Federal Anti-Referral Laws

Section 1877 of Title 18 of the Social Security Act, commonly referred to as the “Stark Law,” prohibits a physician from making a referral to an entity for the furnishing of Medicare-covered “designated health services” if the physician (or an immediate family member of the physician) has a “financial relationship” with that entity. “Designated health services” include clinical laboratory services; physical and occupational therapy services; radiology services, including magnetic resonance imaging,

computerized axial tomography scans, and ultrasound services (including the professional component of such diagnostic testing, but excluding invasive procedures where the imaging modality is used to guide a needle, probe or catheter accurately); radiation therapy services and supplies; durable medical equipment and supplies; home health services; inpatient and outpatient hospital services; and certain other services. A “financial relationship” is defined as an ownership or investment interest in or a compensation arrangement with an entity that provides designated health services. Sanctions for prohibited referrals include denial of Medicare payment, and civil money penalties of up to $15,000 for each service ordered. Designated health services furnished pursuant to a referral that is prohibited by the Stark Law are not covered by Medicare and payments improperly collected must be promptly refunded.

The physicians in our owned practices have a financial relationship with the owned practices (they receive compensation for services rendered) and may refer patients to the owned practices for physical and occupational therapy services (and perhaps other designated health services) covered by Medicare. Therefore, an exception would have to apply to allow the physicians in our owned practices to refer patients to the owned practices for the provision by the owned practices of Medicare-covered designated health services.

There are several exceptions to the prohibition on referrals for designated health services which have the effect of allowing a physician that has a financial relationship with an entity to make referrals to that entity for the provision of Medicare-covered designated health services. The exception on which we rely with respect to the owned practices is the exception for employees, as all of the physicians employed in our owned practices are employees of the respective owned practices. Therefore, we believe that the physicians employed by our owned practices can refer patients to the owned practices for the provision of designated health services covered by Medicare. Nevertheless, should the owned practices fail to adhere to the conditions of the employment exception, or if a regulator determines that the employees or the employment relationship do not meet the criteria of the employment exception, the owned practices would be liable for violating the Stark Law, and that could have a material adverse effect on us. We believe that our relationships with the managed practices and the limited management practices, respectively, do not trigger the Stark Law. Nevertheless, if a regulator were somehow to determine that these relationships are subject to the Stark Law, and that the relationships do not meet the conditions of any exception to the Stark Law, such failure would have a material adverse effect on us.

The referral of Medicare patients by physicians employed by or under contract with the managed practices and the limited management practices, respectively, to their respective practices, however, does trigger the Stark Law. We believe, nevertheless, that the in-office ancillary exception to the Stark Law has the effect of permitting these physician members of the respective managed practices and limited management practices to refer patients to their respective group practice for the provision by the respective group practice of Medicare-covered designated health services. If the managed practices or limited management practices fail to abide by the terms of the in-office ancillary exception, they cannot properly bill Medicare for the designated health services provided by them. In such an event, our business could be materially adversely affected because the revenues we generate from these practices is dependent, at least in part, on the revenues or profits generated by those practices.

State Anti-Referral Laws

At least some of the states in which we do business also have prohibitions on physician self-referrals that are similar to the Stark Law. These laws and interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. As indicated elsewhere, we enter into management agreements with the managed practices and the limited management practices. Under those agreements, we provide management and equipment and services to the practices in exchange for compensation. Although we believe that the practices comply with these laws, and although we attempt to structure our relationships with these practices in a manner that we believe keeps us from violating these laws (or in a manner that we believe does not trigger the law), state regulatory authorities

or other parties could assert that the practices violate these laws and/or that our agreements with the practices violate these laws. Any such conclusion could adversely affect our financial results and operations.

A substantial portion of our business operations, including our corporate offices, are located in Florida. Florida’s prohibition on self-referrals, Fla. Stat. §456.053 (“Self-Referral Act”), prohibits health care providers from referring patients, regardless of payment source (not just Medicare and Medicaid beneficiaries), for the provision of certain designated health services (“Florida Designated Health Services”) to an entity in which the health care provider is an investor or has an investment interest. Under the Self-Referral Act, Florida Designated Health Services are defined as clinical laboratory, physical therapy, and comprehensive rehabilitative, diagnostic-imaging and radiation therapy services. We currently operate facilities, and plan to purchase additional practices that provide some or all of these Florida Designated Health Services. All health care products and services not considered Florida Designated Health Services are classified as “other health services.” The Self-Referral Act also prohibits the referral by a physician of a patient for “other health services” to an entity in which that physician is an investor, unless (i) the physician’s investment interest is in the registered securities of a publicly traded corporation whose shares are traded on a national exchange or over-the-counter market and which has net equity at the end of its most recent fiscal quarter in excess of $50,000,000; or (ii) the physician’s investment interest is in an entity whereby (a) no more than 50% of the value of the investment interests in the entity may be held by investors who are in a position to make referrals to the entity; (b) the terms under which an investment interest is offered must be the same for referring investors and non-referring investors; (c) the terms under which an investment interest is offered may not be related to the investor’s volume of referrals to the entity; and (d) the investor must not be required to make referrals or be in the position to make referrals to the entity as a condition for becoming or remaining an investor (the “50% Investor Exception”).

Entities that meet either exception must also (i) not lend to or guarantee a loan to an investor who is in a position to make referrals if the investor uses any part of that loan to obtain the investment interest, and (ii) distribute profits and losses to investors in a manner that is directly proportional to their capital investment.

The Self-Referral Act excludes from the definition of “referral” services by a health care provider who is a sole provider or member of a group practice (as defined by the Self-Referral Act) that are provided solely for the referring health care provider’s or group practice’s own patients (“Group Practice Exception”). Referrals by our physician investors who are not employed by an owned practice to an owned practice for “other health services” should qualify for the 50% Investor Exception, because physician-investors in a position to refer to our owned practice, but who are not employed by our owned practice, do not collectively own more than 50% of the investment value of PainCare. However, physician investors who are not employed by our owned practices cannot refer to our owned practices for Florida Designated Health Services because they are not members of our owned group practices and, thus, their referrals would not qualify for the Group Practice Exception. So long as physician investors who are not employed by our owned practices do not refer to our owned practices for Florida Designated Health Services, we believe we will be in compliance with the Self-Referral Act. Although we will have mechanisms in place to monitor referrals from physician investors, it is the responsibility of the physician investors to comply with the Self-Referral Act and there can be no assurances that physician investors will comply with such law. Violations thereof could adversely affect us, as well as result in regulatory action against the Company.

The Self-Referral Act also imposes certain disclosure obligations on us and physician investors who are referring physicians. Under the Self-Referral Act, a physician may not refer a patient to an entity in which he or she is an investor, even for services that are not Florida Designated Health Services, unless, before doing so, the patient is given a written statement disclosing, among other things, the physician’s investment interest in the entity to which the referral is made. Other obligations are imposed

on the Company as a result of the Self-Referral Act. It is the responsibility of any referring physician investor to comply with such statutes, regulations and professional standards. However, this law may discourage certain physician investors from making referrals to us or encourage patients to choose alternative health care providers. In addition, the violation thereof could adversely affect us, as well as result in regulatory action against us.

Violations of the Florida self-referral laws may result in substantial civil penalties and administrative sanctions for individuals or entities as well as the suspension or revocation of a physician’s license to practice medicine in Florida. Such sanctions, if applied to us or any of our physician investors, would result in significant loss of reimbursement and could have a material adverse effect on us.

Florida also has a criminal prohibition regarding the offering, soliciting, or receiving of remuneration, directly or indirectly, in cash or in kind, in exchange for the referral of patients (the “Patient Brokering Act”). One of the exceptions to this prohibition is for business and compensation arrangements that do not violate the Anti-Kickback Statute. Accordingly, so long as we are in compliance with the Anti-Kickback Statute, then the arrangement should be in compliance with the Patient Brokering Act.

Information Privacy Regulations

Numerous state, federal and international laws and regulations govern the collection, dissemination, use and confidentiality of patient-identifiable health information, including the federal Health Insurance Portability and Accountability Act of 1996 and related rules, or HIPAA. In the provision of services to our patients, we may collect, use, maintain and transmit patient information in ways that may or will be subject to many of these laws and regulations. The three rules that were promulgated pursuant to HIPAA that could most significantly affect our business are the Standards for Electronic Transactions, or Transactions Rule; the Standards for Privacy of Individually Identifiable Health Information, or Privacy Rule; and the Health Insurance Reform Security Standards, or Security Rule. The respective compliance dates for these rules for most entities were October 16, 2002, April 16, 2003 and April 21, 2005. HIPAA applies to covered entities, which include most healthcare providers and health plans that will contract for the use of our services. HIPAA requires covered entities to bind contractors to compliance with certain burdensome HIPAA requirements. Other federal and state laws restricting the use and protecting the privacy of patient information also apply to us, either directly or indirectly.

The HIPAA Transactions Rule establishes format and data content standards for eight of the most common healthcare transactions. When we perform billing and collection services for our owned practices or managed practices we may be engaging in one of more of these standard transactions and will be required to conduct those transactions in compliance with the required standards. The HIPAA Privacy Rule restricts the use and disclosure of patient information and requires entities to safeguard that information and to provide certain rights to individuals with respect to that information. The HIPAA Security Rule establishes elaborate requirements for safeguarding patient information transmitted or stored electronically. We may be required to make costly system purchases and modifications to comply with the HIPAA requirements that are imposed on us and our failure to comply with these requirements may result in liability and may adversely affect our business.

Federal and state consumer protection laws are being applied increasingly by the Federal Trade Commission, or FTC, and state attorneys general to regulate the collection, use and disclosure of personal or patient information, through websites or otherwise, and to regulate the presentation of website content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access.

Numerous other federal and state laws protect the confidentiality of private information. These laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by courts

and government agencies, creating complex compliance issues for us and potentially exposing us to additional expenses, adverse publicity and liability. Other countries also have, or are developing, laws governing the collection, use and transmission of personal or patient information and these laws, if applicable, could create liability for us or increase our cost of doing business.

New health information standards, whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we must handle health care related data, and the cost of complying with these standards could be significant. If we do not properly comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions.

Employees

As of March 29, 2006, the Company and its subsidiaries employed and leased approximately 428 persons, of which approximately 390 are full time and 38 are licensed physicians. These employees do not include physicians and other allied healthcare personnel employed by our managed practices.

Our ability to provide our services is dependent upon recruiting, hiring, and retaining qualified technical personnel. To date, we have been able to recruit and retain sufficient qualified personnel. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider relations with our employees to be good.

Available Information

Our Internet address for our corporate website is www.paincareholdings.com. We make available free of charge, through the Investor Information section of our corporate website, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We have not incorporated by reference into this Report the information on our corporate website, and you should not consider it to be a part of this Report. The Internet address for our corporate website is included as an inactive textual reference only.

ITEM 1A. RISK FACTORS

You should consider the risks described below before making an investment decision. We believe that the risks and uncertainties described below are the principal material risks facing our company as of the date of this Form 10-K. In the future, we may become subject to additional risks that are not currently known to us. Our business, financial condition or results of operations could be materially adversely affected by any of the following risks. The trading price of our common stock could decline due to any of the following risks.

Risks Related to Our Business

We may need to restate our consolidated financial statements again.

Based upon comments received from the SEC staff regarding our method of accounting for (i) certain term notes, freestanding and embedded derivatives, and (ii) intangible assets acquired in connection with physician practice and surgery center acquisitions, we have restated our consolidated financial statements

for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. We based the foregoing restatements on our interpretation of applicable accounting pronouncements, notwithstanding the fact that the SEC staff comments remain unresolved. There can be no assurance that the SEC staff will agree with our interpretation of the applicable accounting pronouncements. In the event the SEC staff disagrees with one or more of our interpretations of applicable accounting pronouncements, we may have to restate our consolidated financial statements again in the future.

A number of class action lawsuits have been filed against us and certain of our officers and directors.

We have become aware of at least twelve putative class action lawsuits and derivative demand letters filed against us and certain of our officers and directors. Of the total filed lawsuits and derivative demand letters, we’ve been served with nine. We understand that the lawsuits arose in connection with our determination to restate certain of our historical financial statements. We believe that the lawsuits lack merit and we have engaged the international law firm of McDermott Will & Emery LLP to vigorously defend against such allegations and claims. There can be no assurance at this time how the lawsuits in question will ultimately be resolved, or the impact, if any, such resolutions will have on our operations and/or financial condition.

We may need to negotiate a waiver letter with respect to our senior credit facility.

On May 2, 2006 we entered into a letter agreement with the lenders under our $30 million senior credit facility pursuant to which the lenders waived certain historic breaches of the terms of the credit facility in consideration for which we paid a $300,000 waiver fee to the lenders.

Subsequent to the date of the letter agreement we may have failed to comply with certain covenants set forth in the credit facility. While we have not received a notice letter from the lenders with respect to any breaches or defaults under the terms of the credit facility after the date of the letter agreement, there can be no assurance that such a notice letter will not be received in the future. In the event we are served with such a notice letter in the future we will attempt to enter into another waiver agreement with the lenders. There can be no assurance that we would be able to enter into any such waiver agreement. As the credit facility is secured by all of our assets, to the extent we were unable to negotiate a waiver letter with the lenders the lenders might attempt to take certain actions that could materially adversely impact our operations, including, but not limited to, taking control of one or more of our operating subsidiaries and/or other company assets.

We Need to Continue to Improve and Implement our Controls and Procedures.

Requirements adopted by the SEC in response to the passage of the Sarbanes-Oxley Act of 2002 require us to (i) evaluate and report on a quarterly basis the effectiveness of our disclosure controls and procedures, and (ii) assess and report on an annual basis the effectiveness of our internal controls over financial reporting.

During our assessment with respect to the effectiveness of the foregoing controls as of December 31, 2005, the end of our most recent fiscal year, management identified a number of material weaknesses, which are fully disclosed in Item 9A in this Form 10-K.

As a result of the material weaknesses, management concluded that our disclosure controls and procedures and our internal controls over financial reporting as of December 31, 2005, the end of our most recent fiscal year, were not effective.

In an effort to rectify the foregoing material weaknesses, we have modified our method of accounting for certain transactions and have implemented additional controls. In so doing, we restated our consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.

We continue to evaluate our disclosure controls and procedures and our internal controls over financial reporting, and may modify, enhance or supplement them as appropriate in the future. There can be no assurance that we will be able to maintain compliance with all of the SEC control requirements. Any modifications, enhancements or supplements to our controls systems could be costly to prepare or implement, divert the attention of our management from operating our business, and cause our operating expenses to increase over the ensuing year. Further, our stock price may be adversely affected by the current, or any future, determination that our disclosure controls and procedures and/or internal controls over financial reporting were not effective.

Please refer to Part II. Item 9A. below for an additional discussion regarding our controls.

The success of our growth strategy depends on the successful identification, completion and integration of acquisitions.

We have acquired or entered into general management agreements with 21 physician practices and 9 ambulatory surgery centers since 2002 and we intend to pursue additional acquisitions and management relationships. Our future success will depend on our ability to identify and complete acquisitions and integrate the acquired businesses with our existing operations. Our growth strategy will result in significant additional demands on our infrastructure, and will place a significant strain on our management, administrative, operational, financial and technical resources, and increase demands on our systems and controls. Our growth strategy involves numerous risks, including, but not limited to:

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the possibility that we are not able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms;

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possible decreases in capital resources or dilution to existing stockholders;

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difficulties and expenses incurred in connection with an acquisition;

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the difficulties of operating an acquired business;

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the diversion of management’s attention from other business concerns;

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a limited ability to predict future operating results of acquired practices; and

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the potential loss of key physicians, employees and patients of an acquired practice.

In the event that the operations of an acquired practice do not meet expectations, we may be required to restructure the acquired practice or write-off the value of some or all of the assets of the acquired practice. We cannot assure you that any acquisition will be successfully integrated into our operations or will have the intended financial or strategic results.

In addition, acquisitions entail an inherent risk that we could become subject to contingent or other liabilities in connection with the acquisitions, including liabilities arising from events or conduct pre-dating our acquisition and that were not known to us at the time of acquisition. Although we conduct due diligence in connection with each of our acquisitions, this does not mean that we will necessarily identify all potential problems or issues in connection with any given acquisition, some of which could be significant.

Our failure to successfully identify and complete future acquisitions or to integrate and successfully manage completed acquisitions could have a material adverse effect on our business, financial condition and results of operations.

Our growth strategy may not prove viable and expected growth and value may not be realized.

Our strategy is to rapidly grow by acquiring, establishing and managing a network of pain management, minimally invasive spine surgery and orthopedic rehabilitation centers. Identifying appropriate physician groups and proposing, negotiating and implementing economically attractive affiliations with them can be a lengthy, complex and costly process. There can be no assurance that we will be successful in identifying and establishing relationships with orthopedic surgery and pain management groups. If we are successful in implementing our strategy of rapid growth, such growth may impair our ability to efficiently provide non-professional support services, facilities, equipment, non-professional personnel, supplies and non-professional support staff to medical practices. Our future financial results could be materially adversely affected if we are unable to manage growth effectively.

There can be no assurance that physicians, medical providers or the medical community in general will accept our business strategy and adopt the strategy offered by us. The extent to which, and rate at which, these services achieve market acceptance and penetration will depend on many variables including, but not limited to, the establishment and demonstration in the medical community of the

clinical safety, efficacy and cost-effectiveness of these services, the advantage of these services over existing technology, and third-party reimbursement practices. There can be no assurance that the medical community and third-party payors will accept our technology. Similar risks will confront any other services developed by us in the future. Failure of our services to gain market acceptance would have a material adverse effect on our business, financial condition, and results of operations.

If we do not have sufficient additional capital to finance our growth strategy, our development may be limited.

We will need to raise additional capital in order to acquire, integrate, develop, operate and expand our affiliated physician practices. We may finance future acquisition and development projects through debt or equity financings and may use shares of our capital stock for all or a portion of the consideration to be paid in acquisitions. To the extent that we undertake these financings or use capital stock as consideration, our stockholders may, in the future, experience significant ownership dilution. To the extent we incur indebtedness, we may have significant interest expense and may be subject to covenants in the related debt agreements that affect the conduct of our business. We have convertible notes and debentures outstanding that have anti-dilution rights and limitations on incurring additional indebtedness that could limit our ability to obtain financing on favorable terms, or at all.

We can give no assurances that we will be able to obtain financing necessary for our acquisition and development strategy or that, if available, the financing will be on terms acceptable to us. If we do not have sufficient capital resources, our growth could be limited and our operations impaired.

There has been a lack of profitable operations in recent periods.

For the years ended December 31, 2005, 2004 and 2003, net loss was ($5,339,378), $(1,501,482) and ($11,482,842), respectively. We expect to increase our spending significantly as we continue to expand our service offerings and commercialization activities. As a result, we will need to generate significant revenues in order to continue to grow our business and become profitable.

A significant portion of our assets consists of goodwill and other intangible assets and any impairment, reduction, or elimination of these intangible assets could hurt our results of operations.

As of December 31, 2005, we had an intangible asset, net goodwill, of approximately $111.5 million, which constituted 61% of our total assets. The net goodwill reflects the amount we pay for our acquired practices in excess of the fair value of other identifiable intangible and tangible assets. Our net goodwill will increase in the future as a result of our acquisitions as we pay the contingent purchase price for the acquisitions according to the terms of the respective purchase agreements. In addition, we expect to acquire additional goodwill in connection with future acquisitions. As prescribed by generally accepted accounting principles, we do not amortize goodwill; rather it is carried on our balance sheet until it is impaired. At least annually we test net goodwill for impairment. Any determination of impairment could require a significant reduction, or the elimination, of goodwill, which could hurt our results of operations. Also, the effect of a prolonged downturn in our business will be exacerbated by the impairment, and resulting write-down, of goodwill related to a reduction in the value of our acquired practices.

Our cash flow and financial condition may be adversely affected by the assumption of credit risks.

Our managed and limited management practices bill their patients’ insurance carriers for services provided by the practices. By undertaking the responsibility for patient billing and collection activities, the practices assume the credit risk presented by the patient base, as well as the risk of payment delays attendant to reimbursement through governmental programs or third-party payors. If our practices are unsuccessful in collecting a substantial amount of such fees, it will have a material adverse affect on our financial condition because our compensation from these practices is dependent on the practices’ collections.

If we are forced to repay our debentures and notes in cash, we may not have enough cash to fund our operations.

Our 7.5% convertible debentures and our secured convertible term notes contain certain provisions and restrictions, which if violated, could result in the full principal amount, $9,653,008 as of December 31, 2005, together with interest and other amounts, becoming immediately due and payable in cash on such securities. If such an event occurred and if a holder of such securities demanded repayment, we might not have the cash resources to repay such indebtedness. The debentures have a term of three years, with interest payable quarterly. Subject to certain conditions, the quarterly interest payments on the debentures may be paid, at our option, in cash or additional shares of our common stock. Our secured convertible term notes are repayable in monthly installments of principal over the three year life of the notes. Subject to certain conditions, the monthly principal and interest payments on the notes may be paid, at our option, in cash or additional shares of common stock. If we made the payments on the debentures and notes in cash rather than additional shares of common stock, it would reduce the amount of cash available to fund operations.

We rely on the services of our physicians. We may not be able to attract and retain qualified physicians we need to support our business.

Our operations are substantially dependent on the services of our practices’ physicians. With respect to our owned practices, we have employment agreements with our physicians that generally have terms of five years, but may be terminated by either party in certain circumstances. Our management agreements with our managed practices generally have a 40 year term, while our agreements with limited management practices have a 5 year term with options for two additional five year renewal terms which are exercisable at our election. These agreements may be earlier terminated under certain circumstances. Although we will endeavor to maintain and renew such contracts, in the event a significant number of physicians terminate their relationships with us, our business could be adversely affected. While our employment and management agreements contain covenants not to compete with us for a period of generally two years after termination of employment, these provisions may not be enforceable.

We compete with many types of health care providers and government institutions for the services of qualified physicians. If we are unable to attract and retain physicians, our revenues will decrease and our business will suffer.

If certain key employees were to leave, we may be unable to operate our business profitably, complete existing projects or undertake certain new projects.

Our key employees and consultants include Merrill Reuter, M.D., Randy Lubinsky, Mark Szporka, and Ron Riewold. We have entered into employment agreements with Randy Lubinsky (Chief Executive Officer and Director), Ron Riewold (President and Director), Mark Szporka (Chief Financial Officer and Director), and Dr. Merrill Reuter (President of one of our subsidiaries and Chairman of the Board). Should the services of Dr. Reuter, Randy Lubinsky, Ron Riewold, or Mark Szporka or other key personnel become unavailable to us for any reason, our business could be adversely affected. There is no assurance that we will be able to retain these key individuals and/or attract new employees of the caliber needed to achieve our objectives. We do not maintain any key employee life insurance policies.

Our employment agreements with certain senior executive officers entitle them to individual annual bonuses equal to a minimum of $200,000 up to a maximum of 150% of salary.

Our employment agreements with our Chief Executive Officer, Chief Financial Officer and

President, which expire on December 31, 2010, and were amended effective January 1, 2006, entitle each officer to a minimum annual bonus of $200,000 up to a maximum of 150% of their base salary in any one calendar year.

Increased costs associated with corporate governance compliance may significantly affect our results of operations.

The Sarbanes-Oxley Act of 2002 and our being subject to the Securities Exchange Act of 1934, as amended, requires changes in some of our corporate governance and securities disclosure and compliance practices, and requires a review of our internal control procedures. We expect these developments to increase our legal compliance and financial reporting costs. In addition, they could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers. Finally, director and officer liability insurance for public companies has become more difficult and more expensive to obtain, and we may be required to accept reduced coverage or incur higher costs to obtain coverage that is satisfactory to us and our officers or directors. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude or additional costs we may incur as a result.

Changes associated with reimbursement by third-party payors for our services may adversely affect our operating results and financial condition.

Approximately 50% of our revenues are directly dependent on the acceptance of the services provided by our managed practices and limited management practices as covered benefits under third-party payor programs, including PPOs, HMOs and other managed care entities. The health care industry is undergoing significant changes, with third-party payors taking measures to reduce reimbursement rates or, in some cases, denying reimbursement for previously acceptable treatment modalities. There is no assurance that third-party payors will continue to pay for the services provided by our owned practices under their payor programs or by the managed practices. Failure of third-party payors to adequately cover minimally invasive surgery or other services will have a material adverse effect on us.

Professional liability claims could adversely impact our business.

Our managed practices are involved in the delivery of health care services to the public and are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in damage awards to the claimants in excess of the limits of any applicable insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. There can be no assurance that our owned and managed practices will not be subject to such claims, that any claim will be successfully defended or, if our practices are found liable, that the claim will not exceed the limits of our insurance. Liabilities in excess of our insurance could have a material adverse effect on us.

Our business is subject to substantial competition which could have a material impact on our business and financial condition.

The health care industry, in general, and the markets for orthopedic, rehabilitation and minimally invasive surgery services in particular, are highly competitive. The practices we own or manage compete with other physicians and rehabilitation clinics who may be better established or have greater recognition in a particular community than the physicians in these practices. These practices also compete against hospitals and large health care companies, such as HealthSouth, Inc. and U.S. Physical Therapy, Inc., with respect to orthopedic and rehabilitation services, and Symbion and AmSurg Corp, with respect to outpatient surgery centers. These hospitals and companies have established operating histories and greater financial resources than us. In addition, we expect competition to increase, particularly in the market for rehabilitation services, as consolidation of the physical therapy industry continues through the acquisition by hospitals and large health care companies of physician-owned and other privately owned physical therapy practices. We will also compete with our competitors in connection with acquisition opportunities.

Failure to obtain managed care contracts and legislative changes could adversely affect our business.

There can be no assurance that our owned or managed practices will be able to obtain managed care contracts. These practices’ future inability to obtain managed care contracts in their markets could have a material adverse effect on our business, financial condition or results of operation. In addition, federal and state legislative proposals have been introduced that could substantially increase the number of Medicare and Medicaid recipients enrolled in HMOs and other managed care plans. We derive, through these practices, a substantial portion of our revenue from Medicare and Medicaid. In the event such proposals are adopted, there can be no assurance that these practices will be able to obtain contracts from HMOs and other managed care plans serving Medicare and Medicaid enrollees. Failure to obtain such contracts could have a material adverse effect on the business, financial condition and results of operations. Even if our practices are able to enter into managed care contracts, the terms of such agreements may not be favorable to us.

Risks Related to Our Industry

The health care industry is highly regulated and our failure to comply with laws and regulations applicable to us or the owned practices, and the failure of the managed practices and the limited management practices to comply with laws and regulations applicable to them, could have an adverse effect on our financial condition and results of operations.

Our owned practices, the managed practices and the limited management practices are subject to stringent federal, state and local government health care laws and regulations. If we or they fail to comply with applicable laws, or if a determination is made that in the past we or the managed practices or the limited management practices have failed to comply with these laws, we may be subject to civil or criminal penalties, including the loss of our license or our physicians’ licenses to operate and our ability to participate in Medicare, Medicaid and other government sponsored and third-party health care programs. In addition, laws and regulations are constantly changing and may impose additional requirements. These changes could have the effect of impeding our ability to continue to do business or reduce our opportunities to continue to grow.

Periodic revisions to laws and regulations may reduce the revenues generated by the owned practices, managed practices and the limited management practices.

A significant amount of the revenues generated by our owned practices, the managed practices and the limited management practices is derived from governmental payors. These governmental payors have taken and may continue to take steps designed to reduce the cost of medical care. Private payors often follow the lead of governmental payors, and private payors have been taking steps to reduce the cost to them of medical care. A change in the makeup of the patient mix that results in a decrease in patients covered by private insurance or a shift by private payors to other payment structures could also adversely affect our business, financial condition and results of operations. If reductions in reimbursement occur, the revenues generated by the owned practices, the managed practices and the limited management practices could shrink. This shrinkage would cause a reduction in our revenues. Accordingly, our business could be adversely affected by reductions in or limitations on reimbursement amounts for medical services rendered, payor mix changes or shifts by payors to different payment structures.

Because government-sponsored payors generally pay providers based on a fee schedule, and the trend is for private payors to do the same, we may not be able to prevent a decrease in our revenues by increasing the amounts the owned practices charge for services. The same applies to the limited

management practices and the managed practices. They cannot increase their charges in an attempt to counteract reductions in reimbursement for services. There can be no assurance that any reduced operating margins could be recouped through cost reductions, increased volume, and introduction of additional procedures or otherwise. We believe that trends in cost containment in the health care industry will continue to result in reductions from historical levels of per-patient revenue.

Federal and state healthcare reform may have an adverse effect on our financial condition and results of operations.

Federal and state governments have continued to focus significant attention on health care reform. A broad range of health care reform measures have been introduced in Congress and in state legislatures. It is not clear at this time what proposals, if any, will be adopted, or, if adopted, what effect, if any, such proposals would have on our business. Currently proposed federal and state legislation could have an adverse effect on our business.

Our affiliated physicians may not appropriately record or document services they provide.

Our affiliated physicians are responsible for assigning reimbursement codes and maintaining sufficient supporting documentation for the services they provide. The owned practices, managed practices and limited management practices use this information to seek reimbursement for their services from third-party payors. If these physicians do not appropriately code or document their services, our financial condition and results of operations could be adversely affected.

Unfavorable changes or conditions could occur in the geographic areas where our operations are concentrated.

A majority of our revenue in 2005 was generated by our operations in five states. In particular, Florida accounted for approximately 37% of our revenue in 2005. Adverse changes or conditions affecting these particular markets, such as health care reforms, changes in laws and regulations, reduced Medicaid reimbursements and government investigations, may have a material adverse effect on our financial condition and results of operations.

Regulatory authorities could assert that the owned practices, the managed practices or the limited management practices fail to comply with the federal Stark Law. If such a claim were successfully asserted, this would result in the inability of these practices to bill for services rendered, which would have an adverse effect on our financial condition and results of operations. In addition, we could be required to restructure or terminate our arrangements with these practices. This result, or our inability to successfully restructure the arrangements to comply with the Stark Law, could jeopardize our business.

Section 1877 of Title 18 of the Social Security Act, commonly referred to as the “Stark Law”, prohibits a physician from making a referral to an entity for the furnishing of Medicare-covered “designated health services” if the physician (or an immediate family member of the physician) has a “financial relationship” with that entity. “Designated health services” include clinical laboratory services; physical and occupational therapy services; radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services (including the professional component of such diagnostic testing, but excluding procedures where the imaging modality is used to guide a needle, probe or catheter accurately); radiation therapy services and supplies; durable medical equipment and supplies; home health services; inpatient and outpatient hospital services; and others. A “financial relationship” is defined as an ownership or investment interest in or a compensation arrangement with an entity that provides designated health services. Sanctions for prohibited referrals include denial of Medicare payment and civil monetary penalties of up to $15,000 for each service ordered. Designated health services furnished pursuant to a referral that is prohibited by the Stark Law are not covered by Medicare and payments improperly collected must be promptly refunded.

There are several exceptions to the prohibition on referrals for designated health services which have the effect of allowing a physician that has a financial relationship with an entity to make referrals to that entity for the provision of Medicare-covered designated health services. The exception on which we rely with respect to the owned practices is the exception for employees, as all of the physicians employed in our owned practices are W-2 employees of the respective owned practices. Therefore, we believe that the physicians employed by our owned practices can refer patients to the owned practices for the provision of designated health services covered by Medicare. Nevertheless, should the owned practices fail to adhere to the conditions of the employment exception, or if a regulator determines that the employees or the employment relationship do not meet the criteria of the employment exception, the owned practices would be liable for violating the Stark Law, which could have a material adverse effect on us. We believe that our relationships with the managed practices and the limited management practices, respectively, do not trigger the Stark Law. Nevertheless, if a regulator were somehow to determine that these relationships are subject to the Stark Law, and that the relationships do not meet the conditions of any exception to the Stark Law, such failure would have a material adverse effect on us.

The referral of Medicare patients by physicians employed by or under contract with the managed practices and the limited management practices, respectively, to their respective practices, however, does trigger the Stark Law. We believe, nevertheless, that the in-office ancillary exception to the Stark Law has the effect of permitting these physician members of the respective managed practices and limited management practices to refer patients to their respective group practice for the provision by the respective group practice of Medicare-covered designated health services. If the managed practices or limited management practices were found not to comply with the terms of the in-office ancillary exception, they cannot properly bill Medicare for the designated health services provided by them. In such an event, our business could be materially adversely affected because the revenues we generate from these practices are dependent, at least in part, on the revenues or profits generated by those practices.

Regulatory authorities could assert that our owned practices, the managed practices or the limited management practices, or the contractual arrangements between us and the managed practices or the limited management practices, fail to comply with state laws analogous to the Stark Law. In such event, we could be subject to civil penalties and could be required to restructure or terminate the contractual arrangements.

At least some of the states in which we do business also have prohibitions on physician self-referrals that are similar to the Stark Law. These laws and interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. As indicated elsewhere, we enter into management agreements with the managed practices and the limited management practices. Under those agreements, we provide management and other items and services to the practices in exchange for compensation. Although we believe that the practices comply with these laws, and although we attempt to structure our relationships with these practices in a manner that we believe keeps us from violating these laws (or in a manner that we believe does not trigger the law), state regulatory authorities or other parties could assert that the practices violate these laws and/or that our agreements with the practices violate these laws. Any such conclusion could adversely affect our financial results and operations.

Regulatory authorities or other persons could assert that our relationships with our owned practices, the managed practices or the limited management practices fail to comply with the anti-kickback law. If such a claim were successfully asserted, we could be subject to civil and criminal penalties and could be required to restructure or terminate the applicable contractual arrangements. If we were subject to penalties or are unable to successfully restructure the relationships to comply with the Anti-Kickback Statute it would have an adverse effect on our financial condition and results of operations.

The anti-kickback provisions of the Social Security Act prohibit anyone from knowingly and willfully (a) soliciting or receiving any remuneration in return for referrals for items and services reimbursable under most federal health care programs; or (b) offering or paying any remuneration to induce a person to make referrals for items and services reimbursable under most federal health care programs, which we refer to as the “Anti-Kickback Statute” or “Anti-Kickback Law.” The prohibited remuneration may be paid directly or indirectly, overtly or covertly, in cash or in kind.

Violation of the Anti-Kickback Statute is a felony and criminal conviction results in a fine of not more than $25,000, imprisonment for not more than five years, or both. Further, the Secretary of the Department of Health and Human Services (“DHHS”) has the authority to exclude violators from all federal health care programs and/or impose civil monetary penalties of $50,000 for each violation and assess damages of not more than three times the total amount of remuneration offered, paid, solicited or received.

As the result of a congressional mandate, the Office of the Inspector General (“OIG”) of DHHS promulgated a regulation specifying certain payment practices which the OIG determined to be at minimal risk for abuse. The OIG named these payment practices “Safe Harbors.” If a payment arrangement fits within a Safe Harbor, it will be deemed not to violate the Anti-Kickback Statute. Merely because a payment arrangement does not comply with all of the elements of any Safe Harbor, however, does not mean that the parties to the payment arrangement are violating the Anti-Kickback Statute.

With respect to the managed practices and the limited management practices, we contract with the managed practices to provide general management services and limited management services, respectively. In return for those services, we receive compensation. The OIG has concluded that, depending on the facts of each particular arrangement, management arrangements may be subject to the Anti-Kickback Statute. In particular, an advisory opinion published by the OIG in 1998 (98-4) concluded that in a proposed management services arrangement where a management company was required to negotiate managed care contracts on behalf of the practice, the proposed arrangement could constitute prohibited remuneration where the management company would be reimbursed for its costs and paid a percentage of net practice revenues.

relation services or practice expansion services to those practices. Because we do not undertake to generate referrals for the managed practices or the limited management practices, and the services provided to these practices differ in scope from those provided under Advisory Opinion 98-4, we believe that our management agreements with the managed practices and limited management practices do not violate the Anti-Kickback Statute. Nevertheless, although we believe we have structured our management agreements in such a manner as not to violate the Anti-Kickback Statute, we cannot guarantee that a regulator would not conclude that the compensation to us under the management agreements constitutes prohibited remuneration. In such an event, our operations would be materially adversely affected.

The relationship between the physicians employed by the owned practices and the owned practices is subject to the Anti-Kickback Statute as well because the employed physicians refer Medicare patients to the owned practices and the employed physicians receive compensation from the owned practices for services rendered on behalf of the owned practices. Nevertheless, we have tried to structure our arrangements with our physician employees to meet the employment Safe Harbor. Therefore, it is our position that the owned practices’ arrangements with their respective employed physicians do not violate the Anti-Kickback Statute. Nevertheless, if the relationship between the owned practices and their physician employees is determined not to be a bona fide employment relationship, this could have a material adverse effect on us.

Our agreements with the limited management practices may also raise different Anti-Kickback concerns, but we believe that our arrangements are sufficiently different from those deemed suspect by the OIG so as not to violate the law. In April of 2003, the OIG issued a Special Advisory Bulletin where the OIG addressed contractual arrangements where a health care provider in one line of business (“Owner”) expands into a related health care business by contracting with an existing provider of a related item or service (“Manager”) to provide the new item or service to the Owner’s existing patient population. In those arrangements, the Manager not only manages the new line of business, but may also supply it with inventory, employees, space, billing and other services. In other words, the Owner contracts out substantially the entire operation of the related line of business to the Manager, receiving in return the profits of the business as remuneration for its federal program referrals to the Manager.

According to the OIG, contractual joint ventures have the following characteristics: (i) the establishment of a new line of business; (ii) a captive referral base; (iii) the Owner lacks business risk; (iv) the Manager is a would be competitor of the Owner’s new line of business; (v) the scope of services provided by the Manager is extremely broad, with the manager providing: day to day management; billing; equipment; personnel; office space; training; health care items, supplies and services; (vi) the practical effect of the arrangement is to enable the Owner to bill insurers and patients for business otherwise provided by the Manager; (vii) the parties agree to a non-compete clause barring the Owner from providing items or services to any patient other than those coming from the Owner and/or barring the Manager from providing services in its own right to the Owner’s patients.

We have attempted to draft our agreements with the limited management practices in a manner that takes into account the concerns in the Special Advisory Bulletin. Specifically, under our arrangements, the limited management practice takes business risk. It is financially responsible for the following costs: the space required to provide the services; employment costs of the personnel providing the services and intake personnel; and billing and collections. We do not reimburse the limited management practice for any of these costs. We provide solely equipment, supplies and our management expertise. In return for these items and services, we receive a percentage of the limited management practice’s collections from the services being managed by us. Consequently, we believe that the limited management practice is not being compensated for its referrals.

State regulatory authorities or other parties may assert that we are engaged in the corporate practice of medicine. If such a claim were successfully asserted, we could be subject to civil, and perhaps criminal, penalties and could be required to restructure or terminate the applicable contractual arrangements. This result, or our inability to successfully restructure our relationships to comply with these statutes, could jeopardize our business and results of operations.

Many states in which we do business have corporate practice of medicine laws which prohibit us from exercising control over the medical judgments or decisions of physicians. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. We enter into management agreements with managed practices and limited management practices. Under those agreements, we provide management and other items and services to the practices in exchange for a service fee. We structure our relationships with the practices in a manner that we believe keeps us from engaging in the corporate practice of medicine or exercising control over the medical judgments or decisions of the practices or their physicians. Nevertheless, state regulatory authorities or other parties could assert that our agreements violate these laws.

Regulatory authorities or others may assert that our agreements with limited management practices or managed practices, or our owned practices, violate state fee splitting laws. If such a claim were successfully asserted, we could be subject to civil and perhaps criminal penalties, and could be required to restructure or terminate the applicable contractual arrangements. This result, or our inability to successfully restructure our relationships to comply with these statutes, could jeopardize our business and results of operations.

Our use and disclosure of patient information is subject to privacy regulations.

Numerous state, federal and international laws and regulations govern the collection, dissemination, use and confidentiality of patient-identifiable health information, including the federal Health Insurance Portability and Accountability Act of 1996 and related rules, or HIPAA. In the provision of services to our patients, we may collect, use, maintain and transmit patient information in ways that may or will be subject to many of these laws and regulations. The three rules that were promulgated pursuant to HIPAA that could most significantly affect our business are the Standards for Electronic Transactions, or Transactions Rule; the Standards for Privacy of Individually Identifiable Health Information, or Privacy Rule; and the Health Insurance Reform; Security Standards, or Security Rule. The respective compliance dates for these rules for most entities were October 16, 2002, April 16, 2003 and April 21, 2005. HIPAA applies to covered entities, which include most health care providers that will contract for the use of our services. HIPAA requires covered entities to bind contractors to comply with certain burdensome HIPAA requirements. Other federal and state laws restricting the use and protecting the privacy of patient information also apply to us, either directly or indirectly.

The HIPAA Transactions Rule establishes format and data content standards for eight of the most common health care transactions. When we perform billing and collection services for our owned

practices or managed practices we may be engaging in one or more of these standard transactions and will be required to conduct those transactions in compliance with the required standards. The HIPAA Privacy Rule restricts the use and disclosure of patient information, requires covered entities to safeguard that information and to provide certain rights to individuals with respect to that information. The HIPAA Security Rule establishes elaborate requirements for safeguarding patient information transmitted or stored electronically. We may be required to make costly system purchases and modifications to comply with the HIPAA requirements that are imposed on us and our failure to comply may result in liability and adversely affect our business.

Federal and state consumer protection laws are being applied increasingly by the Federal Trade Commission, or FTC, and state attorneys general, to regulate the collection, use and disclosure of personal or patient information, through websites or otherwise, and to regulate the presentation of website content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access.

Numerous other federal and state laws protect the confidentiality of private information. These laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and potentially exposing us to additional expense, adverse publicity and liability. Other countries also have, or are developing, laws governing the collection, use and transmission of personal or patient information and, if applicable, these laws could create liability for us or increase our cost of doing business.

Risks Related to Our Common Stock

Because we use our common stock as consideration for our acquisitions, your interest in our company will be significantly diluted. In addition, if the investors in our recent financings convert their debentures and notes, or if we elect to pay principal and/or interest on the debentures and notes with shares of our common stock or anti-dilution rights in these securities are triggered, our existing shareholders will experience significant dilution.

We have used, and we expect in the future to use, our common stock as consideration for our acquisitions. In addition, a significant amount of our acquisitions’ purchase price is contingent upon future performance. We expect to issue a significant amount of our common stock to pay contingent purchase prices for previous acquisitions. In addition, because the value of the stock we issue as payment of contingent consideration is not fixed, to the extent our stock price decreases our existing shareholders interest in our company will be even more diluted by the payment of contingent consideration.

To the extent that our outstanding debentures and notes are converted, a significantly greater number of shares of our common stock will be outstanding and the interests of our existing stockholders will be substantially diluted. In addition, if we complete a financing at a price per share that is less than the conversion price of our debentures and notes, the conversion price of our debentures and notes will be reduced to the financing price. We cannot predict whether or how many additional shares of our common stock will become issuable as a result of these provisions. Hence, such amounts could be substantial. Additionally, we may elect to make payments of principal and interest on the debentures and the notes in shares of our common stock, which could result in increased downward pressure on our stock price and further dilution to our existing stockholders.

Future sales of our common stock in the public market, including sales by our stockholders with significant holdings, may depress our stock price.

Most of our outstanding shares of common stock are freely tradable. In 2004, we filed registration statements registering the resale of 49,376,123 shares, which includes shares issuable upon conversion of convertible notes and debentures, upon exercise of options and warrants and shares that are issuable pursuant to the earnout provisions of various business acquisitions. The market price of our common stock could drop due to sales of a large number of shares or the perception that such sales could occur, including sales or perceived sales by our directors, officers or principal stockholders. These factors also could make it more difficult to raise funds through future offerings of common stock.

There is a limited market for our common stock and the market price of our common stock has been volatile.

There is a limited market for our common stock. There can be no assurance that an active trading market for the common stock will be developed or maintained. Historically, the market prices for securities of companies like us have been highly volatile. In fact, since January 1, 2002, our common stock price has ranged from a low of $0.12 to a high of $5.45 (as determined on a reverse-split basis). The market price of the shares could continue to be subject to significant fluctuations in response to various factors and events, including the liquidity of the market for the shares, announcements of potential business acquisitions, and changes in general market conditions.

We do not expect to pay dividends.

Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. The Board of Directors is not expected to declare dividends or make any other distributions in the foreseeable future, but instead intends to retain earnings, if any, for use in business operations. In addition, the securities purchase agreement for our convertible notes contains restrictions on the payment of dividends. Accordingly, investors should not rely on the payment of dividends in considering an investment in our Company.

Provisions of Florida law and our charter documents may hinder a change of control and therefore depress the price of our common stock.

Our articles of incorporation, our bylaws and Florida law contain provisions that could have the effect of delaying, deferring or preventing a change in control of us by various means such as a tender offer or merger not approved by our board of directors. These provisions may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by stockholders. These provisions may also entrench our management by making it more difficult for a potential acquirer to replace or remove our management or board of directors. See “Description of Capital Stock.”

ITEM 1B. UNRESOLVED STAFF COMMENTS

As part of a periodic review by the Division of Corporation Finance of the SEC of our Annual Report on Form 10-KSB for the year ended December 31, 2004, we received and responded to a number of SEC staff comments. As of May 26, 2006 certain of the SEC comments remain unresolved and pertain to our method of accounting for (i) certain term notes, freestanding and embedded derivatives, and (ii) intangible assets acquired in connection with physician practice and surgery center acquisitions.

In order to resolve the foregoing comments we intend to continue to discuss relevant accounting issues with the SEC staff, to continue to file responses to the accounting comments which the SEC staff has provided to date, and to respond to any additional accounting comments which the SEC staff may provide. In addition, based upon our interpretation of the applicable accounting pronouncements, we have restated our consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.

Additional disclosure regarding the foregoing matters is set forth in our Current Report on Form 8-K filed with the SEC on March 15, 2006, and in our audited financial statements for the year ended December 31, 2005.

ITEM 2. PROPERTIES

Listed below is a summary of our real property leases.


Subsidiary or Managed Practice	Lease Expiration	Approx. Square Feet	Monthly Rent Amount
PainCare Holdings, Inc. (Corporate Office)	2009	3,887	$	6,478
Advanced Orthopaedics of South Florida II, Inc.	2007	12,000	$	15,400
Rothbart Pain Management Clinic, Inc.	2008	6,000	$	9,872
Pain and Rehabilitation Network, Inc.	2013	6,067	$	7,838
Medical Rehabilitation Specialists II, Inc.	2009	5,202	$	8,155
Associated Physicians Group (4 locations)	2006-2007	10,283	$	11,387
Spine and Pain Center, PC	2006	7,151	$	10,391
Health Care Center of Tampa, Inc.	2008	5,280	$	8,800
Bone and Joint Surgical Clinic	2008	8,734	$	5,266
Kenneth Alo, M.D., PA	2006	1,837	$	3,026
Denver Pain Management	2006	10,175	$	20,146
Georgia Surgical Centers, Inc. & Georgia Pain Physicians, PC (3 locations)	2006-2014	22,033	$	30,508
Dynamic Rehabilitation Centers (4 locations)	2006-2010	15,948	$	25,803
Rick Taylor, D.O., PA (4 locations)	2006-2008	12,905	$	9,398
Benjamin Zolper, M.D., Inc.	2006	5,957	$	10,273
The Center for Pain Management, LLC (4 locations)	2006-2016	10,172	$	20,809
Colorado Pain Specialists, PC	2006	1,550	$	3,203
PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center	2007	4,400	$	4,049
PSHS Beta Partners, Ltd. d/b/a Gables Surgical Center	2008	7,786	$	13,943
Piedmont Center for Spinal Disorders	2007	1,000	$	5,475
Center for Pain Management ASC, LLC	2006-2010	7,481	$	14,569
Floyd O. Ring, Jr., M.D., PC	2006	312	$	535
Christopher J. Centeno, M.D., PC & Therapeutic Management, Inc.	2012	5,322	$	7,043
Desert Pain Management Group	2007-2015	8,075	$	18,124
REC, Inc. & CareFirst Medical Associates	2011	5,000	$	2,500

Our corporate office is located in Orlando, Florida and currently contains approximately 3,887 square feet of space. We are expanding the corporate office to add 2,317 square feet of space, which is expected to be completed in June 2006. Upon completion of this expansion, the corporate office will be adequate for our current primary office needs.

Our physician practices and surgery centers range in size from 312 to 22,000 square feet. We lease land and space at all of our practice offices and surgery center locations. We consider all of our offices and surgery centers to be well-suited to our present requirements. However, as we expand to additional practice offices and surgery centers, or where additional capacity is necessary, additional space will be obtained where feasible.

ITEM 3. LEGAL PROCEEDINGS

On March 21, 2006, Roy Thomas Mould filed a complaint under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, as well as the Company's chief executive officer and chief financial officer, before the United States District Court for the Middle District of Florida. The complaint is entitled Mould v. PainCare Holdings, Inc., et al., Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with the Company's financial statements which appear to relate principally to the Company's previously announced intention to restate certain past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased the Company's common stock from August 27, 2002 to March 15, 2006. Eight additional complaints were filed shortly afterward before the same court which recite similar allegations. (Collectively, these cases will be referred to as the "Securities Litigation.") The Company cannot predict the outcome of the Securities Litigation, but believes that the allegations lack merit and will vigorously defend against them.

On April 7, 2006, Kenneth R. Cope filed a derivative complaint against the directors of the Company before the United States District Court for the Middle District of Florida. The complaint is entitled Cope v. Reuter, et al., Case No. 06-CV-00449-JA-DAB. Mr. Cope alleges that the directors breached their fiduciary duties by failing to supervise and manage the operations of the company, among other claims. Mr. Cope's complaint appears to relate principally to the Company's previously announced intention to restate certain past financial statements; Mr. Cope also recites many of the same allegations contained in the Securities Litigation. (This litigation is referred to as the “Derivative Action.”) Mr. Cope seeks unspecified damages from the directors on behalf of the Company. The Company's management cannot predict the outcome of the Derivative Action, but believes that the allegations lack merit and will vigorously defend against them.

On March 30, 2006, a purported shareholder of the Company made a demand on the Company’s board of directors. This demand raises many if not all of the same issues as the Derivative Action, but asks the independent directors to investigate the charges and to take “legal action against those individuals responsible.” The Company is in the process of reviewing this demand and will respond shortly.

Except for the above matters, neither we nor any of our subsidiaries or managed practices are a party to any other legal action or proceeding which we believe could have a material adverse effect on our business, financial condition or results of operation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On October 4, 2005 the Company filed and subsequently amended a Definitive Proxy Statement with the SEC with respect to the solicitation of proxies by the Board of Directors of the Company for use at the Annual Meeting of its

stockholders (the "Annual Meeting”), which was held on November 4, 2005. With respect to the proposals set forth in the Proxy Statement, the Company set the record date as of the close of business on September 30, 2005 (the "Record Date") for the determination of stockholders entitled to notice of and to vote at the Annual Meeting. As of the Record Date, there were 55,143,884 shares issued to Company stockholders which were entitled to vote.

At the Annual Meeting of the Company stockholders, the following matters were approved:

1. Election of Directors. The board of directors of the Company nominated and the stockholders elected the following individuals to serve on the Company’s board until the next annual meeting of the stockholders or until their successors are nominated and appointed:

VOTE 1:


	SHARES FOR		SHARES AGAINST		ABSTAIN
NAME	Proxy	In Person	Proxy	In Person	Proxy	In Person
Randy Lubinsky	34,697,558	-0-	3,325,796	-0-	-0-	-0-
Mark Szporka	34,433,729	-0-	3,589,625	-0-	-0-	-0-
Merrill Reuter, M.D.	34,565,659	-0-	3,457,695	-0-	-0-	-0-
Ronald Riewold	34,698,058	-0-	3,325,296	-0-	-0-	-0-
Jay L. Rosen, M.D.	34,858,531	-0-	3,164,823	-0-	-0-	-0-
Arthur J. Hudson	37,066,403	-0-	956,951	-0-	-0-	-0-
Robert Fusco	36,913,533	-0-	1,109,821	-0-	-0-	-0-
Thomas J. Crane	37,183,511	-0-	839,843	-0-	-0-	-0-
Aldo F. Berti, M.D.	37,237,926	-0-	785,428	-0-	-0-	-0-

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock traded on the Over-the-Counter Bulletin Board under the symbol HELP from September 29, 1997 to March 18, 2002. On June 16, 2003 our common stock commenced trading on the American Stock Exchange and our symbol was changed to PRZ.

(a) Market Information. The table below sets forth, for the periods indicated, the reported high and low sale prices of our common stock on the American Stock Exchange.


	Common Stock
	High		Low
CALENDAR 2004
Quarter ending March 31, 2004	$	3.60	$	2.48
Quarter ending June 30, 2004	$	3.44	$	2.25
Quarter ending September 30, 2004	$	3.45	$	1.95
Quarter ending December 31, 2004	$	3.19	$	1.90
CALENDAR 2005
Quarter ending March 31, 2005	$	5.22	$	2.90
Quarter ending June 30, 2005	$	5.45	$	3.75
Quarter ending September 30, 2005	$	4.49	$	3.50
Quarter ending December 31, 2005	$	4.21	$	3.05
CALENDAR 2006
Quarter ending March 31, 2006	$	3.74	$	1.40
Quarter to date ending June 30, 2006	$	2.06	$	1.45

The last sale price of our common stock on May 26, 2006 as reported on the American Stock Exchange was $1.42 per share.

(b) Shareholders. As of May 26, 2006, we had 64,050,365 shares of common stock outstanding and approximately 10,638 common stockholders of record, including individual and broker-dealer position listings.

(c) Dividends. Since July 2002, we have not declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. The Board of Directors is not expected to declare dividends or make any other distributions in the foreseeable future, but instead intends to retain earnings, if any, for use in business operations. In addition, the securities purchase agreement for our convertible notes contains restrictions on the payment of dividends. Accordingly, investors should not rely on the payment of dividends in considering an investment in our Company.

(d) Recent Sales of Unregistered Securities. The following information sets forth certain information for all securities sold by the Company during the past year without registration under the Securities Act of 1933, as amended (the “Securities Act”).

Our 2005 Acquisitions:


Name and Nature of Business	Effective Date of Purchase	Purchase Price
Colorado Pain Specialists, PC., an interventional pain management practice located in Colorado	April 15, 2005	$2,125,000 in cash and 653,698 shares of common stock, plus contingent payments of up to $4,250,000 in cash and common stock if certain performance goals are met.

PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center., a fully accredited ambulatory surgical center located in Lake Worth, Florida	May 12, 2005	$6,930,940 in cash and 324,520 shares of common stock, for a 67.5% ownership interest.

PSHS Beta Partners, Ltd. d/b/a Gables Surgical Center, a fully accredited ambulatory surgical center located in Miami, Florida	August 1, 2005	$3,282,304 in cash and 868,624 shares of common stock, plus promissory notes totaling $1,536,952, due one year from the closing date, for a 73% ownership interest.

Piedmont Center for Spinal Disorders, P.C., an orthopedic spine surgery practice located in Danville, Virginia	August 9, 2005	$1,000,000 in cash and 263,400 shares of PainCare’s common stock, plus contingent payments of up to $2,000,000 in cash and common stock if certain performance goals are met.

Floyd O. Ring, Jr., M.D., P.C., an pain management physician practice located in Denver, Colorado	October 3, 2005	$1,250,000 in cash and 349,162 shares of PainCare’s common stock, plus contingent payments of up to $2,500,000 in cash and common stock if certain performance goals are met.

Christopher J. Centeno, M.D., P.C. and Therapeutic Management, Inc., collectively doing business as The Centeno Clinic, a pain management physician practice located in Denver, Colorado.	October 14, 2005	$3,750,000 in cash and 1,132,931 shares of PainCare’s common stock, plus contingent payments of up to $7,500,000 in cash and common stock if certain performance goals are met.

During 2005, there were 3,687,500 shares issued to the shareholders of Center for Pain Management, LLC, representing the stock portion of the initial consideration of this practice acquisition, which closed on December 1, 2004.

During 2005, there were 115,340 shares issued to Andrea Trescot, M.D., representing the second of three earn-out installments related to the acquisition of Pain and Rehabilitation Network.

During 2005, there were 108,097 shares issued to Kirk Mauro, M.D., representing the second of three earn-out installments related to the acquisition of Medical Rehabilitation Specialists.

During 2005, there were 108,610 shares issued to John Vick, representing the second of three earn-out installments related to the acquisition of Associated Physicians Group.

During 2005, there were 83,001 shares issued to Michael Martire, M.D., representing the first of three earn-out installments related to the acquisition of Spine and Pain Center.

During 2005, there were 226,608 shares issued to Saqib Bashir Khan, M.D., representing the first of three earn-out installments related to the acquisition of Health Care Center of Tampa.

During 2005, there were 130,662 shares issued to Christopher Cenac, M.D., representing the first of three earn-out installments related to the acquisition of the Bone and Joint Surgical Clinic.

During 2005, there were 203,252 shares issued to Kenneth Alo, M.D., representing the first of three earn-out installments related to the acquisition of Kenneth M. Alo, M.D., P.A.

During 2005, there were 460,026 shares issued to Robert Wright, M.D. and Kenneth Alo, M.D., representing a portion of the earn-out installment related to the acquisition of Denver Pain Management.

During 2005, there were 86,806 shares issued to Robert Windsor, M.D., representing the first of three earn-out installments related to the acquisition of Georgia Pain Physicians and Georgia Surgical Centers.

During 2005, there were 175,644 shares issued to Michael Wayne and Jeff Wayne, representing the first of three earn-out installments related to the acquisition of Dynamic Rehabilitation Centers.

During 2005, there were 148,104 shares issued to Rick Taylor, D.O., representing the first of three earn-out installments related to the acquisition of Rick Taylor, D.O., P.A.

During 2005, there were 69,115 shares issued to Benjamin Zolper, M.D., representing the first of three earn-out installments related to the acquisition of Benjamin Zolper, M.D., P.A.

During 2005, there were 111,327 shares issued to Rehab Management Group, representing the first of three earn-out installments related to acquisition of three EDX contracts.

During 2005, we issued 1,075,291 shares as the result of the exercise of options and warrants previously granted.

During 2005, we issued 18,860 restricted shares, to employees at Advanced Orthopaedics of South Florida, Inc. to replace previously granted stock options.

During 2005, we issued 3,626,167 shares to Midsummer Investments, Ltd. and Laurus Master Fund, Ltd. for the conversion of convertible debenture principal.

During 2005, we issued 283,448 shares to Midsummer Investments, Ltd. for the payment of convertible debenture interest.

With respect to the foregoing offers and sale of restricted and unregistered securities, the Company relied on the provisions of Sections 3(b) and 4(2) of the Securities Act and rules and regulations promulgated thereunder, including, but not limited to Rules 505 and 506 of Regulation D, in that such transaction did not involve any public offering of securities and were exempt from registration under the Securities Act. The offers and sale of the securities was not made by any means of general solicitation, the securities were acquired by the investors without a view towards distribution, and all purchasers represented to the Company that they were sophisticated and experienced in such transactions and

investments and able to bear the economic risk of their investment. A legend was placed on the certificates or instruments, as the case may be, they have not been registered under the Securities Act and setting forth the restrictions on their transfer and sale. Each investor also signed a written agreement that the securities would not be sold without registration under the Securities Act or pursuant to an applicable exemption from such registration.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA


	Year Ended December 31,
	2005			2004 (Restated)			2003 (Restated)
	(in thousands, expect per share data)
Consolidated Statement of Operations Data:
Revenues:
Pain management	$	43,269		$	22,317		$	6,117
Surgeries		6,165			5,203			3,431
Ancillary services		19,230			10,398			5,433

Total revenues		68,664			37,918			14,981

Cost of revenues		12,471			6,664			4,587

Gross profit		56,193			31,254			10,394
General and administrative		38,085			20,052			7,782
Compensation expense		2,382			357			13,533
Amortization expense		1,529			549			114
Depreciation expense		1,616			837			463


Operating income (loss)		12,581			9,459			(11,498	)
Interest expense		(5,796	)		(3,464	)		(531	)
Derivative expense		(7,056	)		(3,256	)		(3,174	)
Other income		445			170			46


Income (loss) before income taxes		174			2,909			(15,157	)
Provision (benefit) for income taxes		4,926			4,410			(3,674	)


Income (loss) before minority interests		(4,752	)		(1,501	)		(11,483	)
Minority interests		587			—			—

Net loss	$	(5,339	)	$	(1,501	)	$	(11,483	)

Basic loss per common share	$	(0.10	)	$	(0.05	)	$	(0.55	)

Basic weighted average common shares outstanding		51,317			32,923			20,773


Diluted loss per common share	$	(0.10	)	$	(0.05	)	$	(0.55	)


Diluted weighted average common shares outstanding		51,317			32,923			20,773


Operating and Other Financial Data:

Cash flows provided by (used in) operating activities		9,173			4,119			15
Cash flows used in investing activities		(36,474	)		(18,408	)		(7,683	)
Cash flows provided by financing activities		30,913			25,466			13,513


	As of December 31,
	2005			2004 (Restated)			2003 (Restated)
	(in thousands)
Consolidated Balance Sheet Data:
Cash	$	22,713		$	19,101		$	7,924
Working capital deficiency		(16,870	)		(20,923	)		(14,938	)

Total assets		183,109			112,929			53,087

Total long-term debt and obligations under capital leases, including current portion		44,185			20,280			11,968

Minority interests		1,764			—			—

Total stockholders’ equity		87,323			41,932			12,010

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate and that apply to an investment in our common stock, please read “Risk Factors.” Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.

Outlook

We are a health care services company focused on the treatment of pain. We have relationships with 64 physician practices and surgery centers. Our growth strategy is to enter into management agreements with profitable, established physician practices and expand the range of services they offer. Because we have acquired either the non-medical assets or the entire practice of 21 practices since December 1, 2000, and because our growth strategy involves acquiring additional physician practices, our historical results are not necessarily indicative of results to be expressed from any future period. Our company was formed in February 1997 and was acquired by HelpMate Robotics, Inc. in a merger in June 2002. Before the merger, PainCare operated two pain management practices and HelpMate had sold its previous business. You should read the notes to our consolidated financial statements if you would like more information on our history.

We provide our services through physician practices with which we have one of three types of relationships:

•

Owned practices. These practices are owned by us through one of our wholly-owned subsidiaries. We own the medical assets and the physicians are our employees.

•

Managed practices. In states where the corporate practice of medicine is not permitted, we are not permitted to own a physician’s practice. In these states, we manage physician practice’s pursuant to a management agreement.

•

Service and equipment contracts. We provide limited management services and equipment pursuant to specific contractual agreements in such areas as in-house physical therapy, electrodiagnostic services and in-office surgery.

We currently have two owned practices primarily providing surgery services, five owned practices primarily providing pain management services, one managed practice primarily providing surgery services, eleven managed practices primarily providing pain management services, two managed practices providing ancillary services, and 34 limited management services and equipment contracts.

We had a number of acquisitions since we began our current business in 2000. The following table presents the changes in the number of practices we own and manage at December 31, 2005, 2004, 2003, and 2002.


	At December 31,
	2002	2003	2004	2005
Owned physician practices	3	6	7	7

Managed physician practices	0	3	8	12

Limited Management service and equipment contracts	3	8	22	34

We manage fourteen practices in states with laws governing the corporate practice of medicine. In those states, a corporation is precluded from owning the medical assets and practicing medicine. Therefore, contractual arrangements are effected to allow us to manage the practice. Emerging Issues Task Force (“EITF”) No. 97-2 states that financial consolidation can occur when a physician practice management entity establishes an other than temporary controlling financial interest in a physician practice through contractual arrangements. In all cases but one, the management services agreement between PainCare and our managed practices satisfies each of the EITF issues. Except for one of our managed practices, we recognize all of the revenue and expenses of these practices in our consolidated financials in accordance with EITF No. 97-2. With respect to the one managed practice for which we do not recognize all of the revenue and expenses and in all of our limited managed practices, we recognize only the management fees earned and expenses incurred by us with respect to such practices.

The Company’s previously issued consolidated financial statements as of and for the years ended December 31, 2000 through 2004 and all quarterly financial information for each of these years have been restated to give effect to the correction of certain errors that were discovered subsequent to December 31, 2005.

Financial Overview

Revenue and Operating Income

We present three categories of revenue in our statement of operations: pain management, surgeries and ancillary services. Pain management revenue is derived from our owned and managed practices, which provide pain management services. Surgery revenue is derived from our owned and managed practices, which primarily provide surgical services. Ancillary service revenue is derived from our owned and managed practices and limited management practices, which provide one or more of our ancillary services, including orthopedic rehabilitation, electrodiagnostic medicine, intra-articular joint therapy and diagnostic imagery. Our cost of revenue is primarily physicians’ salaries and medical supplies.

We have set forth below our revenues, expenses and operating income classified by the type of service we perform as well as the expenses allocated to our corporate offices.


	December 31, 2005 (in thousands)
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Total
Revenues	$	43,269	$	6,165	$	19,230	$	—		$	68,664
Gross profit		36,632		5,110		14,451		—			56,193
General & administrative expenses		17,086		3,152		8,184		9,663			38,085
Compensation expense		—		—		—		2,382			2,382
Amortization		550		—		—		979			1,529
Depreciation		478		66		426		646			1,616
Operating income (loss)	$	18,518	$	1,892	$	5,841	$	(13,670	)	$	12,581

	December 31, 2004 (in thousands)
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Total
Revenues	$	22,317	$	5,203	$	10,398	$	—		$	37,918
Gross profit		18,249		4,607		8,398		—			31,254
General & administrative expenses		8,002		2,613		3,571		5,866			20,052
Compensation expense		—		—		—		357			357
Amortization		—		—		—		549			549
Depreciation		132		72		128		505			837
Operating income (loss)	$	10,115	$	1,922	$	4,699	$	(7,277	)	$	9,459

	December 31, 2003 (in thousands)
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Total
Revenues	$	6,117	$	3,431	$	5,433	$	—		$	14,981
Gross profit		3,718		1,958		4,718		—			10,394
General & administrative expenses		2,168		748		1,404		3,462			7,782
Compensation expense		—		—		—		13,533			13,533
Amortization		—		—		—		114			114
Depreciation		17		18		44		384			463
Operating income (loss)	$	1,533	$	1,192	$	3,270	$	(17,493	)	$	(11,498	)

Analysis of Results of Operations from Segment Reporting for the Twelve Months Ended December 31, 2005 Compared to the Twelve Months Ended December 31, 2004

Revenues from pain management practices increased by approximately $20,952,000, representing an increase of 93.9%. Revenues from surgery practices increased by approximately $962,000, representing an increase of 18.5%. Revenues from ancillary services increased by approximately $8,832,000, representing an increase of 84.9%. These increases are a result of new practice and surgery center acquisitions, new limited managed programs and growth in existing practices.

Operating income from pain management practices increased by approximately $8,403,000, representing an increase of 83.1%. Operating income from surgery practices decreased by approximately $30,000, representing a decrease of 1.6%. This decrease is related to two surgery practices affected by hurricanes during 2005. Operating income from ancillary services increased by approximately $1,142,000, representing an increase of 24.3%. The increases from pain management practices and ancillary services are a result of new practice and surgery center acquisitions, new limited managed programs and growth in existing practices.

Analysis of Results of Operations from Segment Reporting for the Twelve Months Ended December 31, 2004 Compared to the Twelve Months Ended December 31, 2003

Revenues from pain management practices increased by approximately $16,200,000, representing an increase of 264.8%. Revenues from surgery practices increased by approximately $1,772,000, representing an increase of 51.6%. Revenues from ancillary services increased by approximately $4,965,000, representing an increase of 91.4%. These increases are a result of new practice acquisitions, new limited managed programs and growth in existing practices.

Operating income from pain management practices increased by approximately $8,582,000, representing an increase of 559.8%. Operating income from surgery practices increased by approximately $730,000, representing an increase of 61.2%. Operating income from ancillary services increased by approximately $1,429,000, representing an increase of 43.7%. These increases are a result of new practice acquisitions, new limited managed programs and growth in existing practices.

Pain management revenue, expense and income are attributable to five owned and nine managed practices that primarily offer physician services for pain management and physiatry. With respect to one of our managed practices, we only include the revenue recognized from management fees earned. Surgery revenue, expense and income are attributable to two owned and one managed practice that offer surgical physician services, including minimally invasive spine surgery. Ancillary services revenue, expense and income are attributable to two managed practices that primarily offer orthopedic rehabilitation services and 34 practices under limited management agreements, including orthopedic rehabilitation, electrodiagnostic medicine, intra-articular joint therapy and real estate services. We do not separate financial results for our Canadian subsidiary, since our operations outside of the U.S. are immaterial to our total operations.

Expenses

Our expenses consist primarily of medical supplies, training and general and administrative expenses. Expenses for our service and equipment contracts consist primarily of training and equipment leases. Amortization expense consists of contract rights amortization. Depreciation expense consists of medical equipment, leasehold improvements and office equipment depreciation.

Significant Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, intangible assets, income taxes, financing operations, contractual obligations, restructuring costs, retirement benefits, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result, they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Our significant accounting estimates include:

Revenue Recognition. Our consolidated practice revenue is recognized at the time the service is performed at the estimated net realizable amounts from patients, third-party payors and others for services rendered. Revenue from limited management fees is recognized as the services are performed under the terms of the contract. We are a provider under the Medicare program and various other third-party payor arrangements which provide for payments to us at amounts different from its established rates. Provisions for estimated third-party payor settlements, if necessary, are provided in the period the related services are rendered.

Intangible Assets. Intangible assets determined to have definite lives are amortized over their useful lives. In accordance with SFAS No. 142, if conditions exist that indicate that the carrying value may not be recoverable, we review those intangible assets with definite lives to ensure they are appropriately valued. Goodwill is not amortized.

Analysis of Financial Condition and Results of Operations For The Twelve Months Ended December 31, 2005 Compared To Twelve Months Ended December 31, 2004

Total revenues increased to $68,663,797 for fiscal 2005, from $37,917,900 in fiscal 2004, representing an increase of 81.1%. This increase was primarily the result of $36,339,637 in revenue from “New-Practices” acquired since December 31, 2004. There was an increase in revenues of $2,588,755 or 11.42%, from practices acquired/managed prior to January 1, 2005 (“Same-Practices”). Net revenue for all practices on a year over year basis is reflected in the chart below.


	2005		2004		% Increase
Same-Practices
Revenues	$	25,263,720	$	22,674,965	11.42	%

New-Practices
Revenues	$	36,339,637

Gross profit increased to $56,193,428 for fiscal 2005, from $31,253,955 in fiscal 2004, representing an increase of 79.8%. This increase is primarily the result of New-Practices acquired/managed since December 31, 2004 and growth in Same-Practices.

Operating income increased to $12,580,806 for fiscal 2005, from $9,458,586 in fiscal 2004, representing an increase of 33.0%.

Operating expenses increased by $21,817,253 to $43,612,622 for fiscal 2005, from $21,795,369 for fiscal 2004, representing an increase of approximately 100.1%. General and administrative expenses increased to $38,084,609 from $20,052,066, representing an increase of 90.0%. This increase is primarily the result of New-Practices acquired/managed since December 31, 2004. General and administrative expenses at corporate increased to $9,663,000 from $5,866,000, representing an increase of 64.7%. This increase is primarily comprised of the following expenses: $846,954 for salaries and payroll taxes, $988,092 for Sarbanes-Oxley consulting and travel expenses, $590,283 for EDX and IAJP servicing fees, $421,204 for consulting fees, $487,199 for legal fees and $149,346 for accounting and audit fees. In addition, compensation expense related to our variable stock option plan increased to $2,382,259 from $356,590, representing an increase of 568%.

Net interest expense increased by $2,332,238 in fiscal 2005, as the result of new debt which commenced during 2005 and non-cash interest charges related to derivative instruments.

The provision for income taxes increased to $4,925,679 in fiscal 2005 from $4,410,587 in fiscal 2004.

Analysis of Financial Condition and Results of Operations For The Twelve Months Ended December 31, 2004 Compared To Twelve Months Ended December 31, 2003

Total revenues increased to $37,917,900 for fiscal 2004, from $14,980,867 in fiscal 2003, representing an increase of 153.1%. This increase was primarily the result of $25,544,013 in revenue from “New-Practices” acquired since December 31, 2003. There was an increase in revenues of $943,937 or 11.87% from practices acquired/managed prior to January 1, 2004 (“Same-Practices”). Net revenue for all practices on a year over year basis is reflected in the chart below.


	2004		2003		% Increase
Same-Practices
Revenues	$	8,898,933	$	7,954,996	11.87	%

New-Practices
Revenues	$	25,544,013

Gross profit increased to $31,253,955 for fiscal 2004, from $10,394,135 in fiscal 2003, representing an increase of 200.7%. This increase is primarily the result of New-Practices acquired/managed since December 31, 2003 and growth in Same-Practices.

Operating income increased to $9,458,586 for fiscal 2004, from $(11,497,705) in fiscal 2003, representing an increase of 182.3%

Operating expenses decreased by $96,471 to $21,795,369 for fiscal 2004, from $21,891,840 for fiscal 2003, representing a decrease of approximately 0.05%. This decrease is primarily due to a decrease of $13,176,110 in compensation expense related to our variable stock option plan.

Net interest expense increased by $2,932,519 in fiscal 2004, as the result of new debt which commenced during 2004 and non-cash interest charges related to derivative instruments.

The provision for income taxes increased to $4,410,587 in fiscal 2004 from $(3,674,358) in fiscal 2003.

Liquidity and Capital Resources

Our cash and cash equivalents equaled $22,713,165 at December 31, 2005, compared to $19,100,840 at December 31, 2004. The net cash provided by our operations was $9,173,097 for fiscal 2005, compared to net cash provided in fiscal 2004 of $4,119,026.

Cash used in investing activities was $36,474,158 during fiscal 2005, compared with a use of $18,407,883 in fiscal 2004. This increase is primarily due to the acquisition of non-medical assets and new practices during fiscal 2005.

Cash provided from financing activities was $30,913,386 in fiscal 2005, compared with $25,465,930 during fiscal 2004. The increased financing activity was the result of capital raised during fiscal 2005, including the proceeds of a combined $30.0 million senior secured credit facility.

Management believes the current cash position will be sufficient to provide us with capital sufficient to fund working capital needs for 2006. Also, we have significant indebtedness, as described under “Convertible Debt” and “Other Debt.” We are obligated to make $11,206,000 in principal payments under this indebtedness in 2006 and $6,750,000 in 2007. We may not have adequate funds from operations to repay the debt when it comes due. It will be necessary, in order to expand the business, consummate acquisitions and refinance indebtedness, to incur additional debt and/or raise additional capital. No assurance can be given at this time that such funds will be available, or, if available, will be sufficient in the near term or that future funds will be sufficient to meet growth. In the event of such developments, attaining financing under such conditions may not be possible, or even if such funds are available, the terms on such capital may not be commercially feasible or advantageous.

Convertible Debt

On December 18, 2003, we completed a private placement offering of $10 million in 7.5% convertible debentures to two institutional investors, Midsummer Investments Ltd. and Islandia, L.P. The debentures are due December 17, 2006 and are convertible by the investors at any time into shares of common stock at an adjusted fixed price of $1.90 per share. Interest on the debentures is payable (in cash or stock, at our election) in quarterly installments, which commenced in March 2004. Interest paid in shares is based upon 90% of the market value for the shares as defined in the debentures. The investors also received warrants to purchase 1,263,316 shares of common stock. The warrants have a term of four years ending on December 17, 2007 and are exercisable at an adjusted fixed exercise price of $1.90 per share. The debentures and the warrants have full ratchet anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or exercise price below the conversion price of the debentures and the exercise price of the warrants, such conversion and exercise prices are automatically reduced to the lower price. The debenture holders also have a right of first refusal to participate in future equity financings of PainCare. With certain exceptions, PainCare is not permitted to incur debt that would be senior to or pari passu with the debentures. The securities purchase agreement pursuant to which the debentures were sold provides that we shall not effect any conversion of debentures or issue any shares upon exercise of the warrants, and holder shall not have the right to convert any portion of debentures or exercise the warrants, to the extent that after giving effect to such conversion or exercise, the holder (together with the holder’s affiliates), would beneficially own in excess of 4.99% of the number of shares of the common stock outstanding immediately after giving effect to such conversion.

On July 1, 2004, we completed an institutional private placement offering with aggregate proceeds of $1.5 million from Midsummer Investments Ltd. Pursuant to a separate securities purchase

agreement with Midsummer, we issued and sold a $1.5 million fixed price 7.5% Convertible Debenture. Midsummer also received warrants to purchase 165,000 shares of our common stock. The 7.5% convertible debenture is due July 1, 2007 and is convertible into shares of our common stock at an adjusted price of $1.90 per share. Interest on the debenture is payable in quarterly installments commencing in September 2004 in cash or stock, at our election. The warrants issued to Midsummer have a term of four years ending on July 1, 2008 and have an adjusted exercise price of $1.90 per share. The conversion terms and other terms, including anti-dilution protections, are otherwise substantially the same as the December 17, 2003 debenture issued to Midsummer.

Other Debt

On May 11, 2005, the Company closed on a $25 million, senior secured credit facility from an investment fund managed by HBK Investments L.P. The credit facility, which carries a term of 48 months and an interest rate equal to LIBOR + 7.25% or prime + 4.25%, will be used primarily to fund the Company’s growth-through-acquisition strategy and to retire a portion of the Company’s existing debt. No warrants or other equity securities were issued to any party in connection with this transaction.

On September 15, 2005, the Company entered into an amendment to the HBK credit facility that increased the amount of the credit facility from $25 million to $30 million. The terms, conditions and date of maturity of the credit facility were not changed pursuant to the amendment.

The outstanding balance under the credit facility was $30,000,000 at March 29, 2006.

On May 2, 2006 we entered into a letter agreement with the lenders under the credit facility pursuant to which the lenders waived certain historic breaches of the terms of the credit facility in consideration for which we paid a $300,000 waiver fee to the lenders. Subsequent to the date of the letter agreement we may have failed to comply with certain covenants set forth in the credit facility. To date we have not received a notice letter from the lenders with respect to any breaches or defaults under the terms of the credit facility after the date of the letter agreement.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”), which requires companies to begin to expense the estimated fair value of employee stock options and similar awards. The accounting provisions of SFAS 123R will be effective for the Company’s first quarter of 2006. The Company will adopt the provisions of SFAS 123R using the Black-Scholes option pricing formula or other fair value model. Modified prospective application recognizes compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123. As disclosed in Note (1) to the financial statements had the Company recognized compensation expense in accordance with the fair-value-based provisions of SFAS 123 for equity instruments, earnings would have been reduced by approximately $0.00 and $0.03 per diluted share for the years ended December 31, 2005 and 2004, respectively. Compensation cost for stock options for which the requisite future service has not yet taken place is estimated for future years. During 2006, 2007 and 2008, the Company estimates under SFAS 123R compensation expense will increase by $722,160, $315,045 and $92,706, respectively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates and market prices. We do not currently have any trading derivatives nor do we expect to have any in the future. We have established policies and internal processes related to the management of market risks, which we use in the normal course of our business operations.

Interest Rate Risk

We have interest rate risk, in that borrowings under our credit facility are based on variable market interest rates. As of December 31, 2005, we had $30 million of variable rate debt outstanding under our credit facility. Presently, the revolving credit line bears interest at a rate of either LIBOR plus 7.25% or prime plus 4.25%, with a term of 48 months. A hypothetical 10% increase in our credit facility’s weighted average interest rate of 10.92% per annum for the twelve months ended December 31, 2005 would correspondingly decrease our pre-tax earnings and operating cash flows by approximately $31,550 and $103,509, respectively.

Intangible Asset Risk

We have a substantial amount of intangible assets. We are required to perform goodwill impairment tests whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position. Although at December 31, 2005 we believed our intangible assets were recoverable, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. We continue to monitor those assumptions and their effect on the estimated recoverability of our intangible assets.

Equity Price Risk

We do not own any equity investments, other than in our subsidiaries. As a result, we do not currently have any direct equity price risk.

Commodity Price Risk

We do not enter into contracts for the purchase or sale of commodities. As a result, we do not currently have any direct commodity price risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements. The Financial Statements required by this Item are included at the end of this report beginning on Page F-1 as follows:


Index to Financial Statements		F-1

Reports of Independent Registered Public Accounting Firms		F-2

Consolidated Balance Sheets As of December 31, 2005 and 2004		F-4

Consolidated Statements of Operations For The Years Ended December 31, 2005, 2004 and 2003		F-5

Consolidated Statements of Cash Flows For The Years Ended December 31, 2005, 2004 and 2003		F-6

Consolidated Statements of Stockholders’ Equity For The Years Ended December 31, 2005, 2004 and 2003		F-7

Notes to Consolidated Financial Statements		F-8

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Effective as of November 16, 2005, the resignation of Tschopp, Whitcomb & Orr, P.A. was accepted by our Audit Committee as our independent auditing firm. During Tschopp, Whitcomb & Orr, P.A.’s retention as our independent auditing firm, there were no disagreements with Tschopp, Whitcomb & Orr, P.A. on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, is not resolved to Tschopp, Whitcomb & Orr, P.A.’s satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their reports. Similarly, none of the reportable events described under Item 304(a)(1)(v) of Regulation S-K have occurred during the time that Tschopp, Whitcomb & Orr, P.A. had been engaged as our independent auditing firm.

None of Tschopp, Whitcomb & Orr, P.A.’s audit reports on our consolidated financial statements contained any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

Effective as of November 16, 2005, our Audit Committee retained Beemer, Pricher, Kuehnhackl & Heidbrink, P.A. as our independent auditing firm for our fiscal 2005. During the years ended December 31, 2004 and 2003 and through November 16, 2005, we did not, nor did anyone acting on our behalf, consult with Beemer, Pricher, Kuehnhackl & Heidbrink, P.A. regarding the application principles to a specified transaction, either completed or proposed, the type of audit opinion that might be rendered on our financial statements, or any reportable events described under Items 304(a)(2)(ii) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The management of the Company, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this annual report.

Based upon, and as of the date of this evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2005, because of the material weaknesses in the Company’s internal control over financial reporting discussed below.

The required certifications of our principal executive officer and principal financial officer are included as exhibits to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures, internal control over financial reporting and changes in internal control over financial reporting referred to in those certifications. Those certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.

Internal Controls Over Financial Reporting

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). There are inherent limitations to the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even an effective system of internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation and presentation in accordance with generally accepted accounting principles. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing [“PCAOB”] Standard No. 2), or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 based on the framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), referred to as the Internal Control - Integrated Framework. The objective of this assessment is to determine whether the Company’s internal control over financial reporting was effective as of December 31, 2005. As a result of ongoing communications with the SEC, the activities of our auditors, and from the results of management’s Sarbanes Oxley work, management has concluded that there is an ineffective control environment over the Company’s financial reporting.

Management has identified the following specific material weaknesses in the Company’s internal control over financial reporting as of December 31, 2005:

(i) The Company is restating its consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004, and for the quarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005 (collectively, the “financial statements”) to correct the Company’s financial statements for the following matters: (a) the accounting used for term notes, certain freestanding and embedded derivates related to shares of the Registrant’s common stock issued to Midsummer Investments, Ltd., Islandia, L.P. and Laurus Master Fund Ltd., (b) the accounting used in connection with physician practice and surgery center acquisitions, including the values recorded for tangible and intangible assets, recording deferred taxes, and correcting the value of shares issued, and (c) accounting for the Registrant’s existing stock option plans, including the use of variable accounting for employee option grants per APB 25, and to use fair value accounting for non-employee option grants. The Company’s provision for income taxes and its recording of deferred taxes was also restated for each period.

In light of the facts and circumstances relating to the restatement and significant adjustments generated from the year-end audit (described in subsequent items below), the Company concluded that the inability of the Company to prepare its financial statements without material misstatements is a material weakness in the Company’s internal control over financial reporting caused by inadequate control over the process for the identification and implementation of the proper accounting for complex and non-routine transactions.

Management of the Company is evaluating steps to enhance the operation and effectiveness of our internal controls over the identification of, and accounting for, complex and non-routine transactions. We have identified a need for additional staff and or consultants with expertise in identifying accounting issues, and in preparing required disclosures in the notes to the financial statements. We have identified a need to develop greater internal resources for identifying, researching and evaluating the appropriateness of complex accounting principles and for evaluating the effects of new accounting pronouncements on us. Our growth during and since 2004 as a result of our acquisitions and the increased complexity surrounding our financing arrangements are major contributors to the need for additional resources in financial reporting and enhanced post-closing procedures and analysis.

(ii) Management has identified that there are lack of adequate segregation of duties in field locations in the purchasing and disbursement function, and in certain field locations for cash receipts and payroll. In addition, we noted that there was a lack of compliance with established procedures regarding approval of invoices. In most locations the Company has attempted to segregate the responsibilities, however due to either the size of the financial staff or the existence of related parties there are inherent limitations in the segregation of duties. Therefore, management has concluded that there were deficiencies in the design at certain locations due to lack of personnel. In addition, at these and at other locations, there was a failure to comply with established policies and procedures.

The Company is in the process of recruiting additional skilled accounting staff to assist in the monitoring and reconciliation process related to field operations.

(iii) The Company has executed agreements with related parties for billing, managerial and administrative services and facility leases. Management has identified that the Company did not have appropriate controls to timely identify, analyze, record, and properly disclose all transactions with related parties. The Company is seeking to enhance its disclosure process by improving its procedures to properly capture, analyze, record, and disclose all related party transactions including the use of an extensive disclosure checklist.

(iv) Management identified deficiencies in the operation of the Company’s policies and procedures associated with a lack of access controls, operating knowledge or training, adequate backup and security of certain critical financial systems. These systems included billing, payroll, accounts payable, general ledger and electronic spreadsheets used in the compilation and presentation of the Company’s financial information. Although, there are manual controls designed to identify material errors, the systems identified affect a significant number of account balances and disclosures, and therefore management has concluded that there is a material weakness related to controls in this area. In regard to these deficiencies, during the fourth quarter of 2005 the Company began developing new information management and security procedures. In addition, the Company intends to implement a process in 2006 to monitor and test compliance with such policies and procedures.

(v) Management has identified a deficiency in the timeliness and accuracy of the monthly close process. This deficiency is specifically related to accuracy and review of key account reconciliations, analysis of changes in debt/capital leases, appropriate support and second party review of journal entries, and consolidation of field location financial statements. The accounting function is decentralized throughout the field locations, and these location lacked personnel with adequate experience in accounting matters to analyze and interpret accounting data in a timely manner.

The company is in the process of recruiting additional skilled accounting staff to assist in the monitoring and reconciliation process.

(vi) The Company’s management did not have adequate technical expertise with respect to income tax accounting and tax compliance to effectively oversee these areas. This lack of adequate technical expertise resulted in errors in the Company’s accounting for income taxes, which have been corrected in the restatements. The errors related to inappropriate accounting for deferred taxes, errors in the calculation of the current income tax accruals, and in the preparation of fully compliant tax returns. The Company is in the process of recruiting additional skilled accounting staff and has engaged consultants to assist in this area.

(vii) Management’s evaluation of internal control over financial reporting as of December 31, 2005 excluded an evaluation of the internal control over financial reporting of the following subsidiaries which were acquired during 2005 and included in the consolidated financial statements as of and for the year ended December 31, 2005:


	For the Year Ended December 31, 2005
Subsidiary Name	Revenue		Assets
Colorado Pain Specialists	$	1,845,682	$	5,496,453
Piedmont Center for Spinal Disorders		511,981		2,450,649
Floyd O. Ring, Jr., M.D., P.C.		644,613		2,903,118
PCSI		5,116,622		25,236,507
Christopher J. Centeno, M.D., P.C.		741,441		8,571,854

Totals	$	8,860,339	$	44,658,581

Beemer, Pricher, Kuehnhackl & Heidbrink, P.A., the Company’s independent registered public accounting firm, has issued a report on management’s assessment of the Company’s internal control over financial reporting, which is included herein.

Attestation Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

on Internal Control Over Financial Reporting

To the Board of Directors and Stockholders of

PainCare Holdings, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that PainCare Holdings, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, because of the effect of the material weaknesses identified in management’s assessment, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The management of PainCare Holdings, Inc. and its subsidiaries (the “Company”) is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2005, the following material weaknesses were identified and included in management’s assessment:

Management has concluded that the Company was not able to prepare its financial statements without material misstatements because of an inadequate control over the process for the identification and implementation of the proper accounting for complex and non-routine transactions. Transactions that were misstated included the following: (1) the accounting used for term notes and certain freestanding and embedded derivates related to financing transactions; (2) the application of purchase accounting used in connection with physician practice and surgery center acquisitions, including the values recorded for tangible and intangible assets, goodwill, recording deferred taxes, and measuring the value of shares issued; and (3) accounting for the Company’s existing stock option plans, including the use of variable accounting for employee option grants and the use of fair value accounting for non-employee option grants.

Management has identified a lack of adequate segregation of duties in field locations in the purchasing and disbursement function, and in certain field locations for cash receipts and payroll. In addition, management noted a lack of compliance with established procedures regarding approval of invoices. Therefore, management has concluded that there were deficiencies in the design of controls at certain locations, and a failure to comply with established policies and procedures.

Management has identified that the Company did not have appropriate controls to timely identify, analyze, record, and properly disclose all transactions with related parties.

Management has identified deficiencies in controls over the operation of critical financial systems, including billing, payroll, accounts payable, general ledger, and electronic spreadsheets used in the compilation and presentation of the Company’s financial information.

Management has identified a deficiency in the timeliness and accuracy of the monthly close process, which is specifically related to accuracy and review of key account reconciliations, analysis of changes in debt/capital leases, appropriate support and second party review of journal entries, and consolidation of field location financial statements.

Management has identified deficiencies in controls with respect to income tax accounting and tax compliance, as the Company did not have adequate technical expertise to effectively oversee these areas. This resulted in errors in the Company’s accounting for income taxes, including inappropriate accounting for deferred taxes, errors in the calculation of the current income tax accruals, and in the preparation of fully compliant tax returns.

The control deficiencies described above resulted in the Company restating its consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004, and for the quarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005. In addition, these control deficiencies could result in other misstatements to the aforementioned financial statement accounts and disclosures that would result in a material misstatement to the annual or interim financial statements of the Company that would not be prevented or detected. Accordingly, management of the Company has concluded that these control deficiences constitute material weaknesses.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 consolidated financial statements of the Company, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect out report dated May 12, 2006 on those consolidated financial statements.

In our opinion, management’s assessment that PainCare Holdings, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, PainCare Holdings, Inc. has not maintained effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

/s/ Beemer, Pricher, Kuehnhackl & Heidbrink, P.A.

Winter Park, Florida

May 12, 2006

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Board of Directors and Executive Officers

The following table sets forth the directors and executive officers of the Company as of December 31, 2005. Directors are elected for a period of one year and thereafter serve until the next annual meeting at which their successors are duly elected by the stockholders. Officers and other employees serve at the will of the Board of Directors.

Board Member


Executive Officer’s Name	Age	Since	Positions
Randy Lubinsky	53	2002	Chief Executive Officer and Director
Mark Szporka	50	2002	Chief Financial Officer and Director
Ronald Riewold	58	2002	President and Director
Merrill Reuter, M.D.	45	2002	President of AOSF and Chairman
Jay Rosen, M.D	47	2002	Director
Arthur J. Hudson	54	2002	Director
Robert Fusco	55	2002	Director
Aldo F. Berti, M.D.	58	2004	Director
Thomas J. Crane	48	2004	Director

Randy Lubinsky, Chief Executive Officer and Director of the Company, joined the Company on August 1, 2000 and has served as a Director of the Company since 2000. Mr. Lubinsky has over 25

years experience as a healthcare entrepreneur and investment banker. He has built businesses from the start-up phase in the healthcare and real estate industries, and has assisted several public companies in implementing roll-up strategies. In March of 2000, Mr. Lubinsky co-founded Quest Capital Partners, LC in Orlando, Florida, an investment banking firm specializing in healthcare where he acted as Managing Director until he joined PainCare in August of 2000. From September of 1999 until March of 2000, Mr. Lubinsky served as a Director of Cloverleaf Capital Advisors, L.L.C., an investment banking firm specializing in healthcare and e-learning, located in Ocoee, Florida. Mr. Lubinsky received a BA degree in finance from Florida International University.

Mark Szporka, Chief Financial Officer and Director of the Company joined the Company on August 1, 2000 and has served as a Director of the Company since 2000. Mr. Szporka has in excess of 25 years experience as an investment banker, chief financial officer and strategic planner. In March of 2000, he co-founded Quest Capital Partners, LC in Orlando, Florida, an investment banking firm specializing in healthcare where he acted as a Director until he joined PainCare in August of 2000. From September of 1999 until March of 2000, Mr. Szporka served as a Director of Cloverleaf Capital Advisors, L.L.C., an investment banking firm specializing in healthcare and e-learning, located in Ocoee, Florida. Mr. Szporka received a MBA from the University of Michigan and a BBA from the University of Notre Dame. He is a Certified Public Accountant (non-active) in New York.

Ronald L. Riewold, is the Company’s President and Director and has served as a Director of the Company since 2002. Effective February 7, 2003, the Board elected Mr. Riewold to succeed Dr. Rosen as President of the Company. From December 1999 until January 2001, Mr. Riewold served as a consultant for American Enterprise Solutions, Inc. (“AESI”), a healthcare delivery system and internet utility located in Tampa, Florida which focused on the connectivity of the Internet in the healthcare industry. Mr. Riewold later became Executive Vice President, then President and Chief Operating Officer of AESI. Mr. Riewold has a BA degree from Florida State University and a MBA from Temple University.

Merrill Reuter, M.D., is the Company’s Chairman of the Board and is the President of Advanced Orthopaedics of South Florida, Inc. and has served as a Chairman of the Board of Directors since 2002. Dr. Reuter founded Advanced Orthopaedics of South Florida, Inc. in Lake Worth, Florida in 1992 and from that date until the present has served as its President and Medical Director. He received a BS degree from Tulane University in 1982 and a Masters in Medical Science and a Medical Degree from Brown University in 1986. Dr. Reuter completed his General Surgical Internship and Orthopedic Surgery Residency Training Program at the University of Texas Medical Branch in Galveston, Texas.

Jay L. Rosen, M.D., has served as a Director of the Company since 2000. Dr. Rosen has over 15 years experience as a healthcare entrepreneur. Since 1992, he has and continues to serve as Chief Executive Officer and Executive Director of Tampa Bay Surgery Center, Inc., an outpatient surgical facility that specializes in minimally invasive spinal surgery and pain management procedures in Tampa, Florida. During his tenure with Tampa Bay Surgery Center, Dr. Rosen has successfully developed and managed outpatient surgery, diagnostic, specialized ambulatory treatment and physical rehabilitation centers. He also is active in managing Seven Springs Surgery Center in New Port Richey, Florida. Dr. Rosen received a BS degree from Fordham University and Medical Degree from Cetec University. He performed graduate medical research at Hahnemann University in Philadelphia and the Medical Center at SUNY at Stony Brook. Dr. Rosen is a Diplomat of the American Board of Quality Assurance and Utilization Review Physicians. He currently serves on the Board of Directors for Tampa Bay Surgery Center, Inc., Tampa Bay Surgery Associates, Inc., Rehab One, Inc., Open MRI & Diagnostic Center, Inc., Immuvac, Inc., and Intellicare, Inc.

Arthur J. Hudson, has served as a Director of the Company since November 2002. Mr. Hudson has been employed with Fidelitone, Inc. of Wauconda, Illinois since 1974. He currently serves as Senior Vice President of Corporate Development for the full service inventory management, distribution and logistics company. From 1998 to 2001, he also served as head of international sales for Aero Products International, Inc., a wholly owned subsidiary of Fidelitone. Mr. Hudson is a member of the board of directors of Fidelitone. He received a B.S. degree in economics from Colorado State University.

Robert Fusco, has served as a Director of the Company since November 2002. Mr. Fusco has over twenty years experience in the healthcare industry and was responsible for building Olsten Corporation into one of the largest home health and specialty pharmaceutical distribution services companies in North America. Since March 2000 when Olsten Corporation was sold to Addecco Corporation, Mr. Fusco has been an independent consultant. From January 1985 to April 2000, Mr. Fusco served in various capacities including President of Olsten Health Services and Executive Vice President of Olsten Corporation. From 1979 to 1985, he served as Executive Vice President of Bio-Medical Applications, inc., a subsidiary of National Medical Care, Inc., and had profit and loss responsibility for over 180 dialysis clinics nationally. Mr. Fusco received a BS degree from Manhattan College.

Aldo F. Berti, M.D., has served as a Director of the Company since November 2004. Since 1980, Dr. Berti has owned and provided physician and neurosurgical services to Aldo F. Berti, M.D. P.A. located in Miami, Florida. Additionally, Dr. Berti is an international medical and neurosurgical consultant, having published numerous academic articles and presented extensively at Medical Conferences worldwide. Dr. Berti has developed an expertise, and has a special interest, in complex spinal surgery, pain management, and spine rehabilitation. Dr. Berti is the Associate Director for Latin America at the Gamma Knife Institute at Jackson Memorial Medical Center at the University of Miami School of Medicine. Dr. Berti is a Fellow at the American College of Surgeons and the American Academy of Pediatrics. Dr. Berti has pioneered the field of CyberKnife Radiosugery in the State of Florida by having performed the first procedure in December of 2003. In the past Dr. Berti has been elected as chief of neurosurgery and chief of the department of surgery at Cedars Medical Center of Miami. Dr. Berti is affiliated with the following hospitals: Cedars Medical Center, Miami, Florida; Jackson Memorial Medical Center -Gamma Knife Institute, Miami, Florida; North Shore Medical Center, Miami, Florida; Palm Springs Hospital, Miami, Florida; and South Miami Hospital, Miami, Florida.

Thomas J. Crane, has served as a Director of the Company since November 2004. Since January 1991, Mr. Crane has owned and operated a specialized law practice located in Naples, Florida. Beginning in 2000, Mr. Crane formed, and currently acts as the Managing Director, of Cloverleaf Capital International, LLC, an investment banking firm focused on media, technology, and health care. In 1990, Mr. Crane founded and became President/CEO of Southwestern Broadcasting Corporation (SBC), a Naples, Florida based radio station group owner. In August of 1998, SBC sold its assets to Broadcast Entertainment Corporation (BEC), an affiliated company operating radio stations in Texas, New Mexico, and California. Mr. Crane was, at the time of the sale, and remains a principal shareholder and Chairman of the Board of Directors of BEC, with its corporate offices located in Clovis, New Mexico. Mr. Crane also sits on the Boards of Compass Knowledge Holdings, Inc. based in Ocoee, Florida and XTEL, Inc., a telecommunications network based in Miami, Florida, and has published several legal articles concerning media, broadcasting, and communications. Mr. Crane holds a Juris Doctor degree from the University of Miami, School of Law, Miami, Florida, a Bachelor of Arts degree from Florida State University, Tallahassee, Florida and a Certificate of Languages from the University of Paris (Sorbonne), Paris, France. Mr. Crane is licensed to practice law in the States of Florida and Texas.

Committees and Meetings

The Board of Directors held 6 meetings in 2005 and a quorum of directors attended either in person or via teleconference. All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Directors receive compensation for serving on the Board of Directors as described below.

Committees of the Board of Directors

The Company has established a standing Audit Committee, Compensation Committee and Stock Option Committee. The Company has not established a Nominating Committee.

Audit Committee

The Audit Committee retains and oversees the Company’s independent accountants, reviews the scope and results of the annual audit of the Company’s consolidated financial statements, reviews non-audit services provided to the Company by its independent accountants and monitors transactions among the Company and its affiliates, if any. The Audit Committee currently consists of Mr. Fusco, the chairman of the Audit Committee, Mr. Hudson and Mr. Crane, who are all independent under American Stock Exchange and SEC rules. The Board of Directors has determined that Mr. Fusco, chairman of the Audit Committee, is qualified as an Audit Committee Financial Expert. During fiscal 2005, the Audit Committee held three meetings at which all of the members of the Committee were present.

Compensation Committee

The Compensation Committee is responsible for supervising the Company’s compensation policies, administering the employee incentive plans, reviewing officers’ salaries and bonuses, approving significant changes in employee benefits and recommending to the Board such other forms of remuneration as it deems appropriate. The Compensation Committee currently consists of Mr. Crane, the chairman of the Compensation Committee, Dr. Berti and Mr. Hudson, who are all independent. During fiscal 2005, the Compensation Committee held 1 meeting, at which all of the members of the Committee were present.

Stock Option Committee

The Stock Option Committee is responsible for supervising and administering the Company’s Stock Option Plans, approving significant changes in the Plans and recommending to the Board such other forms of remuneration as it deems appropriate. The Stock Option Committee currently consists of Mr. Crane, the Chairman of the Stock Option Committee, and Mr. Hudson, who are independent. During fiscal 2005, the Stock Option Committee did not hold any meetings.

Section 16(A) Beneficial Ownership Reporting

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10% of the Company’s common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership, and to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on review of the copies of such reports and written statements from officers and directors furnished to the Company, all Section 16(a) filing requirements applicable to its officers, directors and beneficial owners of more than 10% of our common stock were complied with during the year.

Code of Ethics

We have adopted a Code of Conduct and Ethics and it applies to all Directors, Officers and employees. A copy of the Code of Conduct and Ethics is posted on our website and we will provide a copy to any person without charge. If you require a copy, you can download it from our website or alternatively, contact us by facsimile or email and we will send you a copy.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth compensation paid by the Company to each person who served in the capacity of Chief Executive Officer during 2005, 2004 and 2003, and other officers of the Company whose total annual salary and bonus for the fiscal years ended December 31, 2005, December 31, 2004 and December 31, 2003 exceeded $100,000 (collectively, the “Named Executive Officers”).

SUMMARY COMPENSATION TABLE


								Long Term Compensation Awards
		Annual Compensation						Awards			Payouts
Name & Principal Position	Year	Salary ($)		Bonus ($)		Other Annual Compensation		Restricted Stock Award(s) $		Securities Underlying Options (#)	LTIP Payouts ($)		All Other Compensation ($)
Randy Lubinsky, CEO (1)(4)	2005 2004 2003	$ $ $	296,667 262,500 220,833	$ $ $	280,000 300,000 46,739	$ $ $	20,892 20,603 19,390	$ $ $	-0- -0- -0-	175,000 100,000 1,050,000	$ $ $	-0- -0- -0-	$ $ $	-0- -0- -0-

Mark Szporka, CFO (2)(4)	2005 2004 2003	$ $ $	271,667 237,500 195,833	$ $ $	280,000 250,000 46,739	$ $ $	24,944 24,522 24,406	$ $ $	-0- -0- -0-	175,000 100,000 1,050,000	$ $ $	-0- -0- -0-	$ $ $	-0- -0- -0-

Ronald Riewold, President (3)(5)	2005 2004 2003	$ $ $	271,667 183,333 175,000	$ $ $	210,000 125,000 -0-	$ $ $	24,944 24,522 24,248	$ $ $	-0- -0- -0-	175,000 1,250,000 -0-	$ $ $	-0- -0- -0-	$ $ $	-0- -0- -0-

(1)

Randy Lubinsky has served as our Director and the Chief Executive Officer since our reorganization on August 1, 2000. Pursuant to an employment agreement entered into in August 2000 and amended on August 1, 2002, Mr. Lubinsky received annual salary payments equal to $200,000 and certain perquisites and other benefits. This employment agreement was subsequently amended on August 1, 2003, increasing Mr. Lubinsky’s annual salary to $250,000. This employment agreement was amended again on August 1, 2004, increasing Mr. Lubinsky’s annual salary to $280,000 and subsequently amended on August 1, 2005, increasing Mr. Lubinsky’s annual salary to $320,000. For the fiscal year ended December 31, 2005, the Company paid Mr. Lubinsky a car allowance of $12,000 and paid health and dental insurance premiums of $8,892. See “Employment Agreements.”

(2)

Mark Szporka has served as a Director and Chief Financial Officer since our reorganization on August 1, 2000. Pursuant to an employment agreement entered into in August 2000 and amended August 1, 2002, Mr. Szporka received annual salary payments equal to $175,000 and certain perquisites and other benefits. This employment agreement was subsequently amended on August 1, 2003, increasing Mr. Szporka’s annual salary to $225,000. This employment agreement was amended again on August 1, 2004, increasing Mr. Szporka’s annual salary to $255,000 and subsequently amended on August 1, 2005, increasing Mr. Szporka’s annual salary to $295,000. For the fiscal year ended December 31, 2005, the Company paid Mr. Szporka a car allowance of $12,000 and paid health and dental insurance premiums of $12,944. See “Employment Agreements.”

(3)

Ronald Riewold has served as a Director since November 8, 2002 and President since February 7, 2003. Pursuant to an employment agreement entered into in February 2003, Mr. Riewold received annual salary payments equal to $175,000 and certain perquisites and other benefits. This employment agreement was amended on November 2, 2004, increasing Mr. Riewold’s annual salary to $225,000. This employment agreement was amended again on August 1, 2005, increasing Mr. Riewold’s annual salary to $295,000. For the fiscal year ended December 31, 2005, the Company paid Mr. Riewold a car allowance of $12,000 and paid health and dental insurance premiums of $12,944. See “Employment Agreements.”

(4)

Two hundred thousand (200,000) options were granted to Mr. Lubinsky and 200,000 options were granted to Mr. Szporka on August 1, 2000 under the Company's 2000 Stock Option Plan. One million (1,000,000) options were granted to Mr. Lubinsky and 1,000,000 options were granted to Mr. Szporka on August 1, 2002 under the Company’s 2001 Stock Option Plan. One Hundred Fifty thousand (150,000) options were granted to Mr. Lubinsky and 150,000 options were granted to Mr. Szporka on June 2, 2003 under the Company’s 2001 Stock Option Plan. Nine Hundred thousand (900,000) options were granted to Mr. Lubinsky and 900,000 options were granted to Mr. Szporka on September 11, 2003 under the Company’s 2001 Stock Option Plan. One hundred thousand (100,000) options were granted to Mr. Lubinsky and 100,000 options were granted to Mr. Szporka on August 1, 2004. One hundred seventy-five thousand (175,000) options were granted to Mr. Lubinsky and 175,000 options were granted to Mr. Szporka on August 1, 2005. Except for the initial 200,000 options granted to Messrs. Lubinsky and Szporka which were exercised by these individuals in February 2005, none of these options have been exercised to date.

(5)

Seven hundred seventy-five thousand (775,000) options previously granted to Mr. Riewold immediately vested upon the execution of his employment agreement in February 2003. Four hundred seventy-five thousand (475,000) options were granted to Mr. Riewold on February 7, 2004 and seven hundred seventy-five thousand (775,000) options were granted to Mr. Riewold on October 16, 2004. One hundred seventy-five thousand (175,000) options were granted to Mr. Riewold on August 1, 2005. None of these options have been exercised to date.

Stock Option Grants

The following table sets forth information regarding grants of stock options during the fiscal year ending December 31, 2005 made to the Named Executive Officers who have received Company option grants.

Stock Option Grants In 2005


Individual Grants						Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
Name	Number of Securities Underlying Stock Options Granted (#)	% of Total Stock Options Granted to Employees in Fiscal 2005	Exercise or Base Price ($/Sh)		Expiration Date	5% ($)		10% ($)
Randy Lubinsky	175,000	19%	$	4.00	8/1/10	$	194,250	$	427,000
Mark Szporka	175,000	19%	$	4.00	8/1/10	$	194,250	$	427,000
Ronald Riewold	175,000	19%	$	4.00	8/1/10	$	194,250	$	427,000

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

The following table sets forth information with respect to the executive officers named in the Summary Compensation Table concerning the exercise of options during the year ended December 31, 2005 and unexercised options held as of the end of fiscal 2005.


Name	Shares Received on Exercise	Value Realized		Number of Securities Underlying Unexercised Options at FY-End(2) Exercisable/Unexercisable	Value of Unexercised In-the- Money Options at FY-End ($) (1)(2) Exercisable/Unexercisable
Randy Lubinsky	197,531	$	634,075	1,575,000/750,000	$	4,564,000/$2,445,000
Mark Szporka	197,531	$	634,075	1,575,000/750,000	$	4,564,000/$2,445,000
Ronald Riewold	0	$	0	1,450,000/750,000	$	4,156,500/$2,445,000

(1)	Calculated based on the fair market value of $3.26 per share at the close of trading on December 30, 2005 as reported by the AMEX, minus the exercise price of the option.

(2)	The unvested portion of the unexercised options, vested on January 1, 2006.

Employment Agreements

Randy Lubinsky, CEO. Mr. Lubinsky serves as Chief Executive Officer of the Company for a term expiring on December 31, 2010. The principal terms of Mr. Lubinsky’s employment agreement, as amended, are as follows: (i) an annual salary of $320,000, which may be increased from time to time at the discretion of the board of directors; (ii) stock options to purchase 175,000 (exercisable at $4.00 per share) shares of the Company’s common stock; (iii) health and dental insurance coverage; (iv) term life insurance; (v) an annual bonus of $200,000, plus a discretionary bonus up to 150% of salary and (vi) such other benefits as the Company may provide for its officers in the future.

Mark Szporka, CFO. Mr. Szporka serves as Chief Financial Officer for the Company for a term expiring on December 31, 2010. The principal terms of Mr. Szporka’s current employment agreement, as amended, are as follows: (i) an annual salary of $295,000, which may be increased from time to time at the discretion of the board of directors; (ii) stock options to purchase 175,000 (exercisable at $4.00 per share) shares of the Company’s common stock; (iii) health and dental insurance coverage; (iv) term life insurance; (v) an annual bonus of $200,000, plus a discretionary bonus up to 150% of salary and (vi) such other benefits as the Company may provide for its officers in the future.

Ronald Riewold, President. Mr. Riewold serves as President for the Company for a term expiring on December 31, 2010. The principal terms of Mr. Riewold’s current employment agreement, as amended, are as follows: (i) an annual salary of $295,000, which may be increased from time to time at the discretion of the board of directors; (ii) stock options to purchase 175,000 (exercisable at $4.00 per share) shares of the Company’s common stock; (iii) health and dental insurance coverage; (iv) term life insurance; (v) an annual bonus of $200,000, plus a discretionary bonus up to 150% of salary and (vi) such other benefits as the Company may provide for its officers in the future.

Merrill Reuter, M.D. Advanced Orthopaedics of South Florida II, Inc. (“AOSF”), a wholly-owned subsidiary of the Company, entered into an employment agreement with Merrill Reuter, M.D. to serve as its President and Medical Director for an initial term expiring on December 31, 2009. This employment agreement was amended during 2004, which extended the term through December 31, 2011. The principal terms of Dr. Reuter’s amended employment agreement are as follows: (i) an annual salary of $300,000 during fiscal year 2004, $500,000 during fiscal year 2005 and $750,000 per year for each year thereafter; (ii) stock options to purchase shares of the Company’s common stock as approved by the stock option committee of the Company; and (iii) health and disability insurance coverage. In the event that AOSF terminates the agreement “Without Cause” or Dr. Reuter terminates the agreement “For Cause,” Dr. Reuter will receive a lump sum severance payment of $1,000,000.

Compensation Committee Report on Executive Compensation

Compensation Governance

This report describes our executive compensation program and the basis on which the 2005 fiscal year compensation determinations were made by us for the executive officers of the Company, including our Chief Executive Officer and the Named Executives. We establish all components of executive pay and recommend or report our decisions to the Board of Directors for approval.

Our duties include recommending to the Board of Directors the base salary levels for all executive officers as well as the design of awards in connection with all other elements of the executive pay program. We also evaluate executive performance and address other matters related to executive compensation.

Compensation Policy and Overall Objectives

In developing recommendations regarding the amount and composition of executive

compensation, our goal is to provide a compensation package that will enable the Company to attract and retain highly qualified individuals for its executive positions. In addition, our objectives include rewarding outstanding performance and linking the interests of our executives to the interests of our stockholders. In determining actual compensation levels, we consider all elements of the program in total rather than any one element in isolation.

We believe that each element of the compensation program should target compensation levels at rates that take into account current market practices. Offering market-comparable pay opportunities allows us to maintain a stable, successful management team.

The key elements of our executive compensation are base salary, discretionary annual bonuses, long-term incentives, and various other benefits, including medical insurance, which are generally available to all employees of the Company. Each of these is addressed separately below.

Base Salaries

We regularly review each executive’s base salary. The base salary ranges of the Company's executives are targeted to be in the range of the median base pay ranges of similarly positioned executives in the group of comparable companies selected for compensation comparison purposes.

Base salaries for executives are initially determined by evaluating executives' levels of responsibility, prior experience, breadth of knowledge, internal equity issues and external pay practices. Increases to base salaries are driven primarily by performance, which is evaluated based on sustained levels of contribution to the Company, and/or salary increases in the industry for similar companies with similar performance profiles.

Annual Bonuses

Annual bonus opportunities allow the Company to communicate specific goals that are of primary importance during the coming year and motivate executives to achieve these goals. The Company’s employment agreements with its Chief Executive Officer, Chief Financial Officer, and President, provide for the payment of an annual bonus to said individuals in the total amount of 11% of the Company’s EBITDA. For the year ended December 31, 2005, the foregoing senior executives agreed to accept an annual bonus in the total amount of $770,000, which is less than 11% of the Company’s EBITDA. Effective January 1, 2006, this bonus structure was amended providing the above named officers minimum bonuses of $200,000 up to a maximum of 150% of their base salary in any one calendar year.

Long-Term Incentives

Our stock option program is designed to align the long-term interest of executives, certain middle managers and other key personnel to the long-term interests of our stockholders and, therefore, are typically granted upon commencement of employment. Stock options are granted at an option price not less than the fair market value of the Company's Common Stock on the date of grant. Accordingly, stock options have value only if the stock price appreciates following the date the options are granted. Further, stock options are typically subject to a 36-month vesting period. The Committee awards stock options on the basis of individual performance and/or achievement of internal strategic objectives. This approach focuses executives on the creation of stockholder value over the long term and encourages equity ownership in the Company.

Tax Considerations

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax

deduction to public companies for certain compensation in excess of $1 million paid to the Company's Chief Executive Officer and the four other most highly compensated executive officers. Certain compensation, including qualified performance-based compensation, will not be subject to the deduction limit if certain requirements are met. The Compensation Committee reviews the potential effect of Section 162(m) periodically and uses its judgment to authorize compensation payments that may be subject to the limit when the Compensation Committee believes such payments are appropriate and in the best interests of the Company and its stockholders, after taking into consideration changing business conditions and the performance of its employees.

Conclusion

We believe that attracting and retaining management and employees of high caliber is essential to maintaining a high-performing organization that creates long-term value for its stockholders. We also believe that offering a competitive, performance-based compensation program with a large equity component helps to achieve this objective by aligning the interests of officers and other key employees with those of stockholders. We believe that the Company's 2005 fiscal year compensation program met these objectives.

By the Compensation Committee of the Board of Directors of PainCare Holdings, Inc.

Thomas Crane

Aldo Berti, M.D.

Arthur Hudson

Compensation Committee Interlocks and Insider Participation

Randy Lubinsky, the Company’s Chief Executive Officer and Director, served on the Compensation Committee until November 2004.

Director Compensation

Cash fees and stock options will be paid to non-employee directors of the Company by the Company for service on the Board of Directors. For being elected to serve during the term year of November 2004 to November 2005 on the Board of Directors, Arthur Hudson, Robert Fusco, Jay Rosen, M.D., Thomas Crane and Aldo Berti, M.D. have each received 25,000 options, exercisable at $2.97 per share and cash compensation of $5,000. In addition, they will receive cash compensation based on the committees they serve on as follows: $5,000 for the Audit Committee, $2,500 for the Stock Option Committee and $2,500 for the Compensation Committee. Directors of the Company who are also officers of the Company receive no additional compensation for their service as directors. All directors are entitled to reimbursement for reasonable expenses incurred in the performance of their duties as members of the board of directors.

Performance Graph

The following graph shows the change in our cumulative total stockholder return for the period from July 17, 2002, the effective date of our merger with HelpMate Robotics, Inc., through the end of our fiscal year ending December 31, 2005, based upon the market price of our common stock, compared with the cumulative total return on the American Stock Exchange and AMEX Health Products and Services Index. The graph assumes a total initial investment of $100 as of July 17, 2002, and shows a “Total Return” that assumes reinvestment of dividends, if any, and is based on market capitalization at the beginning of each period. The performance on the following graph is not necessarily indicative of future stock price performance.

LOGO

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information as of May 26, 2006 as to the number of shares of the Company common stock that will be beneficially owned by: (i) each person that beneficially owns more than 5% of the outstanding shares of the Company common stock; (ii) each director of the Company; (iii) the Chief Executive Officer and the four other most highly compensated executive officers of the Company; and (iv) the Company executive officers and directors as a group.

The holders listed below will have sole voting power and investment power over the shares beneficially held by them. The table below includes shares subject to options, warrants and convertible notes.


Beneficial Ownership (1) Name of Beneficial Owner	Shares	Percent		Current Position
Merrill Reuter, M.D. (2)	1,914,810	3.0	%	Chairman of the Board, President - AOSF
Randy Lubinsky (3) (11)	3,351,970	5.2	%	CEO and Director
Mark Szporka (4) (11)	3,299,871	5.2	%	CFO and Director
Ronald Riewold (5)	2,350,000	3.7	%	President and Director
Jay Rosen, M.D. (6)	425,000	0.7	%	Director
Arthur J. Hudson (7) (11)	570,000	0.9	%	Director
Robert Fusco (8)	120,000	*		Director
Thomas J. Crane (9)	29,000	*		Director
Aldo F. Berti, M.D. (10)	25,000	*		Director

All officers, directors, and affiliates as a group (9 persons)	12,085,651	18.9	%

*	Less than 0.2%

(1)	Based on an aggregate of 64,050,365 shares of the Company’s common stock outstanding as of May 26, 2006.

(2)

Includes the impact of the merger on January 1, 2001 between the Company’s subsidiary, PainCare Acquisition Company I, Inc., and Advanced Orthopaedics of South Florida, Inc., of which Dr. Reuter was a stockholder, at which time a trust controlled by Dr. Reuter received 1,850,000 shares of common stock and $1,239,000 in convertible debentures, which were paid in full in February of 2004. Dr. Reuter received 62,810 shares of common stock as partial consideration for the Company’s purchase of 50% of his ownership interest in the Lake Worth Surgical Center in May of 2005. In addition, Pamela Reuter, Dr. Reuter’s wife, owns 2,000 shares of our common stock.

(3)

Includes options issued pursuant to the Company’s stock option plans (the “Plans”) to acquire (i) 1,000,000 shares of common stock at $1.00 per share; (ii) 900,000 shares of common stock at $1.93 per share; and (iii) 100,000 shares of common stock at $3.08 per share and (iv) 175,000 shares of common stock at $4.00 per share.

(4)

(5)

Includes options issued pursuant to the Company’s stock option plans (the “Plans”) to acquire (i) 775,000 shares of common stock at $1.00 per share; (ii) 475,000 shares of common stock at $3.02 per share; (iii) 775,000 shares of common stock at $1.90 per share; and (iv) 175,000 shares of common stock at $4.00 per share.

(6)	Includes Plan options to acquire (i) 200,000 shares of common stock at $0.05 per share; and (ii) 25,000 shares of common stock at $2.97 per share.

(7)	Includes Plan options to acquire (i) 70,000 shares of common stock at $0.70 per share; (ii) 25,000 shares of common stock at $2.40 per share; and (iii) 25,000 shares of common stock at $2.97 per share.

(8)	Includes Plan options to acquire (i) 70,000 shares of common stock at $0.70 per share; (ii) 25,000 shares of common stock at $2.40 per share and (iii) 25,000 shares of common stock at $2.97 per share.

(9)	Includes Plan options to acquire (i) 25,000 shares of common stock at $2.97 per share.

(10)	Includes Plan options to acquire (i) 25,000 shares of common stock at $2.97 per share.

(11)

Includes Plan options to acquire 150,000 shares of common stock at $2.25 per share, which were granted and fully vested in accordance with a personal guarantee provided by each Messrs. Lubinsky, Szporka and Hudson with respect to the guarantee of a line of credit with Merrill Lynch Business Financial Services, Inc. This line of credit was subsequently closed in February of 2004.

EQUITY COMPENSATION PLAN INFORMATION


	(a)	(b)		(c)
	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	9,752,150	$	2.01	247,850
Equity compensation plans not approved by security holders	3,179,316	$	6.69	0

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In 2004 the Company entered into a contract with Merill Reuter, M.D., chairman of the Company’s board of directors and an approximately 3.0% shareholder. Under the terms of the contract, which are similar to those entered into with other physicians, the Company is providing real estate development and construction oversight services to Dr. Reuter related to a planned medical facility that is intended to be owned by Dr. Reuter and leased to the Company and others. As of December 31, 2005 and 2004, $427,553 and $406,227, respectively, is due from Dr. Reuter under this contract.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table shows the audit fees we were billed by our auditors during fiscal 2005 and 2004.


	2005		2004
Audit fees	$	92,400	$	51,120
Audit related fees		159,346		99,504
Tax fees		42,780		9,210

Total	$	294,526	$	159,834

Audit fees were for the audit of our annual financial statements, review of financial statements included in our Forms 10-Q and 10-QSB quarterly reports, and services that are normally provided by independent auditors in connection with our other filings with the SEC. This category also includes advice on accounting matters that arose during, or as a result of, the audit or review of our interim financial statements.

Audit related fees include due diligence in connection with acquisitions, consultation on accounting and internal control matters and audits in connection with proposed or consummated acquisitions.

Tax fees related to services for tax consultation, tax compliance and submitting tax returns.

As part of its duties, our Audit Committee pre-approves audit and non-audit services performed by our independent auditors in order to assure that the provision of such services does not impair the auditors’ independence. Our Audit Committee does not delegate to management its responsibilities to pre-approve services performed by our independent auditors.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Report.

1. Financial Statements (appearing at the end of this Report)


Index to Financial Statements		F-1

Reports of Independent Registered Public Accounting Firms:

Report of Beemer, Pricher, Kuehnhackl & Heidbrink, P.A.		F-2

Report of Tschopp, Whitcomb & Orr, P.A.		F-3

Consolidated Balance Sheets As of December 31, 2005 and 2004		F-4

Consolidated Statements of Operations For The Years Ended December 31, 2005, 2004 and 2003		F-5

Consolidated Statements of Cash Flows For The Years Ended December 31, 2005, 2004 and 2003		F-6

Consolidated Statements of Stockholders’ Equity For The Years Ended December 31, 2005, 2004 and 2003		F-7

Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003		F-8

(b). Exhibits

INDEX TO EXHIBITS


NO.		DESCRIPTION OF EXHIBIT
3.01		Articles of Incorporation (1)

3.02		By Laws(1)

3.03		Amendment to Bylaws (2)

3.04		Amendment to Articles of Incorporation (3)

4.1		2000 Stock Option Plan of PainCare, Inc. (1)

4.2		2001 Stock Option Plan of PainCare, Inc. (1)

10.01		Merger Agreement and plan of Reorganization by and among PainCare Holdings, Inc. and CPS Merger Corp., Scott Brandt, M.D. and Bradley Vilims, M.D.(4)

10.02		Securities Purchase Agreement by and Among PSHS Partnership Ventures, PainCare Holdings, Inc. and PainCare Surgery Centers I, Inc. (5)

10.03		Securities Purchase Agreement by and among PSHS Partnership Ventures, Inc., PainCare Holdings, Inc. and PainCare Surgery Centers II, Inc. (6)

10.04		Merger Agreement and Plan of Reorganization by and among PainCare Holdings, Inc. and Piedmont Center for Spinal Disorders, P.C. (7)

10.05		Asset Purchase Agreement by and among PainCare Holdings, Inc., PainCare Surgery Centers III, Inc. and The Center for Pain Management ASC, LLC. (8)

10.06		Merger Agreement and Plan of Reorganization by and among PainCare Holdings, Inc. and Floyd O. Ring, Jr., M.D., P.C. (9)

10.07		Asset Purchase by and among PainCare Holdings, Inc. and Christopher J. Centeno, M.D., P.C. (10)

10.08		Loan and Security Agreement by and among PainCare Holdings, Inc. and HBK Investments, L.P.

10.09		Amendment Number One to Loan and Security Agreement by and among PainCare Holdings, Inc. and HBK Investments, L.P.

10.10		Third Addendum to Second Amended and Restated Employment Agreement by and between PainCare Holdings, Inc. and Randy Lubinsky.

10.11		Third Addendum to Second Amended and Restated Employment Agreement by and between PainCare Holdings, Inc. and Mark Szporka

10.12		Fourth Addendum to Employment Agreement by and between PainCare Holdings, Inc. and Ronald Riewold

14.1		Code of Ethics for PainCare Holdings, Inc.

21.1		Subsidiaries of the Company

23(a)		Consent of BPKH

23(b)		Consent of Tschopp, Whitcomb & Orr, P.A.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)

32.1		Section 1350 Certifications


(1)		Previously filed with the SEC with the Company’s Form S-4 on January 4, 2002
(2)		Previously filed with the SEC with the Company’s Form 8-K on July 12, 2005
(3)		Previously filed with the SEC with the Company’s Form 8-K on August 11, 2005
(4)		Previously filed with the SEC with the Company’s Form 8-K on April 18, 2005
(5)		Previously filed with the SEC with the Company’s Form 8-K on May 17, 2005
(6)		Previously filed with the SEC with the Company’s Form 8-K on August 8, 2005
(7)		Previously filed with the SEC with the Company’s Form 8-K on August 11, 2005
(8)		Previously filed with the SEC with the Company’s Form 8-K on September 27, 2005
(9)		Previously filed with the SEC with the Company’s Form 8-K on October 7, 2005
(10)		Previously filed with the SEC with the Company’s Form 8-K on October 14, 2005

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


	PAINCARE HOLDINGS, INC.

Date: June 1, 2006	By:	/s/ RANDY LUBINSKY
		Chief Executive Officer and Director

Date: June 1, 2006	By:	/s/ MARK SZPORKA
		Chief Financial and Accounting Officer
		and Director

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signature	Title	Date
/s/ RONALD RIEWOLD	President and Director	June 1, 2006

/s/ JAY ROSEN, M.D.	Director	June 1, 2006

/s/ MERRILL REUTER, M.D.	Director	June 1, 2006

/s/ ARTHUR J. HUDSON	Director	June 1, 2006

/s/ ROBERT FUSCO	Director	June 1, 2006

/s/ ALDO F. BERTI, M.D.	Director	June 1, 2006

/s/ THOMAS J. CRANE	Director	June 1, 2006

PART F/S

PAINCARE HOLDINGS, INC.

CONTENTS


Index to Financial Statements		F-1

Reports of Independent Registered Public Accounting Firms:

Report of Beemer, Pricher, Kuehnhackl, & Heidbrink, P.A.		F-2

Report of Tschopp, Whitcomb & Orr, P.A.		F-3

Consolidated Balance Sheets As of December 31, 2005 and 2004		F-4

Consolidated Statements of Operations For The Years Ended December 31, 2005, 2004 and 2003		F-5

Consolidated Statements of Cash Flows For The Years Ended December 31, 2005, 2004 and 2003		F-6

Consolidated Statements of Stockholders’ Equity For The Years Ended December 31, 2005, 2004 and 2003		F-7

Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003		F-8

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of PainCare Holdings, Inc.

We have audited the accompanying consolidated balance sheet of PainCare Holdings, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PainCare Holdings, Inc. and subsidiaries as of December 31, 2005 and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of PainCare Holdings, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 12, 2006 expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting.

/s/ Beemer, Pricher, Kuehnhackl & Heidbrink, P.A.

Winter Park, Florida

May 12, 2006

F-2

TSCHOPP, WHITCOMB & ORR, P.A.

Independent Auditors’ Report

The Board of Directors

PainCare Holdings, Inc.

We have audited the accompanying consolidated balance sheets of PainCare Holdings, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in note 2 of the consolidated financial statements, the Company has restated its 2004 and 2003 consolidated financial statements.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PainCare Holdings, Inc., as of December 31, 2004 and 2003, and the results of its consolidated operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Tschopp, Whitcomb & Orr, P.A.

March 4, 2005, except for note 2 as to which the date is April 17, 2006

Maitland, Florida

F-3

PAINCARE HOLDINGS, INC.

Consolidated Balance Sheets

December 31, 2005 and 2004


	2005			2004
				(As restated)
Assets
Current assets:
Cash and cash equivalents	$	22,713,165		$	19,100,840
Accounts receivable, net		21,263,405			14,077,643
Deposits and prepaid expenses		2,557,492			1,117,317
Deferred tax asset		683,391			130,000

Total current assets		47,217,453			34,425,800

Property and equipment, net		11,494,656			7,119,065
Goodwill, net		111,468,292			61,817,801
Due from shareholder		427,553			406,227
Deferred tax asset		867,854			2,536,923
Other assets		11,834,822			6,623,360

Total assets	$	183,310,630		$	112,929,176

Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses	$	3,522,714		$	752,045
Accrued compensation expense		17,142,549			14,760,290
Derivative liabilities		12,952,455			13,364,535
Acquisition consideration payable		8,011,567			17,900,833
Common stock payable		5,405,601			—
Income tax payable		3,003,766			3,939,972
Current portion of notes payable		3,883,012			765,177
Current portion of capital lease obligations		1,646,378			930,117
Current portion of convertible debentures		8,519,131			2,935,480

Total current liabilities		64,087,173			55,348,449

Notes payable, less current portion		26,129,569			295,583
Convertible debentures		1,133,877			13,163,014
Capital lease obligations, less current portion		2,872,708			2,190,627

Total liabilities		94,223,327			70,997,673

Minority interests in consolidated subsidiaries		1,763,838			—

Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value. Authorized 200,000,000 shares; issued and outstanding 55,823,026 and 41,512,833 shares		5,582			4,151
Preferred stock, $.0001 par value. Authorized 10,000,000 shares; issued and outstanding -0- shares		—			—
Additional paid in capital		106,253,345			55,539,687
Accumulated deficit		(18,983,089	)		(13,643,711	)
Cumulative translation adjustments		47,627			31,376

Total stockholders' equity		87,323,465			41,931,503


Total liabilities and stockholders' equity	$	183,310,630		$	112,929,176

See accompanying notes to consolidated financial statements.

F-4

PAINCARE HOLDINGS, INC.

Consolidated Statements of Operations

For the years ended December 31, 2005, 2004 and 2003


	2005			2004			2003
				(As restated)			(As restated)
Revenues:
Pain management	$	43,269,382		$	22,316,610		$	6,116,520
Surgeries		6,165,175			5,202,766			3,431,272
Ancillary services		19,229,240			10,398,524			5,433,075

Total revenues		68,663,797			37,917,900			14,980,867

Cost of revenues		12,470,369			6,663,945			4,586,732

Gross profit		56,193,428			31,253,955			10,394,135

General and administrative expense		38,084,609			20,052,066			7,782,313
Compensation expense-variable stock options		2,382,259			356,590			13,532,700
Amortization expense		1,529,438			549,229			113,637
Depreciation expense		1,616,316			837,484			463,190

Operating income (loss)		12,580,806			9,458,586			(11,497,705	)

Interest expense		(5,795,915	)		(3,463,677	)		(531,158	)
Derivative expense		(7,055,502	)		(3,256,372	)		(3,173,763	)
Other income		444,549			170,568			45,425

Income (loss) before income taxes		173,938			2,909,105			(15,157,201	)

Provision (benefit) for income taxes		4,925,679			4,410,587			(3,674,358	)

Loss before minority interests		(4,751,741	)		(1,501,482	)		(11,482,843	)

Minority interests in net earnings of consolidated subsidiaries		(587,637	)		—			—


Net loss	$	(5,339,378	)	$	(1,501,482	)	$	(11,482,843	)

Basic loss per common share	$	(0.10	)	$	(0.05	)	$	(0.55	)

Basic weighted average common shares outstanding		51,316,562			32,923,211			20,772,620

Diluted loss per common share	$	(0.10	)	$	(0.05	)	$	(0.55	)

Diluted weighted average common shares outstanding		51,316,562			32,923,211			20,772,620

See accompanying notes to consolidated financial statements.

F-5

PAINCARE HOLDINGS, INC.

Consolidated Statements of Cash Flows

For the years ended December 31, 2005, 2004 and 2003


	2005			2004			2003
				(As restated)			(As restated)
Cash flows from operating activities:
Net loss	$	(5,339,378	)	$	(1,501,482	)	$	(11,482,843	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,145,754			1,386,713			576,827
Non-cash transactions and other		28,143			30,415			26,290
Loss on disposal of property and equipment		88,651			—			—
Amortization of debt discount		1,704,693			1,805,846			—
Stock issued for interest payments		991,146			383,053			—
Mark to market derivatives		7,055,502			3,256,372			3,173,763
Compensation expense-variable stock options		2,382,259			356,590			13,532,700
Deferred income taxes		1,113,566			748,623			(3,563,544	)
Amortization of deferred financing costs		(475,717	)		—			—
Minority interests		587,637			—			—

Change in operating assets and liabilities, net of assets acquired:
Accounts receivable		(2,428,409	)		(5,332,692	)		(1,834,012	)
Deposits and prepaid expenses		(960,977	)		(448,695	)		(369,911	)
Other assets		139,375			—			—
Income tax payable		(908,735	)		3,794,566			63,385
Accounts payable and accrued expenses		2,049,587			(360,283	)		(108,093	)

Net cash provided by operating activities		9,173,097			4,119,026			14,562

Cash flows from investing activities:
Purchase of property and equipment		(1,832,701	)		(1,018,597	)		(353,143	)
Cash paid for earnouts		(7,510,966	)		(3,108,888	)		(695,708	)
Cash used for contract rights		(202,291	)		(2,253,215	)		(325,525	)
Cash used for acquisitions		(27,172,913	)		(12,297,753	)		(6,346,552	)
Cash from acquisitions		244,713			270,570			38,232

Net cash used in investing activities		(36,474,158	)		(18,407,883	)		(7,682,696	)

Cash flows from financing activities:
Proceeds from issuance of debentures, net of offering costs		—			12,382,315			9,367,397
Proceeds from issuance of common stock, net of capital offering costs		5,964,013			15,500,446			5,821,916
Payments of capital lease obligations		(1,556,217	)		(686,734	)		(363,814	)
Payment of convertible debentures		—			(885,000	)		—
Notes receivable from employees		(201,353	)		—			—
Cash distributions to minority interests		(410,896	)		—			—
Due from/to shareholders		—			(34,907	)		134,385
Net proceeds from (payments on) notes payable		(1,068,760	)		328,222			(210,060	)
Notes payable issued		28,186,599			(1,138,412	)		(1,236,607	)

Net cash provided by financing activities		30,913,386			25,465,930			13,513,217

Net increase in cash and cash equivalents		3,612,325			11,177,073			5,845,083

Cash and cash equivalents at beginning of year		19,100,840			7,923,767			2,078,684

Cash and cash equivalents at end of year	$	22,713,165		$	19,100,840		$	7,923,767

Supplemental disclosures of cash flow information:

Cash paid during the year for interest	$	2,499,181		$	1,207,049		$	487,786
Cash paid during the year for income taxes		2,895,752			—			—

Non-cash investing and financing transactions:
Common stock issued for acquisitions		25,701,467			7,846,712			13,596,867
Common stock issued for contract right purchases		—			1,097,333			—
Common stock issued for convertible debentures		15,735,237			1,650,948			175,000
Common stock issued for earnouts		7,689,464			2,978,770			171,929
Common stock issued for bridge note		—			—			208,000
Acquisition consideration payable		8,011,567			17,900,833			3,000,000
Equipment financed with capital lease obligations		2,355,578			928,756			641,254
Distribution rights acquired		—			—			2,212,653

See accompanying notes to consolidated financial statements.

F-6

PAINCARE HOLDINGS, INC.

Consolidated Statements of Stockholders’ Equity

For the years ended December 31, 2005, 2004 and 2003


	Common Stock			Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares	Amount		Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances at December 31, 2002, as previously reported	15,576,640	$	1,557	$	7,019,246		$	556,487		$	(23,299	)	$	7,553,991
Effect of prior years’ restatements	—		—		(273,000	)		(1,215,873	)		—			(1,488,873	)

Balances at December 31, 2002 (as restated)	15,576,640	$	1,557	$	6,746,246		$	(659,386	)	$	(23,299	)	$	6,065,118
Common stock issued for earnouts	107,456		11		171,918			—			—			171,929
Common stock issued for cash	5,053,166		505		5,405,673			—			—			5,406,178
Common stock issued for conversion of convertible preferred stock	455,913		46		212,704			—			—			212,750
Common stock issued for exercise of stock options	200,000		20		9,980			—			—			10,000
Common stock issued for conversion of bridge note	208,000		21		207,979			—			—			208,000
Common stock issued for conversion of convertible debenture	118,243		12		174,988			—			—			175,000
Common stock issued for exercise of warrants	256,230		26		192,962			—			—			192,988
Common stock issued to advisory network members	2,030		—		2,030			—			—			2,030
Common stock issued for acquisitions	4,904,919		490		13,596,377			—			—			13,596,867
Tax benefit realized from stock plans	—		—		111,328			—			—			111,328
Common stock share based grants for non employee consulting fees					238,398									238,398
Adjustment for fair value of warrants	—		—		(2,921,713	)		—			—			(2,921,713	)
Components of comprehensive income (loss):
Translation adjustment	—		—		—			—			24,260			24,260
Net loss	—		—		—			(11,482,843	)		—			(11,482,843	)
Comprehensive loss	—		—		—			—			—			(11,458,583	)

Balances at December 31, 2003 (as restated)	26,882,597	$	2,688	$	24,148,870		$	(12,142,229	)	$	961		$	12,010,290
Common stock issued for earnouts	1,064,251		107		2,978,663			—			—			2,978,770
Common stock issued for contract rights	401,617		40		1,097,293			—			—			1,097,333
Common stock issued for exercise of warrants	534,466		53		343,067			—			—			343,120
Common stock issued for exercise of stock options	312,673		31		71,031			—			—			71,062
Common stock issued for acquisitions	2,667,747		267		7,846,445			—			—			7,846,712
Common stock issued for conversion of convertible debenture	530,000		53		1,650,895			—			—			1,650,948
Common stock issued for debenture interest payments	154,482		15		383,053			—			—			383,068
Common stock issued for secondary offering	8,965,000		897		15,085,366			—			—			15,086,263
Common stock options issued for non employee consulting fees	—		—		219,829			—			—			219,829
Adjustment for fair value of warrants	—		—		1,715,175			—			—			1,715,175
Components of comprehensive income (loss):
Translation adjustment	—		—		—			—			30,415			30,415
Net loss								(1,501,482	)		—			(1,501,482	)

Comprehensive loss	—		—		—			—			—			(1,471,067	)

Balances at December 31, 2004 (as restated)	41,512,833	$	4,151	$	55,539,687		$	(13,643,711	)	$	31,376		$	41,931,503
Common stock issued for earnouts	2,026,592		203		7,689,261			—			—			7,689,464
Common stock issued for exercise of warrants	400,316		40		474,672			—			—			474,712
Common stock issued for exercise of stock options	674,975		67		83,633			—			—			83,700
Common stock issued as restricted shares	18,860		2		11,890			—			—			11,892
Common stock issued for acquisitions	7,279,835		727		25,700,740			—			—			25,701,467
Common stock issued for conversion of convertible debenture	3,626,167		364		15,734,873			—			—			15,735,237
Common stock issued for debenture interest payments	283,448		28		991,118			—			—			991,146
Common stock options issued for non employee consulting fees	—		—		27,471			—			—			27,471
Components of comprehensive income (loss):
Translation adjustment	—		—		—			—			16,251			16,251
Net loss	—		—		—			(5,339,378	)		—			(5,339,378	)

Comprehensive loss	—		—		—			—			—			(5,323,127	)

Balances at December 31, 2005	55,823,026	$	5,582	$	106,253,345		$	(18,983,089	)	$	47,627		$	87,323,465

See accompanying notes to consolidated financial statements.

F-7

PAINCARE HOLDINGS, INC.

Notes to Consolidated Financial Statements

(1)

Organization and Summary of Significant Accounting Policies

History of the Company

PainCare Holdings, Inc. (“the Company”) was initially incorporated in the State of Connecticut in May, 1984 under the name of HelpMate Robotics, Inc. ("HelpMate"). Prior to the sale of its business in December 1999, HelpMate was primarily engaged in the design, manufacture, and sale of HelpMate's flagship product, the HelpMate courier system, a trackless robotic courier used primarily in the health care industry to transport materials. On December 30, 1999, HelpMate sold substantially all of its assets to Pyxis Corporation ("Pyxis").

Following the sale to Pyxis in December 1999, HelpMate’s business plan was to effect a business combination with an operating business, which HelpMate believed to have the potential to increase stockholder value.

On December 20, 2001, HelpMate entered in an Agreement and Plan of Merger with PainCare, Inc., a Nevada corporation (the “Merger Agreement”), which was consummated on July 17, 2002 (the “Merger”). Pursuant to the Merger, PainCare, Inc. became a wholly-owned subsidiary of HelpMate. In connection with the Merger, the shareholders of PainCare, Inc. received voting common stock of HelpMate.

History of PainCare, Inc.

PainCare, Inc. was incorporated in the State of Nevada on February 19, 1997, under the name of Hi-Profile Corporation. PainCare, Inc. was reorganized in the fall of 2000 for the purpose of establishing a North American network of pain management, minimally invasive surgery and orthopedic rehabilitation centers.

On July 17, 2002 PainCare, Inc. consummated a Merger with HelpMate, as described below. PainCare, Inc. had approximately 128 shareholders of record prior to the Merger with HelpMate. As of December 31, 2005, the combined Company has approximately 10,638 shareholders of record.

The Merger

As indicated above, on December 20, 2001, HelpMate Robotics, Inc. entered into a Merger Agreement with PainCare, Inc. whereby a wholly-owned subsidiary of HelpMate, formed for the purpose of the Merger, merged into PainCare, Inc. and PainCare, Inc. became a subsidiary of HelpMate. The shareholders of PainCare, Inc. received voting common stock of HelpMate. In connection with the Merger, the companies filed a Form S-4 with the SEC which was effective on July 12, 2002. Immediately thereafter, a Certificate of Merger was filed with the Secretary of State of the State of Connecticut and Articles of Merger were filed with the Secretary of State of the State of Nevada. The Merger became effective on July 17, 2002.

The Merger was accounted for in accordance with accounting principles generally accepted in the United States. No goodwill or intangibles were recorded because the merger was essentially a recapitalization transaction and was accounted for in a manner similar to a reverse acquisition, identifying PainCare, Inc. as the accounting acquirer.

Holders of PainCare, Inc. common stock received shares of HelpMate common stock at a conversion rate of one (1) share of HelpMate common stock for each one share of PainCare, Inc. common stock surrendered. As of the date the Merger was consummated there were 7,555,357 shares of PainCare’s common stock issued and outstanding. Holders of PainCare, Inc. options, warrants and other derivatives have the right to exercise those derivatives for HelpMate’s common stock.

HelpMate had 900,122 shares of common stock outstanding as of the date of the Merger. There were no other shares of HelpMate capital stock or derivatives issued or outstanding.

In summary, PainCare, Inc. security holders received an aggregate of 11,789,816 shares of HelpMate common stock in the merger, or approximately 93% of the issued and outstanding shares of HelpMate common stock, assuming the exercise or conversion of all issued and outstanding PainCare, Inc. stock options, warrants and convertible notes.

On November 8, 2002, the Board of Directors and shareholders approved an amendment to the Company’s Certificate of Incorporation for the purpose of changing the name of the Company from HelpMate Robotics, Inc. to PainCare Holdings, Inc. This name change reflects the revised strategic vision and marketing strategy of the Company. In conjunction with the Company name change, the trading symbol for the Company’s common stock changed from “HMRB” to “PANC” in December 2002 and on November 8, 2002, the Board of Directors and shareholders approved a proposal to change the Company’s state of incorporation from Connecticut to Florida. On June 16, 2003, the Company’s stock symbol was changed to “PRZ”.

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying financial statements include the accounts of PainCare Holdings, Inc. and its wholly-owned subsidiaries. The Company consolidates PSHS Alpha Partners as it has a 67.5% ownership interest in this entity, and it consolidates PSHS Beta Partners as it has a 73% ownership interest. The other parties’ interest in these entities are reported as minority interests in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company operates fifteen practices in states with laws governing the corporate practice of medicine. In those states, a corporation is precluded from owning the medical assets and practicing medicine. Therefore, contractual arrangements are effected to allow the Company to manage the practice. Emerging Issues Task Force No. 97-2 (“EITF No. 97-2”) states that consolidation can occur when a physician practice management entity establishes an other than temporary controlling financial interest in a physician practice through contractual arrangements. All but one of the management services agreements between the Company and the physician satisfies all of the criteria of EITF No. 97-2. The Company includes revenue with respect to these practices in the consolidated financial statements in accordance with EITF No. 97-2.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are depreciated

F-8

over the shorter of the term of the lease, including renewal periods when appropriate, or the estimated useful lives of the improvements. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for betterments and major improvements are capitalized and depreciated over the remaining useful life of the asset. The carrying amounts of assets sold or retired and related accumulated depreciation are eliminated in the year of disposal and the resulting gains and losses are included in other income or expense. The useful lives of operating equipment range from five to ten years, and the depreciation period for leasehold improvements ranges from three to ten years.

Advertising Costs

Advertising expenditures relating to marketing efforts consisting primarily of marketing material, brochure preparation, printing and trade show expenses are expensed as incurred. Advertising expense was $1,478,285, $866,557 and $250,133 for the years ended December 31, 2005, 2004 and 2003, respectively, and is included in general and administrative expense in the accompanying consolidated statements of operations.

Income Taxes

The Company records income taxes using the liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequence of temporary differences between the financial statement and income tax bases of its assets and liabilities. The Company estimates its income taxes in each of the jurisdictions in which we operate. This process involves estimating our tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets.

The recording of a net deferred tax asset assumes the realization of such asset in the future, otherwise a valuation allowance must be recorded to reduce this asset to its net realizable value. The Company considers future pretax income and, if necessary, ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. In the event that the Company determines that it may not be able to realize all or part of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is charged against income in the period such determination is made. The Company has not recorded any valuation allowances as of December 31, 2005 or 2004. The Company anticipates that it will generate sufficient pretax income in the future to realize its deferred tax assets.

Fair Value Disclosures

The carrying values of cash, accounts receivable, deposits, prepaid expenses, accounts payable and accrued expenses generally approximate the respective fair values of these instruments due to their current nature.

The carrying value of acquisition consideration payable consists of the value of cash and Company stock to be paid per contractual obligations and approximates fair value due to the current nature of the cash obligation and the stock which is recorded at fair value.

The fair values of debt instruments for disclosure purposes only are estimated based upon the present value of the estimated cash flows at interest rates applicable to similar instruments.

F-9

The Company generally does not use derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company maintains its cash and cash equivalents in deposit accounts with high quality, credit-worthy financial institutions. Funds with these institutions exceeded the federally-insured limits by approximately $18,761,000 on December 31, 2005.

Credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base. The Company controls credit risk associated with its receivables through credit checks and approvals, credit limits, and monitoring procedures. Generally, the Company requires no collateral from its customers.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, derivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates.

Cash and Cash Equivalents

All short-term investments with original maturities of three months or less when purchased are considered to be cash equivalents. At December 31, 2005 and 2004, the Company had cash and cash equivalents denominated in Canadian dollars that translate to U.S. dollar amounts of approximately $147,239 and $232,961, respectively.

As of December 31, 2005, the Company had $3,750,000 held in escrow representing the initial cash payment of the closing consideration for the acquisition of the Center for Pain Management ASC, LLC. This acquisition closed on January 3, 2006 and the cash held in escrow was disbursed on that date.

The Company also has a qualified cash requirement from the HBK Investments credit facility. This requires the Company to maintain a minimum consolidated balance of $2,000,000 in cash and cash equivalents at all times.

Preferred Stock

The Board of Directors is expressly authorized at any time to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, but not to exceed one vote per share, or without voting powers, and with such designations, preferences and relative participating, optional or other special rights and qualifications, limitations or restrictions, as shall be fixed and determined in the resolution or resolutions providing for the issuance thereof adopted by the Board of Directors.

Reclassifications

The presentation of certain prior year amounts have been reclassified to conform to the year 2005 presentation. In addition, certain current and long-term assets, as well as current and non-current liabilities, have been reclassified on the consolidated balance sheet as of December 31, 2004 to conform to the current year presentation.

Comprehensive Income (Loss)

As reflected in the consolidated statements of stockholders’ equity, comprehensive income is a measure of net income (loss) and all other changes in equity that result from transactions other than with shareholders. Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments. Comprehensive losses for the years ended December 31, 2005, 2004 and 2003 were $(5,323,127), $(1,471,067) and $(11,458,583), respectively.

Foreign Currency

The Company operates a subsidiary in Canada, which is subject to different monetary, economic and regulatory risks than our domestic operations. The subsidiary uses a functional currency other than U.S. dollars, and the balance sheet accounts are translated into U.S. dollars at exchange rates in effect at the end of each reporting period. The foreign entity’s revenue and expenses are translated into U.S. dollars at the average rates that prevailed during the reporting period. The resulting net translation gains and losses are reported as foreign currency translation adjustments in shareholders’ equity as a component of other accumulated comprehensive income. Exchange gains and losses on transactions and equity investments denominated in a currency other than their functional currency are included in results of operations as incurred.

Deferred Financing Costs

Deferred financing costs related to the Company’s various credit facilities and are amortized over the related terms of the debt using the effective interest method. Net deferred financing costs were $1,688,431 and $691,139 at December 31, 2005 and 2004, respectively.

F-10

Revenue Recognition

Revenue consists of net patient fee-for-service revenue. Net patient fee-for-service revenue is recognized when services are rendered. Net patient service revenue is recorded net of contractual adjustments and other arrangements for providing services at less than established patient billing rates. Allowances for contractual adjustments and bad debts are provided for accounts receivable based on estimated collection rates. The Company estimates contractual allowances based on the patient mix at each location, the impact of contract pricing and historical collection information.

Substantially all of the accounts receivable are due under fee-for-service contracts from third party payers, such as insurance companies and government-sponsored healthcare programs or directly from patients. Services are generally provided pursuant to contracts with healthcare providers or directly to patients. Accounts receivable for services rendered have been recorded at their established charges and reduced by the estimated contractual adjustments and bad debts. Contractual adjustments result from the differences between the rates charged for services performed and reimbursements by government-sponsored healthcare programs and insurance companies. Receivables generally are collected within industry norms for third-party payors. The Company continuously monitors collections from its customers and maintains an allowance for bad debts based upon any specific payor collection issues that have been identified, the historical collection experience including each practice’s experiences, and the aging of patient accounts receivable balances. The Company is not aware of any claims, disputes or unsettled matters with third-party payors which could have a material effect on the financial statements. The Company either uses in-house billing or local billing companies in each location it operates. Therefore, the Company analyzes its accounts receivable and allowance for doubtful accounts on a site-by-site basis as opposed to a company-wide basis. This allows the Company to be more detailed and more accurate with its collection estimates. While such credit losses have historically been within our expectations and the provisions established, an inability to accurately estimate credit losses in the future could have a material adverse impact on operating results.

The estimated contractual allowance rates for each facility are reviewed periodically. The Company adjusts the contractual allowance rates, as changes to the factors discussed above become known. As these factors change, the historical collection experience is revised accordingly in the period known. These allowances are reviewed periodically and adjusted based on historical payment rates. Depending on the changes made in the contractual allowance rates, net revenue may increase or decrease.

Changes in contractual allowances for the years ended December 31, 2005 and 2004 were as follows:


	For the Year Ended December 31,
	2005			2004
Balance at beginning of year (including balances from purchased business combinations)	$	14,788,745		$	5,520,213
Increase for contractual allowance in the current year (based on historical percentages)		40,437,607			32,458,453
Increase (decrease) in contractual allowance for the prior years contractual allowance		(173,722	)		(3,689,814	)
Decrease to the contractual allowance for the current year		(24,393,787	)		(19,500,107	)

Balance at end of year	$	30,658,843		$	14,788,745

F-11

A summary of the activity in the allowance for uncollectible accounts is as follows:


	For the Year Ended December 31,
	2005			2004
Balance, beginning of year	$	335,459		$	142,277
Additions charged to provision for bad debts		2,788,601			599,621
Accounts receivable written off (net of recoveries)		(1,360,283	)		(406,439	)

Balance, end of year	$	1,763,777		$	335,459

The Company’s payor mix and aging table for the year ended December 31, 2005 were as follows:


Financial Class	Balance on December 31, 2005		Current		31-60 Days		61-90 Days		91 + Days
Medicare	$	1,588,876	$	658,177	$	281,062	$	117,867	$	531,770
Private insurance		12,738,637		5,276,860		2,253,383		944,989		4,263,405
Self-pay		1,056,948		437,832		186,967		78,407		353,742
Workers compensation		2,606,677		1,079,792		461,104		193,371		872,410
Government		2,415,551		1,000,618		427,296		179,193		808,444
Medicaid		262,510		108,742		46,436		19,474		87,858
Other		2,357,983		976,772		417,112		174,922		789,177


Total		23,027,182		9,538,793		4,073,360		1,708,223		7,706,806

Allowance for doubtful accounts		1,763,777		333,355		305,287		162,191		962,944


Net realizable value	$	21,263,405	$	9,205,438	$	3,768,073	$	1,546,032	$	6,743,862

Summary


Aging category	Amount		Percentage estimated for allowance for doubtful accounts	Required balance in allowance for doubtful accounts
Current	$	9,538,793	3.5%	$	333,355
31-60 days		4,073,360	7.5%		305,287
61-90 days		1,708,223	9.5%		162,191
Over 91 days		7,706,806	12.5%		962,944


Year end balance of allowance for doubtful accounts				$	1,763,777

The Company’s payor mix and aging table for the year ended December 31, 2004 were as follows:


Financial Class	Balance on December 31, 2004		Current		31-60 Days		61-90 Days		91 + Days
Medicare	$	1,970,228	$	1,203,017	$	417,291	$	125,875	$	224,045
Private insurance		7,480,315		4,446,917		1,323,497		565,251		1,144,650
Self-pay		428,160		205,462		102,273		33,939		86,486
Workers compensation		1,237,915		669,298		261,912		121,777		184,928
Government		268,564		107,694		88,089		57,473		15,308
Medicaid		676,195		332,595		106,861		90,863		145,876
Other		2,351,725		702,059		457,619		974,047		218,000


Total		14,413,102		7,667,042		2,757,542		1,969,225		2,019,293

Allowance for doubtful accounts		335,459		178,447		64,181		45,833		46,998


Net realizable value	$	14,077,643	$	7,488,595	$	2,693,361	$	1,923,392	$	1,972,295

F-12


Summary

Aging category	Amount		Percentage estimated for allowance for doubtful accounts	Required balance in allowance for doubtful accounts
Current	$	7,667,042	2.3%	$	178,447
31-60 days		2,757,542	2.3%		64,181
61-90 days		1,969,225	2.3%		45,833
over 91 days		2,019,293	2.3%		46,998


Year end balance of allowance for doubtful accounts				$	335,459

Goodwill and Other Intangible Assets

The value of goodwill is stated at the lower of cost or fair value. At December 31, 2005 and 2004, the Company had $111.5 million and $61.8 million, respectively, of goodwill related to acquiring physician practices and surgery centers. The Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), as of January 1, 2002. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Under SFAS No. 142, goodwill and other intangible assets with an indefinite useful life are no longer amortized as expenses of operations, but rather carried on the balance sheet as permanent assets.

The Company evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable in accordance with SFAS No. 142. Goodwill is allocated to the Company's individual practices. Impairment of goodwill is tested at the practice level by comparing the practices’ net carrying amount, including goodwill, to the fair value of the practice. The fair values of the practices are estimated using a combination of the income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount of the practice exceeds its fair value, goodwill is potentially impaired and a second test is performed to measure the amount of impairment loss, if any. The fair value of each of the Company’s practices exceeded their individual carrying values and, consequently, no impairment was recorded for the years ended December 31, 2005 and 2004.

Other intangible assets primarily consist of patient referral networks acquired in conjunction with our physician and surgery center acquisitions, which are amortized on a straight-line basis over their estimated useful lives, which range from seven to twelve years.

Recent Accounting Pronouncements

F-13

in accordance with the fair-value-based provisions of SFAS 123 for equity instruments, earnings would have increased by approximately $0.00, $(0.02) and $0.21 per diluted share for the years ended December 31, 2005, 2004 and 2003, respectively. Compensation cost for stock options for which the requisite future service has not yet taken place is estimated for future years. During 2006, 2007, and 2008, the Company estimates additional compensation expense of $722,160, $315,045 and $92,706, respectively.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”), which supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements for the accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. SFAS 154 is effective for accounting changes and corrections or errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material impact on the Company’s results of operations or financial condition.

Share-Based Payments

The Company accounts for share-based payments to employees using the provisions of Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations, which provides for the measurement of compensation from share-based payments in the form of common stock or equity-indexed instruments based upon the intrinsic value of the instruments, among other provisions. As further described in Note 2, the Company originally recorded stock options granted to employees as a fixed plan under the provisions of APB 25. However, the fixed plan accounting was inappropriate in our circumstances, as the terms of our plan required variable accounting pursuant to APB 25. The following information in this footnote, for the years ended December 31, 2004 and 2003, has been restated to correct the accounting treatment.

The Company accounts for its issued employee stock options using the intrinsic value method. For those employee stock options that are exercisable, at the holder's option, in a cashless manner by surrendering options held on appreciated shares of common stock, the Company uses variable accounting and records estimates of compensation (benefit) expense based upon the estimated fair value of the stock at each intervening financial statement date.

The Company accounts for share-based payments to non-employees using the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), which provides for the measurement of compensation from share-based payments in the form of common stock or equity-indexed instruments based upon the fair value of instruments as determined on the grant date. The Company uses management’s best estimate of the fair value of common stock in measuring compensation cost, which generally takes into account the trading prices of the shares in the open trading market. The Company uses the Black-Scholes-Merton option-pricing model to determine the fair value of each option or warrant award as of the date of grant for purposes of recording compensation expense.

Had total employee stock-based compensation expense been calculated using the fair value recognition provisions of SFAS 123, the Company’s net loss and basic and diluted loss per common share for the years ended December 31, 2005, 2004 and 2003 would have been as follows, on a pro forma basis:


	2005			2004			2003
Net loss, as reported	$	(5,339,378	)	$	(1,501,482	)	$	(11,482,843	)
Stock-based employee compensation included in reported net loss, net of tax		901,904			87,736			5,351,580
Stock-based employee compensation expense as determined under the fair value method for all awards, net of tax		(837,183	)		(925,307	)		(1,021,797	)

Net loss, pro forma	$	(5,274,657	)	$	(2,339,053	)	$	(7,153,060	)


Loss per common share:
Basic – as reported	$	(0.10	)	$	(0.05	)	$	(0.55	)
Basic – pro forma	$	(0.10	)	$	(0.07	)	$	(0.34	)
Diluted – as reported	$	(0.10	)	$	(0.05	)	$	(0.55	)
Diluted – pro forma	$	(0.10	)	$	(0.07	)	$	(0.34	)

F-14

The fair value of each employee stock option included in the table above was computed as follows: the weighted average fair value of options and warrants granted to employees were estimated on the date of grant using the Black-Scholes-Merton option pricing model for employees and non-employee options with the following assumptions for the years ended December 31, 2005, 2004 and 2003:


	2005		2004		2003
Risk-free interest rate	3.98	%	4.5	%	4.5	%
Expected life	2.73 years		5 years		5 years
Volatility	48.895	%	50	%	50	%
Dividend yield	0.0	%	0.0	%	0.0	%

The same assumptions were used to compute the fair value of non-employee options. The amount of non-employee consulting expense recorded as a result of share-based payment in the years ended December 31, 2005, 2004 and 2003 totaled $27,471, $219,829 and $238,398, respectively. The net tax benefit of non employee option exercises is recorded as an adjustment to additional paid in capital. This amount was $111,328 in 2003.

(2)

Restatement and Reclassifications of Previously Issued Financial Statements

The Company’s previously issued consolidated financial statements as of and for the years ended December 31, 2000 through 2004 have been restated to give effect to the correction of certain errors that were discovered subsequent to December 31, 2005. All quarterly financial information for each of these years have also been restated to give effect to the correction of these errors. A discussion of each of the corrections is as follows:

Accounting for derivative financial instruments:

The Company originally recorded convertible debentures issued in 2003 and 2004 as conventional debt instruments with no separate recognition given to the derivative values of certain embedded conversion features or free-standing warrants.

The consolidated financial statements for the years ended December 31, 2003 and 2004 and each of the interim periods from March 31, 2005 through September 30, 2005 have been corrected and restated to recognize all features of the derivative financial instruments including the host instruments, the embedded conversion features and the free-standing warrants in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”).

Host instrument:

The proceeds from each financing arrangement were allocated to the various elements of the financing resulting in discounts to the face values of the debt instruments. These discounts were then amortized over the debt terms (in all instances three-years) using the effective interest method.

Free-standing warrants:

Proceeds from the financing were allocated to the fair value of the warrants issued using the Black-Scholes-Merton model. These instruments will be carried as current liabilities, and their carrying values adjusted to fair value at the end of each reporting period.

F-15

Embedded conversion features:

Each hybrid instrument was analyzed in accordance with the guidance in SFAS 133 for features that possessed the characteristics of derivative instruments. Those instruments whose economic characteristics and risks of the embedded derivative instrument were not “clearly and closely related” to the host instrument were bifurcated and treated as derivatives under the guidance of SFAS 133 and recorded at fair value with adjustments to fair value at the end of each reporting period.

Other derivative instruments:

Other warrants and convertible debt were outstanding that were indexed to our common stock and were previously classified as equity. We considered the application of EITF 00-19 to these instruments and determined that they were derivatives because, although we had sufficient authorized/unissued common stock to settle all equity instruments on the date the first EITF 00-19 applicable instrument was issued, features of that financing arrangement rendered the number of shares necessary to settle the instrument indeterminate. As a result, physical settlement of the other derivatives was not within our control. Accordingly, the fair value of the other derivatives has been reclassified from equity to liabilities and we will continue to carry those derivatives as current liabilities and at fair value until our control of share settlement is reacquired.

Accounting for stock options:

The Company originally recorded stock options granted to employees as a fixed plan under the intrinsic value method provisions of APB No. 25. While the intrinsic value method under APB 25 is appropriate, the fixed plan accounting was inappropriate in our circumstances because our plan allowed for cashless exercises. With a cashless exercise feature, the number of shares to be issued is indeterminable as it is dependent on the stock price on the exercise date. As a result, we have a variable stock option plan and are required to record estimates of compensation expense (benefit) based on the fair value of the stock at the end of each reporting period.

The Company’s financial statements for the years ended December 31, 2003 and 2004 have been restated to reflect non-cash charges of $13,532,700 and $356,590, respectively, for additional compensation expense resulting from the correction in the accounting for the Company’s stock option plans. In addition, the interim consolidated financial information for each of the periods from March 31, 2002 through September 30, 2005 have also been restated to give effect to the correction of this error.

The Company originally recorded stock option grants to non-employees without valuing the options and recording that value as an expense. The grants were to consultants and should have been recorded in accordance with SFAS 123. SFAS 123 requires all non-employee stock option grants to have a fair value calculation prepared on the grant date. The value of the non-employee stock option grant should then be recorded in the appropriate expense item. The Company will use the Black-Scholes option pricing model to estimate the fair value of stock option grants to non-employees.

The Company’s financial statements for the years ended December 31, 2003, 2004, and 2005 have been restated to reflect charges of $238,398, $219,829, and $27,471, respectively, for additional consulting expense resulting from the correction in the accounting for stock options issued to non-employees. The financial statements for the interim periods from March 31, 2003 through September 30, 2005 have been restated to give effect to this correction of an error.

Accounting for purchase acquisition transactions:

The Company has corrected the accounting used for acquisitions so as to be in compliance with generally accepted accounting principles. We have adjusted the purchase prices of each of our business acquisitions by correcting the value of our shares issued to their fair value at the date of the acquisitions. We also re-assessed the value of intangible assets acquired and the recording of deferred income taxes. An acquisition previously reported in September 2005 was reassessed and will be accounted for as a January 2006 acquisition when the transaction was completed. We have determined that there are other identifiable intangible assets that have an associated value. As such, we have adjusted the allocation of the purchase price and the recording of net assets for each of our acquisitions. The valuation of these identifiable intangibles was determined by a third-party valuation expert. The amortization period has been determined by management based on our estimates of the useful lives of the identified intangibles.

F-16

The Company’s financial statements for the years ended December 31, 2003 and 2004 and each of the interim periods from March 31, 2005 through September 30, 2005 have been restated to reflect net intangible assets and amortization expense on those intangibles.

The Company originally recorded the acquisition of Denver Pain Management as a purchase combination on April 29, 2004. On August 27, 2004 an addendum to the management agreement modified the term of the agreement to a period of nine years. This modification required the acquisition to be treated as an intangible asset subject to quarterly amortization charges and annual impairment testing. At the end of 2004, this was not reflected as an intangible asset on the balance sheet. The consideration paid and assets acquired totaled $1,717,560. As a result, we recorded this amount as an intangible asset in 2004. During the years ending 2004 and 2005 the amount of amortization recorded is $160,540 and $516,584 respectively. There was no impairment charge recorded in either period.

The Company originally recorded the acquisition consideration paid into escrow for the Center for Pain Management ASC into a separate account in the financials at September 26, 2005. This item was reflected on the balance sheet ending September 30, 2005 as acquisition consideration paid in escrow. This transaction should not have been recorded as such because the escrow agreement allowed for either party to walk away from the agreement before consummation. As a result, the cash and stock consideration placed into the escrow account were reversed. Cash increased by $3,750,000, common stock decreased by $3,750,000, and promissory notes decreased by $7,500,000. There are no income statement effects regarding this transaction.

The Company’s restated financial statements all reflect the changes as described above for the derivative instruments, accounting for stock options, and accounting for purchase acquisitions. These changes all required an adjustment to the prior period tax provisions. The change in the provision for the years ended December 31, 2003, 2004 and 2005 reflect an income tax expense (benefit) of $4,344,658, ($1,324,588), and ($2,011,858), respectively for the additional (reduced) tax provision computation.

The following tables present the effect on results of operations for each of the interim periods during 2005, 2004 and 2003 resulting from the corrections described above:


	2005
	March 31,			June 30,			September 30,
Net income, as previously reported	$	2,273,178		$	3,364,190		$	3,473,897
General and administrative expenses		(22,452	)		(5,019	)		—
Fair value adjustments for derivative instruments		(18,238,898	)		4,992,151			3,143,397
Amortization of debt discount		(470,841	)		(741,460	)		(229,811	)
Compensation charge (benefit) from variable option accounting		(18,138,790	)		6,161,631			5,241,297
Amortization of intangibles		(95,894	)		(194,662	)		(248,053	)
Provision for income taxes		6,930,065			(2,466,003	)		(2,011,858	)

Net income (loss), restated	$	(27,763,632	)	$	11,110,828		$	9,368,869

Basic earnings per common share:
As previously reported	$	0.05		$	0.07		$	0.06
As restated	$	(0.63	)	$	0.22		$	0.18

Diluted earnings per common share:
As previously reported	$	0.04		$	0.05		$	0.05
As restated	$	(0.63	)	$	0.18		$	0.14


	2004
	March 31,			June 30,			September 30,			December 31,			Year to Date
Net income, as previously reported	$	966,335		$	1,757,611		$	1,541,879		$	1,464,328		$	5,730,153
General and administrative expenses		(28,220	)		(87,468	)		(50,288	)		(97,626	)		(263,602	)
Fair value adjustments for derivative instruments		1,439,619			(2,885,673	)		6,286,632			(8,096,950	)		(3,256,372	)
Amortization of debt discount		(225,217	)		55,997			(943,557	)		(642,820	)		(1,755,597	)
Compensation charge (benefit) from variable option accounting		2,243,025			(3,757,355	)		8,245,813			(7,088,073	)		(356,590	)
Amortization of intangibles		(28,638	)		(32,217	)		(128,262	)		(85,769	)		(274,886	)
Provision for income taxes		(925,378	)		1,131,393			(3,042,565	)		1,511,962			(1,324,588	)

Net income (loss), restated	$	3,441,526		$	(3,817,712	)	$	11,909,652		$	(13,034,948	)	$	(1,501,482	)

Basic earnings per common share:
As previously reported	$	0.04		$	0.06		$	0.05		$	0.04		$	0.14
As restated	$	0.13		$	(0.13	)	$	0.38		$	(0.32	)	$	(0.05	)

Diluted earnings per common share:
As previously reported	$	0.03		$	0.04		$	0.04		$	0.03		$	0.11
As restated	$	0.11		$	(0.13	)	$	0.31		$	(0.32	)	$	(0.05	)

F-17


	2003
	March 31,			June 30,			September 30,			December 31,			Year to Date
Net income, as previously reported	$	323,289		$	563,000		$	360,605		$	(33,988	)	$	1,212,906
General and administrative expenses		—			(123,422	)		—			(114,976	)		(238,398	)
Fair value adjustments for derivative instruments		—			—			—			(3,173,763	)		(3,173,763	)
Compensation charge (benefit) from amortization of debt discount		—			—			—			(43,372	)		(43,372	)
Compensation charge (benefit) from variable option accounting		(4,204,050	)		(4,468,700	)		49,800			(4,909,750	)		(13,532,700	)
Amortization of intangibles		(9,248	)		(10,740	)		(15,172	)		(17,014	)		(52,174	)

Provision for income taxes (benefit)		939,260			1,631,536			(252,704	)		2,026,566			4,344,658

Net (loss) income, restated	$	(2,950,749	)	$	(2,408,326	)	$	142,529		$	(6,266,297	)	$	(11,482,843	)

Basic earnings (loss) per common share:
As previously reported	$	0.02		$	0.03		$	0.02		$	(0.01	)	$	0.06
As restated	$	(0.18	)	$	(0.12	)	$	0.01		$	(0.26	)	$	(0.55	)

Diluted earnings (loss) per common share:
As previously reported	$	0.02		$	0.02		$	0.01		$	0.00		$	0.05
As restated	$	(0.18	)	$	(0.12	)	$	0.00		$	(0.26	)	$	(0.55	)

F-18

The following table presents the balance sheet effects as of September 30, 2005 and December 31, 2004 for the corrections noted above:


	September 30, 2005						December 31, 2004
	As Previously Reported			As Restated			As Previously Reported			As Restated
Assets
Current assets:
Cash	$	18,086,682		$	21,836,682		$	19,100,840		$	19,100,840
Accounts receivable, net		22,909,586			22,909,586			14,077,643			14,077,643
Acquisition consideration paid in escrow		14,525,761			—			—			—
Deposits and prepaid expenses		3,455,423			3,455,423			1,117,317			1,117,317
Deferred tax assets		—			2,731,000			—			130,000

Total current assets		58,977,452			50,932,691			34,295,800			34,425,800
Property and equipment, net		10,935,321			10,694,733			7,119,065			7,119,065
Goodwill, net		85,069,645			96,957,956			55,237,910			61,817,801
Due from shareholder		2,954,580			1,565,850			1,794,957			406,227
Deferred tax asset		(715,752	)		1,766,247			(1,500,200	)		2,536,923
Other assets		6,522,189			9,265,505			4,628,770			6,623,360

Total assets	$	163,743,435		$	171,182,982		$	101,576,302		$	112,929,176

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	2,316,636		$	2,314,187		$	693,682		$	752,045
Compensation expense		—			21,496,153			—			14,760,290
Derivative liabilities		—			16,000,302			—			13,364,535
Acquisition consideration payable		916,667			916,667			17,900,833			17,900,833
Income tax payable		3,851,709			4,242,929			2,199,100			3,939,972
Current portion of notes payable		9,812,713			2,786,952			765,177			765,177
Current portion of capital lease obligations		1,437,600			1,437,600			930,117			930,117
Current portion of convertible debentures		—			—			3,885,000			2,935,480

Total current liabilities		18,335,325			49,194,790			26,373,909			55,348,449
Notes payable, net of current portion		28,750,000			28,750,000			295,583			295,583
Convertible debentures, net of current portion		10,456,000			9,354,548			17,186,000			13,163,014
Capital lease obligations, net of current portion		2,562,850			2,562,850			2,190,627			2,190,627

Total liabilities		60,104,175			89,862,188			46,046,119			70,997,673

Minority interests		1,732,729			1,732,729			—			—
Stockholders’ Equity:
Common stock, par value $0.0001 per share:
Authorized 200,000,000 shares; issued and outstanding 55,823,026 and 41,512,833 shares		5,514			5,412			4,151			4,151
Preferred stock, par value $0.0001 per share:
Authorized 10,000,000 shares; issued and outstanding -0- shares		—			—			—			—
Additional paid in capital		85,243,879			100,463,972			47,995,110			55,539,687
Retained earnings (accumulated deficit)		16,610,811			(20,927,646	)		7,499,546			(13,643,711	)
Cumulative translation adjustments		46,327			46,327			31,376			31,376

Total stockholders’ equity		101,906,531			79,588,065			55,530,183			41,931,503

Total liabilities and stockholders’ equity	$	163,743,435		$	171,182,982		$	101,576,302		$	112,929,176

The following table presents the balance sheet effects as of March 31, 2005, June 30, 2005 and September 30, 2005 for the corrections noted above:

F-19


	March 31, 2005					June 30, 2005					September 30, 2005
	As Previously Reported		As Restated			As Previously Reported		As Restated			As Previously Reported		As Restated
Assets
Current assets:
Cash	$	10,272,446	$	10,272,446		$	12,231,091	$	12,231,091		$	18,086,682	$	21,836,682
Accounts receivable, net		14,301,134		14,301,134			19,575,037		19,575,037			22,909,586		22,909,586
Due from shareholder		2,192,800		804,069			2,290,158		901,428			2,954,580		1,565,850
Acquisition consideration paid in escrow		—		—			—		—			14,525,761		—
Deposits and prepaid expenses		1,976,633		1,976,633			2,286,010		2,286,010			3,455,423		3,455,423
Deferred tax asset		—		7,135,000			—		4,755,000			—		2,731,000

Total current assets		28,743,013		34,489,282			36,382,296		39,748,566			61,932,032		52,498,541
Property and equipment, net		7,190,906		7,190,906			9,614,623		9,614,623			10,935,321		10,694,733
Goodwill, net		55,675,019		66,141,495			72,745,918		84,228,000			85,069,645		96,957,956
Other assets		5,025,377		7,705,599			5,717,021		8,524,248			6,522,189		9,265,504
Deferred tax asset		—		2,354,923			—		2,057,685			—		1,766,247

Total assets	$	96,634,315	$	117,882,208		$	124,459,858	$	144,173,122		$	164,459,187	$	171,182,982

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	849,584	$	930,239		$	1,444,715	$	1,525,369		$	2,247,741	$	2,314,187
Accrued compensation expense		—		32,899,080			—		26,737,450			—		21,496,153
Derivative liabilities		—		27,993,686			—		19,143,699			—		16,000,302
Acquisition consideration payable		583,333		583,333			2,154,300		2,154,300			916,667		916,667
Income tax payable		503,004		2,475,978			1,922,359		4,394,981			3,851,709		4,242,929
Interest payable		104,063		—			65,350		—			68,895		—
Current portion of notes payable		658,603		658,603			—		—			9,812,713		2,786,952
Current portion of capital lease obligations		609,443		609,443			1,313,699		1,313,699			1,437,600		1,437,600
Current portion of convertible debentures		2,382,334		2,382,334			—		—			—		—

Total current liabilities		5,690,364		68,532,696			6,900,423		55,269,498			18,335,325		49,194,790
Notes payable, net of current portion		139,035		139,035			13,641,642		13,641,642			28,750,000		28,750,000
Convertible debentures, net of current portion		13,023,266		10,807,187			10,456,000		9,106,972			10,456,000		9,354,548
Capital lease obligations, net of current portion		2,313,341		2,313,341			2,331,563		2,331,563			2,562,850		2,562,850
Deferred tax liability		1,839,367		—			2,505,012		—			715,752		—

Total liabilities		23,005,372		81,792,259			35,834,640		80,349,675			60,819,927		89,862,188

Minority interests		—		—			—		963,127			1,732,729		1,732,729
Stockholders’ equity:
Common stock, par value $0.0001 per share;
Authorized 200,000,000 shares; issued and outstanding 55,823,026 and 41,512,833 shares		4,879		4,879			5,216		5,216			5,514		5,412
Preferred stock, par value $0.0001 per share;
Authorized 10,000,000 shares; issued and outstanding -0- shares		—		—			—		—			—		—
Additional paid in capital		63,830,551		77,471,621			74,485,837		93,117,494			85,243,879		100,463,972
Retained earnings (accumulated deficit)		9,772,724		(41,407,342	)		13,136,914		(30,296,514	)		16,610,811		(20,927,646	)
Cumulative translation adjustment		20,789		20,789			34,124		34,124			46,327		46,327

Total stockholders’ equity		73,628,943		36,089,947			87,662,091		62,860,320			101,906,531		79,588,065

Total liabilities and stockholders’ equity	$	96,634,315	$	117,882,208		$	124,459,858	$	144,173,122		$	164,459,187	$	171,182,982

The following table presents the balance sheet effects as of March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004 for the corrections noted above:

F-20


	March 31, 2004						June 30, 2004						September 30, 2004					December 31, 2004
	As Previously Reported			As Restated			As Previously Reported			As Restated			As Previously Reported		As Restated			As Previously Reported		As Restated
Assets
Current assets:
Cash	$	10,419,527		$	10,419,527		$	4,038,249		$	4,038,249		$	5,031,783	$	5,031,783		$	19,100,840	$	19,100,840
Accounts receivable, net		6,762,493			6,762,493			11,942,589			11,942,589			13,328,623		13,328,623			14,077,643		14,077,643
Due from shareholder		383,090			383,090			28,021			28,021			1,545,097		200,140			1,794,957		—
Acquisition consideration paid in escrow		284,964			284,964			79,301			79,301			78,810		78,810			—		—
Deposits and prepaid expenses		599,638			599,638			780,093			780,093			635,506		635,506			1,117,317		1,117,317
Deferred tax asset		—			—			—			—			—		—			—		130,000

Total current assets		18,449,712			18,449,712			16,868,253			16,868,253			20,619,819		19,274,862			36,090,757		34,425,800

Property and equipment, net		4,734,001			4,734,001			6,433,246			6,433,246			6,702,977		6,702,977			7,119,065		7,119,065
Goodwill, net		24,059,078			28,984,604			37,898,540			43,542,191			36,475,796		42,230,992			55,237,910		61,817,801
Deferred tax asset		—			3,662,000			—			4,995,000			—		2,149,000			—		2,536,923
Due from shareholder		—			—			—			—			—		—			—		406,227
Other assets		4,437,083			5,477,125			4,841,698			6,150,175			4,532,904		7,143,979			4,628,770		6,623,360

Total assets	$	51,679,874		$	61,307,442		$	66,041,737		$	77,988,865		$	68,331,496	$	77,501,810		$	103,076,502	$	112,929,176

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	393,616		$	454,617		$	671,912		$	732,913		$	865,590	$	926,591		$	562,314	$	752,045
Accrued compensation expense		—			12,160,675			—			15,918,030			—		7,672,218			—		14,760,290
Derivative liabilities		—			9,705,739			—			11,577,842			—		5,739,613			—		13,364,535
Acquisition consideration payable		—			—			—			—			—		—			17,900,833		17,900,833
Income tax payable		329,026			473,097			891,329			1,397,109			1,370,060		2,261,994			2,199,100		3,939,972
Interest payable		—			22,917			62,500			58,750			55,975		71,868			131,368		—
Current portion of notes payable		—			867,206			4,258,850			4,258,850			1,242,791		1,242,791			765,177		765,177
Current portion of capital lease obligations		867,206			607,294			611,426			611,426			935,691		935,691			930,117		930,117
Current portion of convertible debentures		607,294			—			2,490,000			2,490,000			3,260,000		3,260,000			3,885,000		2,935,480

Total current liabilities		2,197,142			24,291,545			8,986,017			37,044,920			7,730,107		22,110,766			26,373,909		55,348,449
Shareholder loans		—			—			—			—			70,758		70,758			—		—
Notes payable, net of current portion		51,280			51,280			471,225			471,225			183,925		183,925			295,583		295,583
Convertible debentures, net of current portion		20,000,000			14,716,997			17,373,600			12,562,543			18,180,160		13,238,987			17,186,000		13,163,014
Capital lease obligations, net of current portion		2,451,850			2,451,850			2,455,181			2,455,181			2,318,465		2,318,465			2,190,627		2,190,627
Deferred tax liability		874,608			1,412,455			1,188,711			1,686,716			1,541,300		1,884,077			1,500,200		—

Total liabilities		25,574,880			42,924,127			30,474,734			54,220,585			30,024,715		39,806,978			47,546,319		70,997,673


Stockholders’ equity:
Common stock, par value $0.0001 per share; Authorized 200,000,000 shares; issued and outstanding 55,823,026 and 41,512,833 shares		2,796			2,796			3,109			3,109			3,195		3,195			4,151		4,151
Preferred stock, par value $0.0001 per share; Authorized 10,000,000 shares; issued and outstanding -0- shares		—			—			—			—			—		—			—		—
Additional paid in capital		23,370,697			27,085,449			31,081,243			36,294,273			32,256,259		38,288,292			47,995,110		55,539,687
Retained earnings (accumulated deficit)		2,735,728			(8,700,703	)		4,493,339			(12,518,414	)		6,035,218		(608,764	)		7,499,546		(13,643,711	)
Cumulative translation adjustment		(4,227	)		(4,227	)		(10,688	)		(10,688	)		12,109		12,109			31,376		31,376

Total stockholders’ equity		26,104,994			18,383,315			35,567,003			23,768,280			38,306,781		37,694,832			55,530,183		41,931,503

Total liabilities and stockholders’ equity	$	51,679,874		$	61,307,442		$	66,041,737		$	77,988,865		$	68,331,496	$	77,501,810		$	103,076,502	$	112,929,176

F-21

The following table presents cash flow effects for the nine months ended September 30, 2005 and the year-ended December 31, 2004 and 2003 for the corrections noted above:


	September 30, 2005						December 31, 2004						December 31, 2003
	As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
Net cash provided by (used in) operating activities	$	4,025,460		$	4,025,460		$	3,422,811		$	4,119,026		$	(310,963	)	$	14,562
Net cash used in investing activities	$	(32,001,202	)	$	(32,001,202	)	$	(16,154,668	)	$	(18,407,883	)	$	(7,357,171	)	$	(7,682,696	)
Net cash provided by financing activities	$	26,961,584		$	26,961,584		$	23,908,930		$	25,465,930		$	13,513,217		$	13,513,217

(3)

Acquisitions

The Company operates fifteen practices in states with laws governing the corporate practice of medicine. In those states, a corporation is precluded from owning the medical assets and practicing medicine. Therefore, contractual arrangements are effected to allow the Company to manage the practice. Emerging Issues Task Force Issue No. 97-2 (“EITF No. 97-2”) states that consolidation can occur when a physician practice management entity establishes an other than temporary controlling financial interest in a physician practice through contractual arrangements. All but one of the management services agreements between the Company and the physician satisfies all of the criteria of EITF No. 97-2. The Company includes revenue with respect to these practices in the consolidated financials in accordance with EITF No. 97-2.

On December 1, 2000 the Company acquired 51% of the outstanding shares of Rothbart Pain Management Clinic, Inc. (Rothbart), which is incorporated in Ontario, Canada. PainCare purchased 51% of the outstanding stock of Rothbart from certain shareholders in exchange for $510,000 in a convertible debenture with an interest rate of 7% and convertible at the fair market value of outstanding shares at the time of conversion. The interest and principal on the convertible debenture will be paid over a three-year period in equal monthly installments after an initial payment of $100,000 was paid on December 1, 2000. The 51% shareholders of Rothbart earned $726,280 in additional consideration based on the future earnings of Rothbart. The remaining 49% of the outstanding shares of Rothbart was acquired from Naomi Investments Limited (Naomi) on March 1, 2001 in exchange for $490,000 in a convertible debenture with an interest rate of 7% and a conversion feature equal to fair market value. The interest and principal on the convertible debenture will be paid over a three-year period in equal monthly installments. The Naomi shareholders earned $697,798 in additional consideration based on the future earnings of Rothbart. Rothbart is one of the largest providers of pain management services in Canada with over 14 pain management physicians practicing in the center.

Purchase price allocation of initial 51% acquisition in December 2000:


Consideration	$	510,000
Contingent Consideration		686,132
Deferred taxes		32,890
Less:
Intangible Assets		82,227
Net assets of Rothbart		59,411

Goodwill	$	1,105,522

Purchase price allocation of remaining 49% acquisition in March 2001:

F-22


Consideration (convertible debenture)	$	490,000
Contingent Consideration		667,938
Deferred taxes		31,601
Less:
Intangible Assets		79,002

Goodwill	$	1,110,537

On January 1, 2001, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company I, Inc. (PNAC I), and Advanced Orthopaedics of South Florida, Inc. (AOSF), a Florida corporation. The Merger Agreement provides for the merger of AOSF into PNAC I, a Florida corporation. In exchange for all of the capital stock of AOSF, the AOSF shareholders received 1,850,000 shares of common stock, $75,000 in cash and $1,200,000 in Convertible Debentures with an interest rate of 9% and a conversion feature at $2.00 per share. The principal and interest on the Convertible Debentures will be paid monthly over four years in equal installments. In addition, the former owner of AOSF earned $1,456,909 in additional consideration based on the future earnings of AOSF. The convertible debenture and additional consideration was paid in full in February 2004. The physician owner of AOSF received a ten-year employment agreement with an annual salary of $300,000 per year for the first four years, $500,000 for year five and $700,000 per year for the next five years, plus incentives based on AOSF earnings. AOSF is an orthopedic surgery, pain management and orthopedic rehabilitation center located in Lake Worth, Florida. The center is run by Merrill Reuter, M.D., a board certified orthopedic surgeon who specializes in minimally invasive spine surgery.

Advanced Orthopaedics of South Florida, Inc. was acquired on January 1, 2001 and was accounted for using the purchase method of accounting.

Purchase price allocation:


Consideration ($1,200,000 convertible debenture)	$	1,200,000
Cash Consideration		75,000
Stock Consideration		1,850,000
Contingent Consideration		1,456,909
Deferred taxes		44,391
Less:
Intangible Assets		110,977
Net assets of AOSF		601,756

Goodwill	$	3,913,567

On August 31, 2001, PainCare entered into an Asset Purchase Agreement with Perry Haney, M.D. to acquire certain assets used by Dr. Haney in his pain management practice in Aurora, Colorado. As consideration for the assets, Dr. Haney received 250,000 shares of PainCare common stock. In addition, PainCare entered into a Business Management Agreement on August 31, 2001 with SpineOne, P.C. (SpineOne), a Colorado professional corporation, and Colorado Musculoskeletal Center, Inc. (CMCI), a Colorado business corporation (collectively, the Practice). Both of these entities are owned by Dr. Haney. PainCare and SpineOne terminated the Management Agreement on or about March 15, 2004 and in connection with such termination PainCare transferred to SpineOne all right, title and interests in and to the assets it acquired from Dr. Haney.

On December 12, 2002, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company II, Inc. (PNAC II), and Pain and Rehabilitation Network, Inc. (PRNI), a Florida corporation. The Merger Agreement provides for the merger of PRNI into PNAC II, a Florida corporation. In exchange for all of the capital stock of PRNI, the PRNI

F-23

shareholder received 1,000,000 shares of common stock and $1,000,000 in cash. As of March 24, 2006, the Company has paid a total of $666,666 in cash and issued 448,673 shares, representing additional payments earned during the two fiscal years following the closing. In addition, the former owner of PRNI may receive up to $666,667 in additional consideration based on the future earnings of PRNI. The physician owner of PRNI received a five-year employment agreement with an annual salary of $360,000 per year for the next five years, plus incentives based on PRNI earnings. PRNI is a pain management center located in Orange Park, Florida. The center is run by Andrea Trescot, M.D., a board certified pain management physician.

Pain and Rehabilitation Network, Inc. was acquired on December 12, 2002 and was accounted for using the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	1,000,000
Stock Consideration		800,000
Contingent Consideration		2,086,234
Deferred taxes		13,190
Less:
Intangible Assets		32,976
Net assets of PRNI		913,085

Goodwill	$	2,953,363

On May 16, 2003, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company IV, Inc. (PNAC IV), and Medical Rehabilitation Specialists II, P.A. (MRS), a Florida corporation. The Merger Agreement provides for the merger of MRS into PNAC IV, a Florida corporation. In exchange for all of the capital stock of MRS, the MRS shareholder received 1,100,000 shares of common stock and $1,375,000 in cash. As of March 24, 2006, the Company has paid a total of $916,666 in cash and issued 258,370 shares, representing additional payments earned during the two fiscal years following the closing. In addition, the former owner of MRS may receive up to $916,667 in additional consideration based on the future earnings of MRS. The physician owner of MRS received a five-year employment agreement with an annual salary of $400,000 per year for the next five years, plus incentives based on MRS earnings. MRS is a pain management practice located in Tallahassee, Florida. The center is run by Kirk Mauro, M.D., a physiatrist.

Medical Rehabilitation Specialists II, P.A. was acquired on May 16, 2003 and utilized the purchase method of accounting. The Company has included financial results for MRS in 2003 financial statements from April 17, 2003.

Purchase price allocation:


Cash Consideration	$	1,375,000
Stock Consideration		2,200,000
Contingent Consideration		1,816,463
Acquisition Costs		70,559
Deferred taxes		25,060
Less:
Cash		(4,600	)
Accounts receivable		262,914
Property and equipment		2,043
Intangible assets		62,650
Plus:
Accounts payable and accrued liabilities		119,747

Goodwill	$	5,283,822

F-24

On August 6, 2003, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company V, Inc. (PNAC V), and Industrial & Sport Rehabilitation, Ltd. d/b/a/ Associated Physicians Group (APG), an Illinois corporation. The Merger Agreement provides for the acquisition of the non-medical assets of APG by PNAC V, a Florida corporation. In exchange for the non-medical assets the APG shareholder received 1,375,000 shares of common stock and $1,375,000 in cash. As of March 24, 2006, the Company has paid a total of $916,666 in cash and issued 566,943 shares, representing additional payments earned during the two fiscal years following the closing. In addition, the former owner of APG may receive up to $916,667 in additional consideration if certain net earnings goals are achieved in the third fiscal year following the closing. APG is comprised of three rehabilitation centers located in the St. Louis-metro area. The centers are run by John Vick.

Industrial & Sport Rehabilitation, Ltd. d/b/a Associated Physicians Group was acquired on August 6, 2003 and utilized the purchase method of accounting. The Company has included APG financial results in its 2003 financial statements from April 25, 2003 in accordance EITF 97-2 as the result of the execution of a definitive management agreement on April 25, 2003.

Purchase price allocation:


Cash Consideration	$	1,375,000
Stock Consideration		3,520,000
Contingent Consideration		2,815,491
Acquisition Costs		646,866
Deferred taxes		61,928
Less:
Cash		12,591
Accounts receivable		624,163
Property and equipment		135,661
Deposits and prepaid expenses		5,499
Intangible Assets		154,821
Plus:
Accounts payable and accrued liabilities		25,868
Note payable		333,099

Goodwill	$	7,845,517

On December 23, 2003, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company VI, Inc. (PNAC VI), and Spine and Pain Center, P.C. (SPC), a North Dakota corporation. The Merger Agreement provides for the acquisition of the non-medical assets of SPC by PNAC VI, a Florida corporation. In exchange for the non-medical assets the SPC shareholder received 277,778 shares of common stock and $625,000 in cash. As of March 24, 2006, the Company has paid a total of $416,667 in cash and issued 141,195 shares, representing additional payments earned during the two fiscal years following the closing. In addition, the former owner of SPC may receive up to $416,667 in additional consideration if certain net earnings goals are achieved in the third fiscal year following the closing. SPC is a pain management practice located in Bismarck, North Dakota. The center is run by Michael Martire, M.D., a board certified pain management physician.

Spine and Pain Center, P.C. was acquired on December 23, 2003 and utilized the purchase method of accounting. The Company has only included December 31, 2003 balance sheet results for SPC in its 2003 financial statements.

F-25

Purchase price allocation:


Cash Consideration	$	625,000
Stock Consideration		747,222
Contingent Consideration		863,213
Acquisition Costs		137,709
Deferred taxes		19,113
Less:
Cash		3,784
Accounts receivable		152,029
Property and equipment		8,564
Intangible Assets		47,783
Plus:
Accounts payable and accrued liabilities		89,832

Goodwill	$	2,269,929

On December 30, 2003, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company VII, Inc. (PNAC VII), and Health Care Center of Tampa, Inc. (HCCT), a Florida corporation. The Merger Agreement provides for the merger of HCCT into PNAC VII, a Florida corporation. In exchange for all of the capital stock of HCCT, the HCCT shareholder received 809,315 shares of common stock and $1,937,500 in cash. As of March 24, 2006, the Company has paid a total of $1,291,667 in cash and issued 226,608 shares, representing additional payments earned during the first two years following the closing. The stock portion of the second year payment has been earned but not issued as of March 24, 2006. In addition, the former owner of HCCT may receive up to $1,291,667 in additional consideration based on the future earnings of HCCT. The physician owner of HCCT received a five-year employment agreement with an annual salary of $400,000 per year for the next five years, plus incentives based on HCCT earnings. HCCT is a pain management practice located in Lakeland, Florida. The center is run by Saqib Bashir Khan, M.D., a board certified pain management physician.

Health Care Center of Tampa, Inc. was acquired on December 30, 2003 and utilized the purchase method of accounting. The Company has only included December 31, 2003 balance sheet results for HCCT in its 2003 financial statements.

Purchase price allocation:


Cash Consideration	$	1,937,500
Stock Consideration		2,832,602
Contingent Consideration		2,653,583
Acquisition Costs		206,753
Liabilities		16,746
Deferred taxes		38,730
Less:
Cash		24,370
Accounts receivable		432,088
Property and equipment		458,322
Note receivable		9,977
Intangible Assets		96,826

Goodwill	$	6,664,331

On December 31, 2003, the Company closed an asset purchase pursuant to an Asset Purchase Agreement with PainCare Holdings, Inc. (PCH), and Bone and Joint Surgical Clinic (BJSC), a Louisiana corporation. The Asset Purchase Agreement provides for the acquisition of the assets of BJSC by PCH, a Florida corporation. In exchange for the assets the BJSC shareholder received 565,048 shares of common stock and $1,250,000 in cash. As of March 24, 2006, the Company has paid a total of $593,333 in cash and issued 190,316 shares, representing additional payments earned during the two fiscal years following the closing. In addition, the former

F-26

owner of BJSC may receive up to $1,313,334 in additional consideration if certain net earnings goals are achieved in the third and fourth fiscal years following the closing. BJSC is an orthopedic practice located in Houma, Louisiana. The center is run by Christopher Cenac, M.D., an orthopedic surgeon.

Bone and Joint Surgical Clinic was acquired on December 31, 2003 and utilized the purchase method of accounting. The Company has only included December 31, 2003 balance sheet results for BJSC in its 2003 financial statements.

Purchase price allocation:


Cash Consideration	$	1,250,000
Stock Consideration		1,808,154
Contingent Consideration		1,214,105
Acquisition Costs		62,137
Less:
Cash		2,631
Accounts receivable		356,877
Property and equipment		5,485
Intangible Assets		139,272
Plus:
Note Payable		599,000

Goodwill	$	4,429,131

On December 31, 2003, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company IX, Inc. (PNAC IX), and Kenneth M. Alo, M.D., P.A. (ALO), a Texas corporation. The Merger Agreement provides for the acquisition of the non-medical assets of ALO by PNAC IX, a Florida corporation. In exchange for the non-medical assets the ALO shareholder received 777,778 shares of common stock and $1,750,000 in cash. As of March 24, 2006, the Company has paid a total of $1,166,667 in cash and issued 362,633 shares, representing additional payments earned during the two fiscal years following the closing. In addition, the former owner of ALO may receive up to $1,166,667 in additional consideration if certain net earnings goals are achieved in the third fiscal year following the closing. ALO is a pain management practice located in Houston, Texas. The center is run by Kenneth Alo, M.D., a board certified pain management physician.

Kenneth M. Alo, M.D., P.A. was acquired on December 31, 2003 and utilized the purchase method of accounting. The Company has only included December 31, 2003 balance sheet results for ALO in its 2003 financial statements.

Purchase price allocation:


Cash Consideration	$	1,750,000
Stock Consideration		2,488,889
Contingent Consideration		2,376,016
Acquisition Costs		306,984
Deferred taxes		16,624
Less:
Cash		100
Accounts receivable		426,133
Property and equipment		13,963
Other assets		128
Intangible Assets		41,561
Plus:
Accounts payable and accrued liabilities		17,553
Note Payable		145,000

Goodwill	$	6,619,181

F-27

On January 17, 2004, the Company purchased from Rehab Management Group, Inc., a South Carolina based corporation (“RMG”) all rights, title and interest that RMG owns or acquires and all management fees, revenues, compensation and payments of any kind with respect to three electro-diagnostic management agreements with the named physician’s practice:


Name of Physician’s Practices		Purchase Price
Associated Physicians Group, Ltd., a fully integrated treatment practice		$107,500 in cash and 48,643 shares of common stock, plus contingent payments of up to $215,000 in cash and common stock if certain earnings goals are met.

Statesville Pain Associates, P.C., a North Carolina professional corporation		$375,000 in cash and 169,683 shares of common stock, plus contingent payments of up to $750,000 in cash and common stock if certain earnings goals are met.

Space Coast Pain Institute, P.C., a Florida professional corporation		$275,000 in cash and 124,434 shares of common stock, plus contingent payments of up to $550,000 in cash and common stock if certain earnings goals are met.

On May 25, 2004, the Company acquired capital stock of Georgia Surgical Centers, Inc. (GSC), which operates three ambulatory surgery centers and acquired the non-medical assets of Georgia Pain Physicians, P.C. (GPP), a pain management physician practice all headquartered in Atlanta, Georgia. GSC was acquired pursuant to a merger agreement from Robert E. Windsor, M.D., the sole shareholder and the non-medical assets of GPP were acquired pursuant to an asset purchase agreement. The combined purchase price for GSC and the assets of GPP consisted of $1,125,000 in cash and 462,344 shares of common stock. As of March 24, 2006, the Company has paid a total of $375,000 in cash and issued 86,806 shares, representing additional payments earned during the first fiscal year following the closing. In addition, the former owner of GSC/GPP may receive up to $1,500,000 in additional consideration if certain net earnings goals are achieved in the second and third fiscal years following the closing. Both GSC and GPP are run by Robert Windsor, M.D., a board certified pain management physician.

GSC and GPP were acquired on May 25, 2004 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	1,125,000
Stock Consideration		1,282,197
Contingent Consideration		723,090
Acquisition Costs		256,197
Deferred taxes		12,040
Less:
Cash		46,494
Accounts receivable		438,539
Property and equipment		186,317
Deposits and prepaid expenses		1,300
Note receivable		7,869
Intangible Assets		30,099
Plus:
Accounts payable and accrued liabilities		182,702

Goodwill	$	2,870,608

On June 3, 2004, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XI, Inc. (PNAC XI), and Dynamic Rehabilitation Centers, Inc. (Dynamic), a Michigan corporation. The Merger Agreement provides for the acquisition of the non-medical assets of Dynamic by PNAC XI, a Florida corporation. In exchange for the non-medical assets the shareholders of Dynamic received 927,414 shares of common stock and $2,250,000 in cash. As of March 24, 2006, the Company has paid a total of $750,000 in cash and issued 175,644 shares, representing additional payments earned during the first fiscal year following the closing. In addition, the former owners of Dynamic may receive up to $3,000,000 in additional consideration if certain net earnings goals are achieved in the second and third fiscal years following the closing. Dynamic is a spinal rehabilitation practice with four locations in Southeast Michigan.

Dynamic was acquired on June 3, 2004 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	2,350,000
Stock Consideration		2,685,885
Contingent Consideration		1,478,923
Acquisition Costs		292,574
Deferred taxes		58,868
Less:
Cash		50,380
Accounts receivable		573,366
Property and equipment		612,251
Deposits and prepaid expenses		53,060
Intangible Assets		147,169
Plus:
Accounts payable and accrued liabilities		130,600
Note payable, current		23,713
Note Payable, long term		125,273

Goodwill	$	5,709,610

F-28

On June 7, 2004, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XIII, Inc. (PNAC XIII), and Rick Taylor, D.O., P.A. (Taylor), a Texas corporation. The Merger Agreement provides for the acquisition of the non-medical assets of Taylor by PNAC XIII, a Florida corporation. In exchange for the non-medical assets the shareholder of Taylor received 761,545 shares of common stock and $1,875,000 in cash. As of March 24, 2006, the Company has paid a total of $625,000 in cash and issued 148,104 shares, representing additional payments earned during the first fiscal year following the closing. In addition, the former owner of Taylor may receive up to $2,500,000 in additional consideration if certain net earnings goals are achieved in the second and third fiscal years following the closing. Taylor is a pain management physician practice with three locations in Texas.

Taylor was acquired on June 7, 2004 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	1,875,000
Stock Consideration		2,240,542
Contingent Consideration		1,217,417
Acquisition Costs		289,588
Deferred taxes		49,353
Less:
Cash		1,000
Accounts receivable		249,556
Property and equipment		24,583
Intangible Assets		123,383
Plus:
Accounts payable and accrued liabilities		6,289
Note payable		160,623

Goodwill	$	5,440,290

Effective July 1, 2004, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XIV, Inc. (PNAC XIV), and Ben Zolper, M.D., L.L.C. (Zolper), a Maine corporation. The Merger Agreement provides for the merger of Zolper into PNAC XIV, a Florida corporation. In exchange for all of the capital stock of Zolper, the Zolper shareholder received 316,444 shares of common stock and $875,000 in cash. As of March 24, 2006, the Company has paid a total of $291,667 in cash and issued 69,115 shares, representing additional payments earned during the first fiscal year following the closing. In addition, the former owner of Zolper may receive up to $1,166,667 in additional consideration if certain net earnings goals are achieved in the second and third fiscal years following the closing. The physician owner of Zolper received a five-year employment agreement with an annual salary of $200,000 per year for the next five years, plus incentives based on Zolper earnings. Zolper is a pain management practice located in Bangor, Maine. The center is run by Benjamin Zolper, M.D., a board certified pain management physician.

Zolper was acquired on July 1, 2004 and utilized the purchase method of accounting.

F-29

Purchase price allocation:


Cash Consideration	$	875,000
Stock Consideration		1,060,088
Contingent Consideration		581,951
Acquisition Costs		202,728
Deferred taxes		34,361
Less:
Cash		72,696
Accounts receivable		346,501
Property and equipment		181,556
Intangible Assets		85,904
Plus:
Accounts payable and accrued liabilities		33,975
Note payable, current		77,165

Goodwill	$	2,178,611

On December 1, 2004, the Company closed an asset purchase pursuant to an Asset Purchase Agreement with The Center for Pain Management (CPM), a Maryland corporation. The Asset Purchase Agreement provides for the acquisition of the assets of CPM by PCH, a Florida corporation. In exchange for the assets the CPM shareholders received 3,687,500 shares of common stock and $6,375,000 in cash. As of March 24, 2006, the Company has paid a total of $2,291,667 in cash and issued 626,139 shares, representing additional payments earned during the first fiscal year following the closing. In addition, the former owners of CPM may receive up to $9,166,667 in additional consideration if certain net earnings goals are achieved in the second and third fiscal years following the closing. CPM is a pain management practice with four locations in Maryland.

CPM was acquired on December 1, 2004 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	6,375,000
Stock Consideration		11,062,500
Contingent Consideration		4,583,334
Acquisition Costs		856,859
Less:
Cash		—
Accounts receivable		1,200,000
Property and equipment		500,000
Intangible Assets		160,721
Plus:
Accounts payable and accrued liabilities		277,837

Goodwill	$	21,294,809

On April 13, 2005, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XVII, Inc. (PNAC XVII), and Colorado Pain Specialists, P.C. (CPS). The Merger Agreement provides for the acquisition of the non-medical assets of CPS by PNAC XVII, a Florida corporation. In exchange for the non-medical assets the shareholders of CPS received 653,698 shares of common stock of the Company priced at $3.25 per share and $2,125,000 in cash. In addition, the former owners of CPS may receive up to $4,250,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. CPS is a pain management physician practice located in Denver, Colorado.

CPS was acquired on April 13, 2005 and utilized the purchase method of accounting.

F-30

Purchase price allocation:


Cash Consideration	$	2,125,000
Stock Consideration		3,327,805
Contingent Consideration		—
Acquisition Costs		623,861
Deferred taxes		45,238
Less:
Cash		27,311
Accounts receivable		322,467
Property and equipment		207,495
Prepaid and deposits		7,555
Intangible Assets		113,094
Plus:
Accounts payable and accrued liabilities		32,748
Note payable		180,764

Goodwill	$	5,657,494

On May 12, 2005, the Company closed a securities purchase pursuant to a Securities Purchase Agreement with its wholly-owned subsidiary, PainCare Surgery Centers I, Inc. (PCSC I), and the partners of PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center (LWSC). Dr. Merrill Reuter, Chairman of the Board of Directors, was a minority owner of this surgery center prior to the Company’s majority interest purchase and remains a minority owner following the Company’s majority interest purchase. The Securities Purchase Agreement provides for the purchase of 67.5% ownership of LWSC by PCSC I, a Florida corporation. In exchange for the majority interest purchase the partners of LWSC received 324,520 shares of common stock and $6,930,940 in cash. LWSC is a fully accredited ambulatory surgery center located in Lake Worth, Florida.

Majority interest in LWSC was purchased on May 12, 2005 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	6,685,388
Stock Consideration		1,531,734
Net Working Capital Adjustment		245,552
Acquisition Costs		286,507
Less:
Cash		100,401
Accounts receivable		2,090,919
Property and equipment		651,837
Prepaids and deposits		238,079
Intangible Assets		208,573
Plus:
Accounts payable and accrued liabilities		240,767
Lease payable		175,686
Minority interests		866,054

Goodwill	$	6,741,879

On August 1, 2005, the Company closed a securities purchase pursuant to a Securities Purchase Agreement with its wholly-owned subsidiary, PainCare Surgery Centers II, Inc. (PCSC II), and the partners of PSHS Beta Partners, Ltd. d/b/a Gables Surgical Center (GSC). The Securities Purchase Agreement provides for the purchase of 73% ownership of GSC by PCSC II, a Florida corporation. In exchange for the majority interest purchase the partners of GSC received 868,624 shares of common stock and $3,282,304 in cash. In addition, the former partners of GSC will receive the remaining balance of the purchase price in the form of promissory notes for $1,536,952 plus interest, due in August 2006. GSC is a fully accredited ambulatory surgery center located in Miami, Florida.

F-31

Majority interest in GSC was purchased on August 1, 2005 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	3,282,304
Promissory Notes		1,536,952
Stock Consideration		3,539,740
Net Working Capital Adjustment		440,259
Acquisition Costs		287,901
Less:
Cash		104,903
Accounts receivable		2,195,484
Property and equipment		370,388
Inventory		139,375
Prepaid and deposits		30,209
Intangible Assets		224,550
Deferred taxes		96,235
Plus:
Accounts payable and accrued liabilities		227,822
Lease payable		182,598
Minority interests		721,043

Goodwill	$	7,057,475

On August 9, 2005, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XVIII, Inc. (PNAC XVIII), and Piedmont Center for Spinal Disorders, P.C. (PCSD). The Merger Agreement provides for the acquisition of the non-medical assets of PCSD by PNAC XVIII, a Florida corporation. In exchange for the non-medical assets the shareholder of PCSD received 263,400 shares of common stock and $1,000,000 in cash. In addition, the former owner of PCSD may receive up to $2,000,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. PCSD is an orthopedic spine surgery physician practice located in Danville, Virginia.

PCSD was acquired on August 9, 2005 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	1,000,000
Stock Consideration		1,122,086
Acquisition Costs		203,176
Deferred taxes		11,438
Less:
Cash		200
Accounts receivable		185,055
Property and equipment		132,030
Intangible Assets		28,596
Plus:
Capital lease obligation		43,020

Goodwill	$	2,033,839

On October 3, 2005, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XXIII, Inc. (PNAC XXIII), and Floyd O. Ring, Jr., M.D., P.C. (RING). The Merger Agreement provides for the acquisition of the non-medical assets of RING by PNAC XXIII, a Florida corporation. In exchange for the non-medical assets the shareholder of RING received 349,162 shares of common stock and $1,250,000 in cash. In addition, the former owner of RING may receive up to $2,500,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. RING is a pain management physician practice located in Denver, Colorado.

F-32

RING was acquired on October 3, 2005 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	1,250,000
Stock Consideration		1,309,358
Acquisition Costs		175,682
Deferred taxes		41,671
Less:
Cash		10,000
Accounts receivable		127,517
Property and equipment		400
Intangible assets		104,177

Goodwill	$	2,534,617

On October 14, 2005, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XXI, Inc. (PNAC XXI), and Christopher J. Centeno, M.D., P.C. and Therapeutic Management, Inc., collectively doing business as The Centeno Clinic (CENTENO). The Merger Agreement provides for the acquisition of the non-medical assets of CENTENO by PNAC XXI, a Florida corporation. In exchange for the non-medical assets the shareholder of CENTENO received 1,132,931 shares of common stock and $3,750,000 in cash. In addition, the former owner of CENTENO may receive up to $7,500,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. CENTENO is a pain management physician practice located in Denver, Colorado.

CENTENO was acquired on October 14, 2005 and utilized the purchase method of accounting.

Purchase price allocation:


Cash Consideration	$	3,750,000
Stock Consideration		3,795,317
Acquisition Costs		442,276
Less:
Cash		1,898
Property and equipment		200,000
Prepaids and deposits		2,000
Intangible Assets		87,397
Plus:
Note payable		76,000

Goodwill	$	7,772,298

During fiscal year 2005, the Company closed six acquisitions with physician practices and ambulatory surgery centers. The combined goodwill amount resulting from these six transactions is $31,797,602.

F-33

Following are the summarized unaudited pro forma results of operations for the years ended December 31, 2005 and 2004 (as restated), assuming all of the acquisitions had taken place at the beginning of the year. The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisitions been completed when assumed.

Pro Forma Consolidated Statement of Operations

Year Ended December 31, 2005

(Unaudited)


	PainCare Historical			CPS (4)			LWSC (5)			GSC (6)			PCSD (7)			RING (8)		CENTENO (9)			Pro Forma Adjustment			Pro Forma
Revenues	$	68,663,797		$	722,974		$	1,828,266		$	2,724,346		$	817,534		$	773,146	$	2,169,806		$	—		$	77,699,869
Cost of revenues		12,470,369			326,637			301,437			307,342			168,640			180,000		87,514			(621,570	)⁽¹⁾		13,220,369

Gross profit		56,193,428			396,337			1,526,829			2,417,004			648,894			593,146		2,082,292			621,570			64,479,500
Operating expenses:
General and administrative		38,084,609			398,396			687,917			752,747			333,018			179,218		1,982,720			(1,479,581	)⁽²⁾		40,939,044
Compensation expense		2,382,259			—			—			—			—			—		—			—			2,382,259
Depreciation and amortization expense		3,145,754			—			—			84,212			2,284			—		—			—			3,232,250

Operating income (loss)		12,580,806			(2,059	)		838,912			1,580,045			313,592			413,928		99,572			2,101,151			17,925,947
Interest expense		(5,795,915	)		(2,040	)		(1,089	)		(15,092	)		(4,529	)		—		(11,005	)		—			(5,829,670	)
Derivative expense		(7,055,502	)																						(7,055,502	)
Other income		444,549			—			38,099			2,938			—			2,748		—			—			488,334

Income (loss) before taxes		173,938			(4,099	)		875,922			1,567,891			309,063			416,676		88,567			2,101,151			5,529,109
Provision for income taxes		4,925,679			—			—			—			—			—		—			1,138,907	⁽³⁾		6,064,586

Income (loss) before minority interests’ share		(4,751,741	)		(4,099	)		875,922			1,567,890			309,063			416,676		88,567			962,244			(535,477	)
Minority interests’ share		(587,637	)		—			(284,675	)		(423,330	)		—			—		—			—			(1,295,642	)

Net income (loss)	$	(5,339,378	)	$	(4,099	)	$	591,247		$	1,144,561		$	309,063		$	416,676	$	88,567		$	962,244		$	(1,831,119	)

Basic loss per common share																								$	(0.03	)

Basic weighted average common shares outstanding																									53,360,077

Diluted loss per common share																								$	(0.03	)

Diluted weighted average common shares outstanding																									53,360,077

Footnotes to Unaudited Pro Forma Financial Statements:

¹⁾	Adjustment for non-recurring cost of sales.

²⁾	Adjustment for non-recurring general and administrative expenses.

³⁾	Represents the provision for income taxes at an effective rate of 35%.

⁴⁾	Represents the results from the period beginning on January 1, 2005 and ending on March 31, 2005.

⁵⁾	Represents the results from the period beginning on January 1, 2005 and ending on April 30, 2005.

⁶⁾	Represents the results from the period beginning on January 1, 2005 and ending on July 31, 2005.

⁷⁾	Represents the results from the period beginning on January 1, 2005 and ending on July 31, 2005.

⁸⁾	Represents the results from the period beginning on January 1, 2005 and ending on September 30, 2005.

⁹⁾	Represents the results from the period beginning on January 1, 2005 and ending on September 30, 2005.

F-34

Pro Forma Consolidated Statement of Operations

Year Ended December 31, 2004

(Unaudited)


	PainCare Historical			DPM ⁽³⁾		GPP/GSC⁽⁴⁾			DYNAMIC ⁽⁵⁾			TAYLOR ⁽⁶⁾			ZOLPER ⁽⁷⁾			CPM ⁽⁸⁾		ProForma Adjustments			Pro Forma
Revenues	$	37,917,900		$	897,909	$	749,511		$	2,271,031		$	1,067,205		$	671,563		$	6,872,177	$	—		$	50,447,296
Cost of revenues		6,663,945			148,520		50,394			344,613			14,086			37,819			687,500					7,946,877

Gross profit		31,253,955			749,389		699,117			1,926,418			1,053,119			633,744			6,184,677		—			42,500,419
Operating expenses:
General and administrative		20,052,066			385,400		613,586			1,728,980			619,592			255,298			1,093,220		(907,686	)⁽¹⁾		23,840,456
Compensation expense		356,590			—		—			—			—			—			—		—			356,590
Depreciation and amortization expense		1,386,713			—		23,400			36,735			22,707			—			16,500		—			1,486,055

Operating income		9,458,586			363,989		62,131			160,703			410,820			378,446			5,074,957		907,686			16,817,318
Interest expense		(3,463,677	)		—		(1,724	)		(4,044	)		(5,419	)		(4,049	)		—		—			(3,478,913	)
Derivative expense		(3,256,372	)		—		—			—			—			—			—		—			(3,256,372	)
Other income		170,569			—		25,247			—			1,161			73			79		—			197,128

Income before taxes		2,909,105			363,989		85,654			156,659			406,562			374,470			5,075,036		907,686			10,279,161
Provision for income taxes		4,410,587			—		—			—			—			—			—		2,272,494	⁽²⁾		6,683,081

Net income (loss)	$	(1,501,482	)	$	363,989	$	85,654		$	156,659		$	406,562		$	374,470		$	5,075,036	$	(1,364,808	)	$	3,596,020

Basic earnings per common share																							$	0.10

Basic weighted average common shares outstanding																								37,905,097

Diluted earnings per common share																							$	0.09

Diluted weighted average common shares outstanding																								42,427,834

Footnotes to Unaudited Pro Forma Financial Statements:

¹⁾	Adjustment for non-recurring general and administrative expenses.

²⁾	Represents the provision for income taxes at an effective rate of 35%.

³⁾	Represents the results from the period beginning on January 1, 2004 and ending on March 31, 2004.

⁴⁾	Represents the results from the period beginning on January 1, 2004 and ending on April 30, 2004.

⁵⁾	Represents the results from the period beginning on January 1, 2004 and ending on May 31, 2004.

⁶⁾	Represents the results from the period beginning on January 1, 2004 and ending on May 31, 2004.

⁷⁾	Represents the results from the period beginning on January 1, 2004 and ending on June 30, 2004.

⁸⁾	Represents the results from the period beginning on January 1, 2004 and ending on November 30, 2004.

F-35

(4)

Due from Shareholder

(5)

Property and Equipment, net

Property and equipment, net at December 31, consisted of:


	2005		2004
Furniture, fixtures & equipment	$	10,744,044	$	4,054,017
Medical equipment		7,895,215		5,334,541

Total cost		18,639,259		9,388,558
Less accumulated depreciation		7,144,603		2,269,493

Property and equipment, net	$	11,494,656	$	7,119,065

F-36

Depreciation expense for the years ended December 31, 2005, 2004 and 2003 amounted to $1,616,316, $837,484 and $463,190, respectively.

(6)

Goodwill

In connection with our acquisitions through December 31, 2005, acquisition consideration paid exceeded fair value of the assets acquired (including estimated liabilities assumed as part of the transaction) by $111,468,292. The excess of the consideration paid over the fair value of the net assets acquired has been recorded as goodwill. At each balance sheet date, management assesses whether there has been any permanent impairment in the value of goodwill. The factors considered by management include trends and prospects as well as the effects of obsolescence, demand, competition and other economic factors. No impairment losses have been recognized in any of the periods presented. The additional goodwill for each consideration payment was as follows:


Company Name	Initial Consideration		Contingent Consideration Year 1		Contingent Consideration Year 2		Contingent Consideration Year 3		Total
Advanced Orthopaedics of S. Florida II, Inc.	$	2,456,658	$	350,000	$	639,834	$	467,075	$	3,913,567
Rothbart Pain Management Clinic, Inc.		834,788		260,290		348,330		754,513		2,197,921
Pain and Rehabilitation Network, Inc.		690,478		1,133,333		872,152		257,400		2,953,363
Medical Rehabilitation Specialists II, Inc.		3,467,358		856,558		959,906		N/A		5,283,822
Associated Physicians Group		5,030,025		1,902,083		913,409		N/A		7,845,517
Spine and Pain Center		1,406,715		446,547		416,667		N/A		2,269,929
Health Care Center of Tampa, Inc.		4,010,749		1,361,915		1,291,667		N/A		6,664,331
Bone and Joint Surgical Clinic		3,215,025		777,439		436,667		N/A		4,429,131
Kenneth M. Alo, MD, PA		4,243,164		1,209,350		1,166,667		N/A		6,619,181
Georgia Pain Physicians & Surgical Centers, Inc.		2,147,518		723,090		N/A		N/A		2,870,608
Dynamic Rehabilitation Centers		4,230,687		1,478,923		N/A		N/A		5,709,610
Rick Taylor, DO, PA (Pain Care Clinics)		4,222,873		1,217,417		N/A		N/A		5,440,290
Benjamin Zolper, MD, Inc.		1,596,660		581,951		N/A		N/A		2,178,611
The Center for Pain Management		16,711,475		4,583,334		N/A		N/A		21,294,809
Colorado Pain Specialists		5,657,494		N/A		N/A		N/A		5,657,494
Lake Worth Surgical Center		6,741,879		N/A		N/A		N/A		6,741,879
Gables Surgical Center		7,057,475		N/A		N/A		N/A		7,057,475
Piedmont Center for Spinal Disorders		2,033,839		N/A		N/A		N/A		2,033,839
Floyd O. Ring, Jr., MD, PC		2,534,617		N/A		N/A		N/A		2,534,617
Christopher J. Centeno, MD & Therapeutic Mgmt		7,772,298		N/A		N/A		N/A		7,772,298

Total Goodwill									$	111,468,292

F-37

The changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2004 are as follows:


	2005		2004
Balance, beginning of year	$	61,817,801	$	26,402,131
Goodwill acquired during year		31,797,602		25,295,437
Additional consideration paid for goodwill during the year		17,852,889		10,120,233

Balance, end of year	$	111,468,292	$	61,817,801

(7)

Other assets

The Company is a distributor for the sale of MedX equipment in North America under an agreement expiring on July 28, 2013. MedX equipment is used to provide orthopedic rehabilitation services in our owned, managed and limited managed physician practices. The agreement provides for the Company to repurchase MedXs’ right to 15% of the gross collections generated by the limited managed orthopedic rehabilitation practices. In addition, the Company receives a 25% commission on all MedX products purchased for resale. This contract right is being amortized over the contract term of ten years. An impairment charge of $47,102 was recorded during 2005.

On April 29, 2004, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company X, Inc. (PNAC X), and Denver Pain Management (DPM), a Colorado corporation. Effective August 27, 2004, DPM and PNAC X entered into an addendum to their agreement whereby the initial consideration to be paid to the shareholders was reduced from $3,750,000 to $700,000 of which $100,000 is payable in cash and the balance of $600,000, is payable with 200,000 shares of common stock priced at $3.00 per share. In addition, the former owners of DPM may receive up to $6,800,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. DPM is a pain management practice located in Denver, Colorado. The center is run by Robert Wright, M.D., a board certified pain management physician. This contract right is being amortized over the contract term of nine years.

The Company has costs associated with closing acquisitions. These costs are on the balance sheet an as asset until the acquisition is closed, when it is allocated to the acquisition costs or expensed when a potential acquisition is not closed.

The Company purchased from Rehab Management Group, Inc., a South Carolina based corporation (“RMG”), all rights, title and interest that RMG owns or acquires and all management fees, revenues, compensation and payments of any kind with respect to three electro-diagnostic management agreements with the named physician’s practice:


Name of Physician’s Practice		Purchase Price
Associated Physicians Group, Ltd. (“APG”), a fully integrated treatment practice		$107,500 in cash and 48,643 shares of common stock, plus contingent payments of up to $215,000 in cash and common stock if certain earnings goals are met.

Statesville Pain Associates, P.C. (“SPA”), a North Carolina professional corporation		$375,000 in cash and 169,683 shares of common stock, plus contingent payments of up to $750,000 in cash and common stock if certain earnings goals are met.

Space Coast Pain Institute, P.C. (“SCPI”), a Florida professional corporation		$275,000 in cash and 124,434 shares of common stock, plus contingent payments of up to $550,000 in cash and common stock if certain earnings goals are met.

These contract rights are being amortized over the contract term of twelve years.

The table below summarizes the other assets at December 31, 2005 and 2004:


	2005						2004
Asset	Cost		Amortization		Net Value		Cost		Amortization		Net Value
MedX Distribution right	$	2,212,673	$	581,831	$	1,630,842	$	2,212,673	$	208,975	$	2,003,698
Deferred acquisition costs		475,958		—		475,958		—		—		—
Contract Right – DPM		6,026,200		677,124		5,349,076		1,717,600		160,540		1,557,060
Contract Right – APG		486,023		34,452		451,571		291,667		14,667		277,000
Contract Right – SPA		1,433,132		118,657		1,314,475		1,006,000		50,400		955,600
Contract Right – SCPI		1,051,564		87,095		964,469		738,333		37,000		701,333
Physician practice and surgery center
acquisitions		2,161,757		513,326		1,648,431		1,395,370		266,701		1,128,669

Total	$	13,847,307	$	2,012,485	$	11,834,822	$	7,361,643	$	738,283	$	6,623,360

Amortization of intangible assets for the years ended December 31, 2005, 2004 and 2003 were $513,326, $266,701 and $119,047 respectively, and is included in amortization in the accompanying statement of operations.

Estimated amortization of intangible assets for each of the next five years is as follows:


	Amortization of intangible assets
2006	$	1,472,207
2007		1,470,287
2008		1,449,174
2009		1,448,781
2010		1,429,281

F-38

(8)

Acquisition Consideration Payable

The Company is obligated at December 31, 2005 to pay initial and contingent consideration on the following acquisitions:


Company Name	Stock Value		Cash Value		Total
Pain and Rehabilitation Network	$	128,700	$	128,700	$	257,400
Center for Pain Management		2,291,667		2,291,666		4,583,333
Spine and Pain Center		208,333		208,334		416,667
Health Care Center of Tampa		645,833		—		645,833
Bone and Joint Surgical Clinic		218,333		218,334		436,667
Kenneth M. Alo, M.D., P.A.		583,333		583,334		1,166,667
Contract Right – APG		35,833		35,834		71,667
Contract Right – SPA		125,000		125,000		250,000
Contract Right - SCPI		91,667		91,666		183,333


Total					$	8,011,567

The contingent consideration paid in stock represents the dollar value of the stock to be paid to the seller.

F-39

(9)

Long-Term Debt

Long-term debt consists of the following on December 31:


	2005		2004
Promissory note for Bone and Joint Surgical Clinic to financial institution, dated April 13, 2004. Variable interest rate currently at 7.25%. Originally due on January 20, 2006. Repaid in 2005.		—		364,715
Line of credit for Dr. Kenneth M. Alo to financial institution, dated October 17, 2003. Interest is 4% annually.		—		145,000
Promissory note for PainCare, Inc. to financial institution due in monthly payments of $791.49 bearing 6.07% interest. Originally due on June 24, 2007. Repaid in 2005.		—		25,117
Note payable for Dynamic Rehabilitation Centers, Inc. to financial institution with monthly payments of $2,535, including principal and interest at 8% through July, 2006. Repaid in 2005.		—		36,237
Note payable for Dynamic Rehabilitation Centers, Inc. to financial institution with monthly payments of $1,928, including principal and interest at 5.25% through January, 2009. Repaid in 2005.		—		77,583
Line of credit for Rothbart Pain Management Clinic, Inc. to financial institution due on demand. Interest rate is Prime plus 2%.		—		46,393
Note payable to vendor that is non-secured for Georgia Pain Physicians. Due on demand with 4% interest.		—		79,808
Note payable to bank for Rick Taylor, D.O., P.A. with monthly payments of $8,761, including principal and interest at 7.0% through July, 2007, due upon demand and secured by medical equipment.		—		247,737
Note payable at Associated Physicians Group secured by equipment. Due on demand with 4% interest.		—		38,170
Note payable to PSHS Partnership Ventures, Inc. (a)		1,305,284		—
Note payable to Gary J. Lustgarten Profit Sharing and Trust (b)		271,934		—
Note payable to HBK Investments L.P. (c)		28,367,363		—
Line of credit payable to Wells Fargo (d)		68,000		—

		30,012,581		1,060,760
Less current installments		3,883,012		765,177

	$	26,129,569	$	295,583

At December 31, 2005, the aggregate annual principal payments with respect to the obligations existing at that date as described above, are as follows:


Year ending December 31:
2006	$	3,883,012
2007		4,568,000
2008		11,750,000
2009		11,500,000
Thereafter		—
Less unamortized discount		1,688,431

	$	30,012,581

(a)

Note payable to PSHS Beta Partners, Ltd. due on August 1, 2006 without a stated interest rate. Interest is imputed at 6.25% over the period. The face value is $1,351,458 with unamortized discount of $46,174. The total amount amortized to interest expense in 2005 was $33,324. The note is secured by the Company’s interest in PSHS Beta Partners, Ltd. The Company’s carrying amount of the partnership is $1,949,486.

(b)

Note payable to Gary J. Lustgarten Profit Sharing & Trust due on August 1, 2006 without a stated interest rate. Interest is imputed at 6.25% over the period. The face value is $281,554 with unamortized discount of $9,620. The total amount amortized to interest expense in 2005 was $6,942. The note is secured by the Company’s interest in PSHS Beta Partners, Ltd. The Company’s carrying amount of the partnership is $1,949,486.

(c)

Note payable to HBK Investments L.P. due on November 10, 2006. Interest is either LIBOR + 7.25% or prime + 4.5% at the discretion of the Company. Interest payments are due monthly with quarterly principal repayments beginning on April 1, 2006. Certain mandatory prepayments must be made upon the occurrence of any indebtedness other than indebtedness permitted by the

F-40

agreement, including equipment leases and notes. The agreement requires compliance with various financial and non-financial covenants for the Company starting in the second quarter of 2005. The primary financial covenants pertain to, among other things, minimum EBITDA, minimum Free Cash Flow, Leverage ratio, and Market Capitalization. The Company for the year end 2005 is in violation of five sections of the agreement. The Company has financial restatements that violate the No Material Adverse Change clause. This also caused a violation of the complete disclosure clause. The disclosures over internal control report one or more material weaknesses. The restatement also caused a violation of meeting certain SEC laws regarding disclosure obligations. The Company failed to meet the EBITDA covenant for the quarter ended December 31, 2005. On May 1, 2006, a waiver between the Company and HBK was executed related to the events of default. The face value of the note is $30,000,000 with unamortized discount of $1,632,637. The total amount amortized to interest expense during 2005 was $366,500.

(d)	Line of credit payable to Wells Fargo for equipment at The Centeno Clinic due on January 25, 2007 with prime + 2% interest payable monthly. The unused portion of the credit line is $82,000. The line of credit is secured by property for use in the practice.

(10)

Convertible Debt

Convertible debentures consist of the following at December 31, 2005 and December 31, 2004:


	2005		2004
Face value none and $5,000,000 Secured Convertible Term Note, variable rate of prime plus 2% (7.5%), due in stated monthly payments of $70,000 to January 2005, $150,000 from February 2005 to January 2006, $181,667 from February 2006 to January 2007 and a final payment of $500,000 at maturity on February 24, 2007 (a, c, d, e)	$	—	$	3,478,365
Face value none and $5,000,000 Secured Convertible Term Note, variable rate of prime plus 2% (7.5%) due in stated monthly payments of $70,000 to February 2005, $150,000 from March 2005 to February 2006, $181,667 from March 2006 to February 2007 and a final payment of $500,000 at maturity on March 22, 2007 (a, c, d, e)		—		3,267,051
Face value none and $1,500,000 Secured Convertible Term Note, variable rate of prime plus 2% (7.5%), due in stated monthly payments of $25,000 to May 2005, $50,000 from June 2005 to May 2006 and $60,000 from June 2006 to May 2007; matures June 30, 2007 (a, c, d, e)		—		823,506
Face value $1,500,000 Convertible Debenture, 7.5%, interest due quarterly, maturing June 30, 2007 (b, c, d)		1,133,877		1,126,508
Face value $8,955,160 and $10,000,000 Convertible Debenture, 7.5%, interest due quarterly, maturing December 17, 2006 (b, c, d, e)		8,519,131		7,403,064
		9,653,008		16,098,494
Less current maturities		8,519,131		2,935,480

Convertible debentures	$	1,133,877	$	13,163,014


	Carrying Value		Original Terms
Scheduled maturities as of December 31, 2005, are as follows:
2006	$	8,519,131	$	14,935,007
2007		1,133,877		2,731,493

	$	9,653,008	$	17,666,500

(a) Laurus Financings: During 2004, the Company entered into a series of three separate financing agreements (the “Laurus Financings”) with Laurus Master Fund, Ltd. (“Laurus”) whereby the Company issued: (i) Secured Convertible Term Notes in the amounts of $5,000,000, $5,000,000 and $1,500,000, in February, March and June 2004, respectively; and (ii) warrants with seven-year terms to

F-41

purchase 450,000 (at fixed exercise prices ranging from $4.24-$4.92), 550,000 (at fixed exercise prices ranging from $2.88-$4.18) and 165,000 (at fixed exercise prices ranging from $3.15-$3.76) shares of common stock, in February, March and June 2004, respectively. The Secured Convertible Term Notes are convertible into common stock at conversion rates of $3.39, $2.88 and $3.15, relative to the $5,000,000, $5,000,000 and $1,500,000 Secured Convertible Term Notes referred to above.

(b) Midsummer Financings: During 2003 and 2004, the Company entered into a series of two financing agreements (the “Midsummer Financings”) with Midsummer Investment, Ltd. (“Midsummer”) whereby the Company issued: (i) Convertible Debentures in the amounts of $10,000,000 and $1,500,000 in December 2003 and June 2004, respectively,(ii) warrants with four-year terms to purchase 1,263,316 shares of common stock (at fixed exercise prices ranging from $2.73-$2.85) and 165,000 shares of common stock (also at fixed exercise prices ranging from $2.73-$2.85), in December 2003 and June 2004, respectively. The Convertible Debentures are convertible into common stock at conversion rates of $2.61 and $3.15, relative to the $10,000,000 and $1,500,000 Convertible Debenture referred to above.

(c) The Laurus and Midsummer Financings included registration rights and certain other terms and conditions related to share settlement of the embedded conversion features and the warrants that the Company has determined are not within its control. In addition, certain features associated with the financings, such as anti-dilution protection afforded to Laurus and Midsummer financing agreements render the number of shares issuable under the Financings to be indeterminate. In these instances, EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, requires allocation of the proceeds between the various instruments and the derivative elements carried at fair values. The following tabular presentation reflects the allocation of the proceeds on the financings dates:


Holder Financing Date	Laurus February 2004		Laurus March 2004		Laurus June 2004		Midsummer June 2004		Midsummer December 03
Allocation:
Warrants	$	583,800	$	718,651	$	270,600	$	196,763	$	1,027,708
Conversion feature		781,711		961,806		271,905		201,905		1,405,000
Debt instrument		3,634,489		3,319,543		957,495		1,101,332		7,567,292

Total proceeds	$	5,000,000	$	5,000,000	$	1,500,000	$	1,500,000	$	10,000,000

See Note 11 for additional information about the Company’s financial instruments.

The discount to the debt instruments resulting from the aforementioned allocation is being amortized through periodic charges to interest expense using the effective interest method. Effective interest rates used to amortize the Laurus Financing discounts amounted to 10.13%, 11.28%, and 12.92% for the February, March and June 2004 financings, respectively. Effective interest rates used to amortize the Midsummer Financing, discounts amounted to 10.94%, and 12.13% for the December 2003 and June 2004 financings, respectively.

The following tabular presentation reflects the amortization of the debt discounts included in interest for each instrument:


Holder Financing Date	Laurus February 2004		Laurus March 2004		Laurus June 2004		Midsummer June 2004		Midsummer December 2003		Total
Year ended December 31, 2005	$	248,981	$	244,380	$	141,428	$	105,660	$	956,166	$	1,696,615

Year ended December 31, 2004	$	497,999	$	477,142	$	94,954	$	56,289	$	764,159	$	1,890,543

(d) During October 2004, the Company sold common stock at values that activated certain anti-dilution protection reset adjustments to the conversion features of the Laurus and Midsummer financing

F-42

arrangements. On the date of activation, the conversion prices for the February, March and June 2004 Laurus instruments adjusted to $3.12, $2.70 and $2.92, respectively. On the date of activation, the conversion prices for both Midsummer financings adjusted to $1.90. The Company accounted for the resets as modifications to the debt agreements that did not require extinguishment and, accordingly, recorded a charge to income in the amount of $413,123 representing the increase in the values of the embedded derivative financial instruments arising from the reset.

(e) During the years ended December 31, 2005 and 2004, Laurus converted face value of $10,520,000 and $374,000, respectively, of Secured Convertible Term Notes into 3,628,095 and 129,861 common shares, respectively. During the year ended December 31, 2004, Midsummer converted face value of $1,044,840 into 400,000 shares of common stock.

(11)

Derivatives

Fair Value of Financial Instruments

The fair values of debt instruments for disclosure purposes only are estimated based upon the present value of the estimated cash flows at credit risk adjusted interest rates, ranging from 9.22% to 10.09% for convertible instruments. As of December 31, 2005, estimated fair values and respective carrying values for debt instruments are as follows:


Debt Instrument	Fair Value		Carrying Value
$5,000,000 Face Value Convertible Secured Term Note	$	—	$	—
$5,000,000 Face Value Convertible Secured Term Note	$	—	$	—
$1,500,000 Face Value Convertible Secured Term Note	$	—	$	—
$1,500,000 Face Value Convertible Debenture	$	1,554,718	$	1,133,877
$8,955,160 Face Value Convertible Debenture	$	9,530,899	$	8,519,131
Other indebtedness	$	39,171,909	$	39,171,909

Derivative Financial Instruments

The Company generally does not use derivative financial instruments to hedge exposures to cash flow risks or market risks that may affect the fair values of its financial instruments. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.

The caption Derivative Liabilities consists of (i) the fair values associated with derivative features embedded in the Laurus Convertible Secured Term Notes and the Midsummer Convertible Debentures and (ii) the fair values of the detachable warrants that were issued in connection with those financing arrangements. In addition, this caption includes the fair values of other pre-existing derivative financial instruments that were reclassed from stockholders’ equity when net-share settlement was no longer within the Company’s control.

F-43

The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at December 31, 2005 and 2004:


Liabilities:	2005		2004
Embedded derivative instruments	$	6,351,194	$	7,239,523
Freestanding derivatives (warrants)		6,601,261		6,125,012

	$	12,952,455	$	13,364,535

The following tabular presentation reflects the number of common shares into which the aforementioned derivatives are indexed:


Common shares indexed:	2005	2004
Embedded derivative instruments	5,502,716	9,198,875
Warrants	2,593,316	2,593,316

	8,096,032	11,792,191

The following tabular presentation reflects the income (expense) associated with adjustments recorded to reflect the aforementioned derivatives at fair value:


Income (expense):	2005			2004
Embedded derivative instruments	$	(6,579,253	)	$	(2,547,803	)
Warrants		(127,729	)		(846,839	)
Other warrants		(348,520	)		138,270

	$	(7,055,502	)	$	(3,256,372	)

Fair value considerations for derivative financial instruments:

Freestanding financial instruments, consisting of warrants are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions included in this model as of December 31, 2005 are as follows:


Holder Financing Date	Laurus February 2004			Laurus March 2004			Laurus June 2004			Midsummer June 2004			Midsummer December 03
Exercise prices	$	4.24—$4.92		$	3.60—$4.18		$	3.60—$3.76		$	1.90		$	1.90
Term (years)		5.4			5.5			5.8			2.8			2.2
Volatility		42.69	%		42.69	%		42.69	%		43.41	%		41.17	%
Risk-free rate		4.5	%		4.5	%		4.5	%		4.5	%		4.5	%

Significant assumptions included in this model as of December 31, 2004 are as follows:


Holder Financing Date	Laurus February 2004			Laurus March 2004			Laurus June 2004			Midsummer June 2004			Midsummer December 03
Exercise prices	$	4.24—$4.92		$	3.60—$4.18		$	3.60—$3.76		$	1.90		$	1.90
Term (years)		6.1			6.2			6.5			3.5			2.9
Volatility		42.69	%		42.69	%		42.69	%		43.41	%		41.17	%
Risk-free rate		4.5	%		4.5	%		4.5	%		4.5	%		4.5	%

Embedded derivative instruments consist of multiple individual features that were embedded in the convertible debt instruments, and compounded into one derivative financial instrument for financial reporting purposes. These financial instruments are valued using the Flexible Monte Carlo Simulation methodology because that model embodies certain other relevant assumptions (including, but not limited to, interest rate risk, credit risk, and Company-controlled redemption privileges) that are necessary to value these complex derivatives.

F-44

Significant assumptions included in this model as of December 31, 2005 and 2004 are as follows:


Holder Financing Date	Laurus February 2004			Laurus March 2004			Laurus June 2004			Midsummer June 2004			Midsummer December 03
Conversion prices	$	3.12		$	2.70		$	2.92		$	1.90		$	1.90
Actual term		2.1			2.2			2.5			2.5—1.8			1.9—1.2
Equivalent term		.9			.7			.6			3			3
Equivalent volatility		42.00	%		42.18	%		42.32	%		42.32	%		43.72	%
Equivalent interest rate		2.14	%		1.92	%		3.33	%		3.33	%		2.34	%
Equivalent yield rate		11.39	%		14.76	%		23.11	%		15.92	%		11.62	%

Equivalent amounts reflect the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying assumptions.

(12)

Leases

The Company is currently leasing its MEDX equipment, EDX equipment and IAJP equipment under capital lease agreements and its offices and clinics under operating leases which expire at various dates. The capitalized asset cost and accumulated depreciation at December 31, 2005 and 2004 were:


	2005			2004
Capitalized cost	$	4,519,086		$	3,120,745
Accumulated depreciation		(398,832	)		(278,379	)

Net book value	$	4,120,254		$	2,842,366

These amounts are included in property and equipment, net.

Depreciation expense for the leased equipment was $398,832, $278,379 and $307,453 for the years ended December 31, 2005, 2004 and 2003, respectively.

At December 31, 2005, future minimum annual rental commitments under noncancellable lease obligations are as follows:


Year-ending December 31:	Capital Leases		Operating Leases
2006	$	1,880,346	$	3,267,612
2007		1,444,492		2,701,812
2008		804,565		2,266,080
2009		399,866		1,701,924
2010		154,464		1,526,328
Thereafter		—		4,531,272

Total minimum lease payments	$	4,683,733	$	15,995,028


Less amounts representing interest (at rates of 5.0% to 9.9%)		591,425


Present value of net minimum lease payments		4,519,086
Less current portion		1,646,378


Capital lease obligations – long-term	$	2,872,708

Rent expense under operating leases was $3,252,326, $1,524,888 and $593,616 for the years ended December 31, 2005, 2004 and 2003, respectively, and is included in general and administrative expense in the accompanying statement of operations.

F-45

(13)

Income Taxes

The income tax provision for the years ended December 31, 2005, 2004 and 2003 consists of the following:


	2005		2004		2003
Current:
Federal		2,947,496		3,228,401		38,785
State		862,450		716,224		8,586

		3,809,946		3,944,625		47,371
Deferred:
Federal		243,837		381,505		(3,047,154	)
State		871,896		84,457		(674,575	)

		1,115,733		465,962		(3,721,729	)

Total	$	4,925,679	$	4,410,587	$	(3,674,358	)

Income tax expense attributable to income before income tax differed from the amount computed by applying the U.S. Federal income tax rate of 34% to income from operations before income taxes as a result of the following:


	2005			2004		2003
Computed “expected” tax expense		59,139			989,096		(5,153,448	)
Increase (reduction) in income tax expense resulting from:
Derivative expense		2,398,871			1,107,166		1,079,079
Derivative interest expense		576,849			634,981		14,746
State income taxes, net of federal income tax benefit		730,150			528,450		(439,553	)
Compensation – incentive stock options		570,163			261,345		717,698
Assets acquired with no tax basis		323,104			544,698		—
Other, net		211,620			174,851		107,120
Other state taxes		50,742			—		—
Unamortized deferred taxes		26,055			—		—
Penalties and interest on amended returns		—			170,000		—
Income for foreign subsidiary, net		(73,935	)		—		—
Amortization of acquisition intangibles		56,922			—		—

Total	$	4,925,679		$	4,410,587	$	3,674,358

The tax effects of temporary differences that give rise to significant portions of the deferred tax expense for the years ended December 31, 2005, 2004 and 2003 are presented below:


	2005			2004			2003
Deferred tax expense (benefit):
Non-cash accrued compensation expense		378,974			(171,152	)		(4,682,948	)
Property and equipment, primarily due to accelerated depreciation		268,680			438,630			262,593
Amortization of the excess of purchase price over fair value of assets acquired		918,477			164,053			185,067
Amortization of unstated interest on deferred, contingent purchase price payments		147,497			118,701			—
Net operating loss carryforward		—			—			202,202
Allowance for doubtful accounts		(613,446	)		(137,555	)		—
Other		98,456			82,000			82,001
Deferred state income taxes		(82,905	)		(28,715	)		229,356

Total	$	1,115,733		$	465,962		$	(3,721,729	)

Significant components of the Company’s net deferred tax asset at December 31, 2005 and 2004 are presented in the following table:


	2005		2004
Deferred tax assets
Allowance for doubtful accounts		624,638		130,000
Employee compensation and retirement benefits		3,945,886		4,163,327

Gross deferred tax assets		4,570,524		4,293,327


Deferred tax liabilities
Fixed assets		1,182,294		939,308
Intangibles		1,058,900		294,831
State income taxes		95,603		84,021
Other		682,482		308,189

Gross deferred tax liabilities		3,019,279		1,626,349

Net deferred tax assets	$	1,551,245	$	2,666,978

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Management considers the projected future taxable income and tax planning strategies in making this assessment. The Company believes that future earnings in addition to the amount of the taxable differences, which will reverse in future periods, will be sufficient to offset recorded deferred tax assets and, accordingly, a valuation allowance is not considered necessary at December 31, 2005, 2004 and 2003.

F-46

(14)

Stock Options and Warrants

The Company’s Board of Directors has adopted the 2000 Stock Option Plan and the 2001 Stock Option Plan (the “Plans”) which authorize the issuance of up to 10,000,000 shares of the Company’s common stock to employees, non-employees and Directors. Options granted under the Plans are exercisable up to 10 years from the grant date at an exercise price of not less than the fair market value of the common stock on the date of grant.

Notwithstanding, the term of an incentive stock option granted under the Plan to a shareholder owning more than 10% of the voting rights may not exceed 5 years, and the exercise price of an incentive stock option granted to such shareholder may not be less than 110% of the fair market value of the common stock on the date of grant.

The number of shares, terms, vesting and exercise period of options and warrants granted under the Plans are determined by the Company’s Board of Directors on a case-by-case basis.

Stock options and warrants granted, exercised and expired during the years ended December 31, 2005, 2004 and 2003 are as follows:


	Options				Warrants
	Number		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
Outstanding, December 31, 2002	4,374,000		$	0.81	1,198,186		$	1.72

Granted in 2003	3,585,000		$	2.06	1,784,316		$	1.70
Exercised in 2003	(205,000	)		0.05	(251,230	)	$	0.86
Forfeited in 2003	—				—

Outstanding, December 31, 2003	7,754,000		$	1.61	2,731,272		$	1.49

Granted in 2004	2,065,000		$	2.52	1,395,000		$	3.78
Exercised in 2004	(312,673	)	$	0.40	(534,216	)	$	0.97
Forfeited in 2004	(46,577	)	$	1.95	(38,615	)	$	1.50

Outstanding, December 31, 2004	9,459,750		$	1.74	3,553,441	(a)	$	2.55

Granted in 2005	1,120,000		$	3.82	—		$	—
Exercised in 2005	(724,975	)	$	0.39	(350,316	)	$	1.23
Forfeited in 2005	(102,625	)	$	0.81	(23,809	)	$	1.00

Outstanding, December 31, 2005	9,752,150		$	2.01	3,179,316	(a)	$	2.61

Exercisable at December 31, 2005	6,725,482		$	1.90	3,179,316		$	2.61

(a)	includes 25,000 warrants issued to employees.

F-47

The following table summarizes information for options and warrants outstanding and exercisable at December 31, 2005:


Exercise Price	Number Outstanding	Weighted Average Remaining Life	Number Outstanding and Exercisable	Weighted Average Remaining Life
Stock Options:
$0.25-$1.00	3,177,150	1.60 years	3,177,150	1.60 years
$1.01-$2.00	3,070,000	2.89 years	1,015,000	2.95 years
$2.01-$3.00	1,805,000	2.88 years	1,270,000	3.49 years
$3.01-$4.00	1,385,000	3.84 years	1,043,332	3.79 years
$4.01-$5.00	290,000	4.25 years	195,000	4.18 years
$5.01-$6.00	25,000	4.01 years	25,000	4.01 years

Total	9,752,150	2.50 years	6,725,482	2.90 years


Warrants:
$0.25-$1.00	163,500	1.17 years	163,500	1.17 years
$1.01-$2.00	1,760,816	1.80 years	1,760,816	1.80 years
$2.01-$3.00	25,000	1.17 years	25,000	1.17 years
$3.01-$4.00	646,000	5.37 years	646,000	5.37 years
$4.01-$5.00	584,000	5.44 years	584,000	5.44 years
$5.01-$6.00	—	— years	—	— years

Total	3,179,316	2.87 years	3,179,316	2.87 years

The weighted-average grant-date fair value of options and warrants granted during the years ended December 31, 2005, 2004 and 2003 approximated $3.82, $2.52 and $2.06, respectively.

(15)

Commitments and Contingencies

The Company has entered into amended five-year employment agreements with its Chief Executive Officer, Chief Financial Officer and President requiring aggregate annual salaries of $910,000 beginning in August 2005.

(16)

Comprehensive Income (Loss)

SFAS No. 130, “Reporting Comprehensive Income,” establishes a standard for reporting and displaying comprehensive income and its components within the financial statements. Comprehensive income includes charges and credits to stockholders’ equity that are not the result of transactions with shareholders. Comprehensive income is composed of two subsets – net income and other comprehensive income. Included in other comprehensive income (loss) for the Company are cumulative translation adjustments. These adjustments are accumulated within stockholders’ equity.

Comprehensive income is as follows:


	2005			2004			2003
Net loss	$	(5,339,378	)	$	(1,501,482	)	$	(11,482,843	)
Foreign currency translation		16,251			30,415			24,260

Comprehensive income	$	(5,323,127	)	$	(1,471,067	)	$	(11,458,583	)

F-48

(17)

Summarized Quarterly Data (Unaudited)

Following is a summary of the quarterly results from operations for the years ending December 31, 2005, 2004 and 2003. All amounts, except per share data, are in thousands.


	2005
	(In thousands, except per share data)
	Q1			Q2			Q3		Q4
Net revenue	$	14,237		$	15,888		$	20,863	$	17,676
Income (loss) from operations		(14,191	)		11,945			12,161		2,666
Net income (loss)	$	(27,764	)	$	11,111		$	9,369	$	1,945
Basic earnings (loss) per common share	$	(0.63	)	$	0.22		$	0.18	$	0.04
Diluted earnings (loss) per common share	$	(0.63	)	$	0.18		$	0.14	$	0.03
Basic weighted average common shares outstanding		44,413			51,622			53,496		55,700
Diluted weighted average common shares outstanding		44,413			61,804			65,021		66,700

	2004
	(In thousands, except per share data)
	Q1			Q2			Q3		Q4
Net revenue	$	6,860		$	9,117		$	10,462	$	11,479
Income (loss) from operations		3,808			(648	)		11,001		(4,702	)
Net income (loss)	$	3,442		$	(3,818	)	$	11,910	$	(13,035	)
Basic earnings (loss) per common share	$	0.13		$	(0.13	)	$	0.38	$	(0.32	)
Diluted earnings (loss) per common share	$	0.11		$	(0.13	)	$	0.31	$	(0.32	)
Basic weighted average common shares outstanding		27,377			29,036			31,693		40,981
Diluted weighted average common shares outstanding		32,663			29,036			39,266		40,981

	2003
	(In thousands, except per share data)
	Q1			Q2			Q3		Q4
Net revenue	$	2,498		$	3,775		$	4,376	$	4,332
Income (loss) from operations		(3,625	)		(3,824	)		526		(4,574	)
Net income (loss)	$	(2,951	)	$	(2,408	)	$	142	$	(6,266	)
Basic earnings (loss) per common share	$	(0.18	)	$	(0.12	)	$	0.01	$	(0.26	)
Diluted earnings (loss) per common share	$	(0.18	)	$	(0.12	)	$	0.00	$	(0.26	)
Basic weighted average common shares outstanding		16,837			20,846			23,202		24,453
Diluted weighted average common shares outstanding		16,837			20,846			30,914		24,453

F-49

(18)

Earnings Per Share

Basic earnings per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. The weighted average shares used in computing diluted earnings per common share include the dilutive effect of stock options, warrants, convertible debt, and other common stock equivalents using the treasury stock method, and earnings are adjusted for the diluted computation for the assumed non-payment of interest, etc., upon conversion. The shares used in the computation of the Company’s basic and diluted earnings per common share are reconciled as follows:


	For the Years Ended December 31,
	2005			2004			2003
Basic earnings per common share:
Net income available to common shareholders	$	(5,339,378	)	$	(1,501,482	)	$	(11,482,843	)

Basic weighted average common shares outstanding		51,316,562			32,923,211			20,772,620

Basic earnings per common share	$	(0.10	)	$	(0.05	)	$	(0.55	)

Diluted earnings per common share:

Net income available to common shareholders	$	(5,339,378	)	$	(1,501,482	)	$	(11,482,843	)
Plus impact of assumed conversions
Interest expense on 7.5% convertible note due 2006, net of tax		—			—			—
Interest expense on 7.5% convertible note due 2007, net of tax		—			—			—
Interest expense on 7.5% convertible note due 2007, net of tax		—			—			—

Net income available to common shareholders plus assumed conversions	$	(5,339,378	)	$	(1,501,482	)	$	(11,482,843	)

Basic weighted average common shares outstanding plus incremental shares from assumed conversions		51,316,562			32,923,211			20,772,620

7.5% convertible note due 2006		—			—			—
7.5% convertible note due 2007		—			—			—
7.5% convertible note due 2007		—			—			—
Employee stock option plan for vested, in the money options		—			—			—
Warrants issued, outstanding, and in the money		—			—			—
Contingent shares for acquisitions		—			—			—
Initial shares for acquisitions, weighted		—			—			—

Diluted weighted average common shares outstanding		51,316,562			32,923,211			20,772,620

Diluted earnings per common share	$	(0.10	)	$	(0.05	)	$	(0.55	)

Potentially dilutive shares for the years ended December 31, 2005, 2004 and 2003, of approximately 13,000,220 shares, 9,975,416 shares and 3,194,810 shares, respectively, were not included diluted weighted average common shares outstanding for the diluted per share calculation because their effect would be anti-dilutive.

Weighted average common shares outstanding, assuming dilution, includes the incremental shares that would be issued upon the assumed exercise of stock options, warrants, as well as the assumed conversion of the convertible notes. Certain of the Company’s stock options and warrants were excluded from the calculation of diluted earnings per share because they were anti-dilutive, but these options could be dilutive in the future. The 7.5% convertible debenture notes dated February 27, 2004 and July 1, 2004 that are anti-dilutive were excluded from the calculation of diluted earnings per share. If the convertible notes had been dilutive, net income (loss) would have been adjusted for the net after tax interest cost that the Company would not have paid assuming the convertible debentures were converted at the beginning of the year.

F-50

(19)

Related Party Transactions

During the years ended December 31, 2005, 2004 and 2003, the Company had transactions with companies owned by certain shareholders of the Company. The following is a summary of transactions with these entities:


			Expense related to the years ended December 31:
Practice Name	Type of Practice	Type of Related Party Transaction	2005		2004		2003		Reported As
Associated Physicians Group, Ltd.	Managed Practice	The Company leases its office space from a limited liability company partially owned by a certain shareholder of the Company. The lease commenced January 1, 2005 for an initial term of ten years with the option to renew for two five year periods.	$	108,255	$	—	$	—	G&A
The Center for Pain Management, LLC	Managed Practice	The Company leases certain employees from a limited liability company owned by certain shareholders of the Company. The Company also charged this entity for the use of its equipment and certain services.	$	674,432	$	7,755	$	—	G&A
		The Company has an agreement to outsource its billing and collections function to a limited liability company owned by certain shareholders of the Company. The Company is charged a fee of 8% of net collections under this arrangement.	$	836,562	$	—	$	—	G&A
		* (A)
		* (B)
Dynamic Rehabilitation Centers, Inc.	Managed Practice	The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease associated with the Redford location has a ten year term commencing January 1, 2000 with no option to renew. The lease associated with the Clinton Township location commenced October 8, 2004 and expires December 31, 2014. The lease was amended in July 2005 for the occupancy of additional space by the Company.	$	182,751	$	82,107	$	—	G&A
		The Company provides services for billing, accounting and management oversight to a limited liability company owned by certain shareholders of the Company.	$	885,471	$	—	$	—	G&A
		* (C)
Health Care Center of Tampa, Inc.	Owned Practice	The Company has an agreement to outsource its billing and collections function to a limited liability company owned by a certain shareholder of the Company. The Company is charged a fee of 10% of net collections under this arrangement.	$	272,708	$	242,661	$	—	G&A
Rick Taylor, D.O., P.A.	Managed Practice	The Company has an agreement to lease an aircraft from a limited liability company owned by a certain shareholder of the Company. The lease agreement was entered into in June 2003 for a period of 60 months. Effective January 1, 2005, the lease payment was lowered to a nominal amount of $1 per year; the Company will continue to pay a third party provider for the related fuel and maintenance cost. Effective January 1, 2004 the lease fee was reduced from the original amount of $12,000 per month to $7,000 per month; maintenance, fuel, insurance recurring training, hangar rental and any other fees required to maintain the aircraft were the responsibility of the Company.	$	1	$	49,000	$	—	G&A
Spine and Pain Center, P.C.	Managed Practice	The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease commenced December 23, 2003 and expires December 31, 2008, with no option to renew.	$	99,996	$	99,996	$	—	G&A
		The Company, through a subsidiary, is the majority partner of the PSHS Alpha Partners, Ltd. Partnership Dr. Merrill Reuter , the Company’s chairman, is a minority partner of partnership. The Company owns 67.5% and Dr. Reuter owns 9.75% of the partnership. Dr. Reuter received distributions from the partnership of $131,625 representing his share of the profits of the surgery center for the period between May 12, 2005 and December 31, 2005. These distributions are reported as minority interest on the balance sheet.	$	131,625	$	—	$	—

(A)

The Company has the option to purchase a ‘Competitive Business Opportunity” (CBO) from shareholders of the Company who are currently operating a competitive rehabilitation clinic that fall outside a ten mile radius from the Center for Pain Management, LLC clinics. The Company has an option to purchase the CBO at market rates similar to the original acquisition. There is no guarantee that the option will be exercised by the Company, nor is the purchase price discounted for the Company should they chose to execute the option to purchase.

F-51

(B)

The Company has the option to purchase a “Competitive Business Opportunity” (CBO) from shareholders of the Company who are currently operating a competitive surgery center that fall outside a ten mile radius from the Center for Pain Management, LLC clinics. The Company has an option to purchase the CBO at market rates similar to the original acquisition. There is no guarantee that the option will be exercised by the Company, nor is the purchase price discounted for the Company should they chose to execute the option to purchase.

(C)

The Company has the option to purchase a “Competitive Business Opportunity” (CBO) from shareholders of the Company who are currently operating competitive rehabilitation clinics that fall outside a ten mile radius from the Dynamic Rehabilitation Centers, Inc. The Company has an option to purchase the CBO at market rates similar to the original acquisition. There is no guarantee that the option will be exercised by the Company, nor is the purchase price discounted for the Company should they chose to execute the option to purchase.

(20)

Subsequent Events

Acquisitions

On February 1, 2006, the Company acquired controlling interest of Amphora, LLC (Amphora), an intraoperative monitoring company located in Denver, Colorado. The initial portion of the purchase price consisted of $3,250,000 plus 1,035,032 common shares. In addition, the Company will pay the shareholders of Amphora an additional $8,500,000 in four annual payments (50% cash and 50% common stock priced at market) subject to the satisfaction of certain earnings goals.

All acquisition earnout payments earned in fiscal 2005 were paid by December 31, 2005, except the following: Andrea Trescot, M.D., Christopher Cenac, M.D., Kenneth Alo, M.D., Michael Martire, M.D., Saqib Bashir Khan, M.D., Prabaal Dey, M.D., Marc Loev, M.D., Lester Zuckerman, M.D., Michael Daly, M.D., Mark Coleman, M.D., and Ali El-Mohandes, M.D. These amounts are included in Note 9, Acquisition Consideration Payable.

On January 3, 2006, the Company acquired Center for Pain Management ASC, LLC (CPMASC), a fully accredited ambulatory surgical center with four locations in Maryland. The initial portion of the purchase price consisted of $3,750,000 plus 1,021,942 common shares. The Company will pay the balance of the consideration, $7,500,000 in cash, one year from the acquisition date.

On January 6, 2006, the Company acquired the non-medical assets of REC, Inc. and CareFirst Medical Associates, P.A. (CMA), a pain management and orthopedic rehabilitation practice with two locations in East Texas. The initial portion of the purchase price consisted of $625,000 plus 191,131 common shares. In addition, the Company will pay the shareholders of CMA an additional $1,250,000 in three equal annual payments (50% cash and 50% common stock priced at market) subject to the satisfaction of certain earnings goals and the payment of the management fee to the Company.

On January 20, 2006, the Company acquired the non-medical assets of Desert Pain Medicine Group (DPMG), a pain management practice with three locations in California. The initial portion of the purchase price consisted of $1,500,000 plus 471,698 common shares. In addition, the Company will pay the shareholders of DPMG an additional $3,000,000 in three equal annual payments (50% cash and 50% common stock priced at market) subject to the satisfaction of certain earnings goals and the payment of the management fee to the Company.

F-52

Private Placement

On January 30, 2006, the Company and a group of accredited investors closed a private placement of 3,305,033 shares of the Company's common stock at a purchase price of $3.10 per share, for gross proceeds of approximately $10,245,602. In addition, the private placement investors were granted warrants to purchase up to an additional 1,349,884 shares of common stock at $3.45 per share.

(21)

Litigation

Securities Litigation and Derivative Actions

On March 21, 2006, Roy Thomas Mould filed a complaint under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, as well as the Company's chief executive officer and chief financial officer, before the United States District Court for the Middle District of Florida. The complaint is entitled Mould v. PainCare Holdings, Inc., et al., Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with the Company's financial statements which appear to relate principally to the Company's previously announced intention to restate certain past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased the Company's common stock from August 27, 2002 to March 15, 2006. Eight additional complaints were filed shortly afterward before the same court which recite similar allegations. (collectively, the "Securities Litigation"). The Company cannot predict the outcome of the Securities Litigation, but believes that the allegations lack merit and will vigorously defend against them.

On April 7, 2006, Kenneth R. Cope filed a derivative complaint against the directors of the Company before the United States District Court for the Middle District of Florida. The complaint is entitled Cope v. Reuter, et al., Case No. 06-CV-00449-JA-DAB. Mr. Cope alleges that the directors breached their fiduciary duties by failing to supervise and manage the operations of the company, among other claims. Mr. Cope's complaint appears to relate principally to the Company's previously announced intention to restate certain past financial statements; Mr. Cope also recites many of the same allegations contained in the Securities Litigation, (the "Derivative Action"). Mr. Cope seeks unspecified damages from the directors on behalf of the Company. The Company's management cannot predict the outcome of the Derivative Action, but believes that the allegations lack merit and will vigorously defend against them.

On March 30, 2006, a purported shareholder of the Company made a demand on the Company’s board of directors. This demand raises many if not all of the same issues as the Derivative Action, but asks the independent directors to investigate the charges and to take "legal action against those individuals responsible." The Company is in the process of reviewing this demand.

Other Matters

The Company and one of its subsidiaries are defendants in a lawsuit arising from business operations. It is the opinion of management that the final outcome of this matter will not materially affect the consolidated financial position of the Company.

All of the above legal actions have been referred to outside legal counsel. Counsel has advised the Company that it is unable to opine on the likelihood of an unfavorable outcome; therefore, the Company’s

F-53

financial statements are affected by an uncertainty the outcome of which is not susceptible of reasonable estimation. Consequently the accompanying consolidated financial statements do not include an accrual for any loss that may result from the ultimate outcome of these actions. The ultimate outcome of these matters may have a material effect on the financial position and/or the results of operations for the Company.

(22)

Retirement Plans

Some of the physician practices that have management contracts with the Company sponsor separate tax-qualified retirement plans benefiting their employees. Contributions made by the physician practices to these plans for the years ended December 31, 2005, 2004 and 2003 were $541,298, $19,564 and $1,291, respectively. A possibility exists that changes in employee demographics may require the Company to make additional retirement contributions in order to maintain the qualified status of these plans. Management is unable to ascertain the amount of a loss accrual that may be needed, or whether such losses, if any, could be material.

(23)

Operating Segment and Geographic Information

We present three categories of revenue in our statement of operations: pain management, surgeries and ancillary services. Pain management revenue is derived from our owned and managed practices, which provide pain management services. Surgery revenue is derived from our owned and managed practices, which primarily provide surgical services. Ancillary service revenue is derived from our owned and managed practices and limited management practices, which provide one or more of our ancillary services, including: orthopedic rehabilitation, electrodiagnostic medicine, intra-articular joint therapy and diagnostic imagery. Our cost of revenue is primarily physicians’ salaries and medical supplies.

We have set forth below our revenues, expenses and operating income classified by the type of service we perform, as well as the expenses allocated to our corporate offices.


	December 31, 2005 (in thousands)
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Total
Revenues	$	43,269	$	6,165	$	19,230	$	—		$	68,664
Gross profit		36,632		5,110		14,451		—			56,193
General and administrative expenses		17,086		3,152		8,184		9,663			38,085
Compensation expense-variable stock options		—		—		—		2,382			2,382
Amortization		550		—		—		979			1,529
Depreciation		478		66		426		646			1,616
Operating income (loss)	$	18,518	$	1,892	$	5,841	$	(13,670	)	$	12,581


	December 31, 2004 (in thousands)
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Total
Revenues	$	22,317	$	5,203	$	10,398	$	—		$	37,918
Gross profit		18,249		4,607		8,398		—			31,254
General and administrative expenses		8,002		2,613		3,571		5,866			20,052
Compensation expense-variable stock options		—		—		—		357			357
Amortization		—		—		—		549			549
Depreciation		132		72		128		505			837
Operating income (loss)	$	10,115	$	1,922	$	4,699	$	(7,277	)	$	9,459

F-54


	December 31, 2003 (in thousands)
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Total
Revenues	$	6,117	$	3,431	$	5,433	$	—		$	14,981
Gross profit		3,718		1,958		4,718		—			10,394
General and administrative expenses		2,168		748		1,404		3,462			7,782
Compensation expense-variable stock options		—		—		—		13,533			13,533
Amortization		—		—		—		114			114
Depreciation		17		18		44		384			463
Operating income (loss)	$	1,533	$	1,192	$	3,270	$	(17,493	)	$	(11,498	)

F-55

EX-10.08 2 dex1008.htm LOAN AND SECURITY AGREEMENT BY AND AMONG PAINCARE HOLDINGS, INC Loan and Security Agreement by and among PainCare Holdings, Inc

Exhibit 10.08

LOAN AND SECURITY AGREEMENT

by and among

PAINCARE HOLDINGS, INC.

as Parent

and

EACH OF ITS SUBSIDIARIES THAT ARE SIGNATORIES HERETO

as Borrowers,

THE LENDERS THAT ARE SIGNATORIES HERETO

as the Lenders,

and

HBK INVESTMENTS L.P.

as the Arranger and Administrative Agent

Dated as of May 10, 2005

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “Agreement”), is entered into as of May 10, 2005, between and among, on the one hand, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a “Lender” and collectively as the “Lenders”), HBK INVESTMENTS L.P., a Texas limited partnership, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, “Agent”), and, on the other hand, PAINCARE HOLDINGS, INC., a Florida corporation (“Parent”), and each of Parent’s Subsidiaries identified on the signature pages hereof (such Subsidiaries are referred to hereinafter each individually as a “Borrower”, and individually and collectively, jointly and severally, as the “Borrowers”).

The parties agree as follows:

1.	DEFINITIONS AND CONSTRUCTION.

1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions:

“2003 Subordinated Note Refinance Date” means the date that is 90 days before the date when all or any portion of the principal balance of the Indebtedness evidenced by the 2003 Subordinated Notes is due and payable.

“2003 Subordinated Notes” means the notes issued by Parent in connection with that certain Securities Purchase Agreement dated as of December 17, 2003, by and among Parent and the Subordinated Lenders.

“2004 Subordinated Note Refinance Date” means the date that is 90 days before the date when all or any portion of the principal balance of the Indebtedness evidenced by the 2004 Subordinated Notes is due and payable.

“2004 Subordinated Notes” means the notes issued by Parent in connection with that certain Securities Purchase Agreement dated as of July 1, 2004, by and among Parent and the Subordinated Lenders.

“Account” means an account (as that term is defined in the Code).

“Account Debtor” means any Person who is obligated on an Account, chattel paper, or a General Intangible.

“Acquisition” means (a) any Stock Acquisition, or (b) any Asset Acquisition.

“Acquisition Documents” means each agreement or other document executed or delivered in connection with any Acquisition that was consummated on or before the Closing Date, which shall be in form and substance satisfactory to Agent.

“Additional Documents” has the meaning set forth in Section 4.4(c).

“Administrative Borrower” has the meaning set forth in Section 17.9.

“Affiliate” means, as applied to any Person, any other Person who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” means the possession, directly or indirectly through one or more intermediaries, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, for purposes of Section 7.13 hereof: (a) any Person which owns directly or indirectly 10% or more of the Stock having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed an Affiliate of such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed an Affiliate of such Person.

“Agent” has the meaning set forth in the preamble to this Agreement.

“Agent Advances” has the meaning set forth in Section 2.3(e)(i).

“Agent-Related Persons” means Agent, together with its Affiliates, officers, directors, employees, attorneys, and agents.

“Agent’s Account” means the Deposit Account of Agent identified on Schedule A-1.

“Agent’s Liens” means the Liens granted by Borrowers or their Subsidiaries to Agent under this Agreement or the other Loan Documents.

“Agreement” has the meaning set forth in the preamble hereto.

“Applicable Prepayment Premium” means, as of any date of determination, an amount equal to (a) during the period from and after the date of the execution and delivery of this Agreement up to the date that is the first anniversary of the Closing Date, the greater of (i) the Yield Maintenance Amount, and (ii) $750,000, (b) during the period from and including the date that is the first anniversary of the Closing Date up to the date that is the second anniversary of the Closing Date, $500,000, and (c) during the period of time from and including the date that is the second anniversary of the Closing Date up to the date that is the third anniversary of the Closing Date, $250,000.

“Asset Acquisition” means any purchase or other acquisition by any Borrower, any Guarantor, or any of their respective wholly-owned Subsidiaries of all or substantially all of the assets of any other Person or the operations of a Medical Practice from any other Person.

“Assignee” has the meaning set forth in Section 14.1(a).

“Assignment and Acceptance” means an Assignment and Acceptance Agreement substantially in the form of Exhibit A-1.

“Authorized Person” means any officer or employee of Administrative Borrower.

“Bankruptcy Code” means title 11 of the United States Code, as in effect from time to time.

“Base LIBOR Rate” means the rate per annum, determined by Agent in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/100%), to be the rate at which Dollar deposits (for delivery on the first day of the requested Interest Period) are offered to major banks in the London interbank market 2 Business Days prior to the commencement of the requested Interest Period, for a term and in an amount comparable to the Interest Period and the amount of the LIBOR Rate Loan requested (whether as an initial LIBOR Rate Loan or as a continuation of a LIBOR Rate Loan or as a conversion of a Base Rate Loan to a LIBOR Rate Loan) by Administrative Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error.

“Base Rate” means, the rate of interest announced, from time to time, by JPMorgan Chase Bank, or any successor thereto, as its “prime rate”, with the understanding that the “prime rate” is not necessarily the lowest rate available from such financial institution.

“Base Rate Loan” means the portion of the Term Loans that bears interest at a rate determined by reference to the Base Rate.

“Base Rate Term Loan Margin” means 4.50 percentage points.

“Benefit Plan” means a “defined benefit plan” (as defined in Section 3(35) of ERISA) for which Parent, any Borrower or any Subsidiary or ERISA Affiliate of Parent or any Borrower has been an “employer” (as defined in Section 3(5) of ERISA) within the past six years.

“Board of Directors” means the board of directors (or comparable managers) of Parent or any committee thereof duly authorized to act on behalf of the board of directors (or comparable managers).

“Books” means all of Parent’s and its Subsidiaries’ now owned or hereafter acquired books and records (including all of their Records indicating, summarizing, or evidencing their assets (including the Collateral) or liabilities, all of Parent’s and its Subsidiaries’ Records relating to their business operations or financial condition, and all of their goods or General Intangibles related to such information).

“Borrower” and “Borrowers” have the respective meanings set forth in the preamble to this Agreement.

“Borrower Collateral” means all of each Borrower’s now owned or hereafter acquired right, title, and interest in and to each of the following:

(a) all of its Accounts,

(b) all of its Books,

(d) all of its Deposit Accounts,

(e) all of its Equipment,

(f) all of its General Intangibles,

(g) all of its Inventory,

(h) all of its Investment Property (including all of its securities and Securities Accounts),

(i) all of its Negotiable Collateral,

(j) all of its Supporting Obligations,

(k) money or other assets of each such Borrower that now or hereafter come into the possession, custody, or control of any member of the Lender Group, and

(l) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all Accounts, Books, Deposit Accounts, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, Supporting Obligations, money, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof.

The foregoing to the contrary notwithstanding, Borrower Collateral shall not include the Excluded Assets.

“Borrowing” means a borrowing hereunder consisting of term loans made on the same day by the Lenders (or Agent on behalf thereof), or by Agent in the case of an Agent Advance, in each case, to Administrative Borrower.

“Business Day” means any day that is not a Saturday, Sunday, or other day on which banks are authorized or required to close in the state of New York, except that, if a

determination of a Business Day shall relate to a LIBOR Rate Loan, the term “Business Day” also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market.

“Canadian Guarantor” means Rothbart Pain Management Clinic, Inc., an Ontario corporation.

“Canadian Guarantor Security Agreement” means the security agreement executed and delivered by Canadian Guarantor in favor of Agent, in form and substance satisfactory to Agent.

“Canadian Guaranty” means the guaranty executed and delivered by Canadian Guarantor in favor of Agent, in form and substance satisfactory to Agent.

“Capital Expenditures” means, with respect to any Person for any period, the aggregate of all expenditures by such Person and its Subsidiaries during such period that are capital expenditures as determined in accordance with GAAP, whether such expenditures are paid in cash or financed, excluding all expenditures in respect of Permitted Acquisitions.

“Capitalized Lease Obligation” means that portion of the obligations under a Capital Lease that is required to be capitalized in accordance with GAAP.

“Capital Lease” means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

“Cash Equivalents” means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor’s Rating Group (“S&P”) or Moody’s Investors Service, Inc. (“Moody’s”), (c) commercial paper maturing no more than 270 days from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody’s, (d) certificates of deposit or bankers’ acceptances maturing within 1 year from the date of acquisition thereof issued by any bank organized under the laws of the United States or any state thereof having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000, (e) Deposit Accounts maintained with (i) any bank that satisfies the criteria described in clause (d) above, or (ii) any other bank organized under the laws of the United States or any state thereof so long as the amount maintained with any such other bank is less than or equal to $100,000 and is insured by the Federal Deposit Insurance Corporation, and (f) Investments in money market funds substantially all of whose assets are invested in the types of assets described in clauses (a) through (e) above.

“Cash Management Account” has the meaning set forth in Section 2.7(a).

“Cash Management Agreements” means those certain cash management agreements, in form and substance satisfactory to Agent, each of which is among Parent or one of its Subsidiaries, Agent, and one of the Cash Management Banks.

“Cash Management Bank” has the meaning set forth in Section 2.7(a).

“Change of Control” means that (a) Permitted Holders sell, dispose or otherwise transfer, directly or indirectly, more than 33% of the Stock of Parent held by Permitted Holders on the Closing Date, (b) any “person” or “group” (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20%, or more, of the Stock of Parent having the right to vote for the election of members of the Board of Directors, or (c) a majority of the members of the Board of Directors do not constitute Continuing Directors, or (d) any Borrower or any Guarantor ceases to own, directly or indirectly, and control (i) 100% of the outstanding Stock of each of its Subsidiaries (other than PSHS Alpha Partners, Ltd.) in existence as of the Closing Date, and (ii) 67.5% of the outstanding Stock of PSHS Alpha Partners, Ltd.

“Closing Date” means the date of the making of the initial Term Loan (or other extension of credit) hereunder.

“Closing Date Business Plan” means the set of Projections of Borrowers for the 4 year period following the Closing Date (on a year by year basis, and for the 1 year period following the Closing Date, on a month by month basis), in form and substance (including as to scope and underlying assumptions) satisfactory to Agent.

“Code” means the New York Uniform Commercial Code, as in effect from time to time; provided, however, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, priority, or remedies with respect to Agent’s Lien on any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of New York, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies.

“Collateral” means all assets and interests in assets and proceeds thereof now owned or hereafter acquired by Administrative Borrower or its Subsidiaries in or upon which a Lien is granted under any of the Loan Documents.

“Collateral Access Agreement” means a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in Administrative Borrower’s or its Subsidiaries’ Books, Equipment or Inventory, in each case, in form and substance satisfactory to Agent.

“Collections” means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds).

“Commercial Tort Claim Assignment” has the meaning set forth in Section 4.4(b).

“Commitment” means, with respect to each Lender, its Term Loan Commitment, or its Total Commitment, as the context requires, and, with respect to all Lenders, their Term Loan Commitments, or their Total Commitments, as the context requires, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 14.1.

“Compliance Certificate” means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Parent to Agent.

“Continuing Director” means (a) any member of the Board of Directors who was a director (or comparable manager) of Parent on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Parent and whose initial assumption of office resulted from such contest or the settlement thereof.

“Control Agreement” means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Parent or one of its Subsidiaries, Agent, and the applicable securities intermediary (with respect to a Securities Account) or bank (with respect to a Deposit Account).

“Daily Balance” means, as of any date of determination and with respect to any Obligation, the amount of such Obligation owed at the end of such day.

“Default” means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default.

“Defaulting Lender” means any Lender that fails to make any Term Loan (or other extension of credit) that it is required to make hereunder on the date that it is required to do so hereunder.

“Defaulting Lender Rate” means (a) for the first 3 days from and after the date the relevant payment is due, the Base Rate, and (b) thereafter, the interest rate then applicable to portions of the Term Loans that are Base Rate Loans (inclusive of the Base Rate Margin applicable thereto).

“Deposit Account” means any deposit account (as that term is defined in the Code).

“Designated Account” means the Deposit Account of Administrative Borrower identified on Schedule D-1.

“Designated Account Bank” has the meaning ascribed thereto on Schedule D 1.

“Designated Stock” means the Stock that has been pledged by Parent or one of its Subsidiaries to secure any outstanding Indebtedness in respect of Existing Seller Notes and Earn-Out Obligations, Seller Notes or Earn-Out Arrangements that has not expired.

“Diagnostic Center” means a Person which provides medical diagnostic services.

“Disbursement Letter” means an instructional letter executed and delivered by Borrowers to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Agent.

“Doctor Departures” means the failure of one or more doctors who were employed by Parent or any of its Subsidiaries or any Medical PC on or after the Closing Date to continue to be so employed for any period of time.

“Dollars” or “$” means United States dollars.

“Earn-Out Arrangements” shall mean payments pursuant to a Purchase Agreement to be made by a Borrower or a Guarantor (other than any Existing Seller Notes and Earn-Out Obligations) based on the performance of the entity acquired (or allocated to assets acquired) in connection therewith (or the related Medical PC).

“EBITDA” means, with respect to any Person for any fiscal period, such Person’s and its Subsidiaries’ consolidated net earnings (or loss), minus extraordinary gains and interest income, plus interest expense, income taxes, and depreciation and amortization for such period, in each case, as determined in accordance with GAAP.

“Eligible Transferee” means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, or other financial institution or fund that is engaged in

making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of a Lender, (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Agent and Administrative Borrower (which approval of Administrative Borrower shall not be unreasonably withheld, delayed, or conditioned), and (f) during the continuation of an Event of Default, any other Person approved by Agent.

“Employment Agreements” means the employment agreements executed by Parent or any of its Subsidiaries with respect to the officers or senior management employees of Parent and such Subsidiaries, including without limitation, Randy Lubinsky, Mark Szporka and Ronald Riewold.

“Environmental Actions” means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of Parent, any Borrower, any other Subsidiary of Parent, or any of their predecessors in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by Parent, any Borrower, any other Subsidiary of Parent, or any of their predecessors in interest.

“Environmental Law” means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, in each case, to the extent binding on Parent, any Borrower or any other Subsidiary of Parent, relating to the environment, the effect of the environment on employee health, or Hazardous Materials, including the Comprehensive Environmental Response Compensation and Liability Act, 42 USC §9601 et seq. (“CERCLA”); the Resource Conservation and Recovery Act, 42 USC §6901 et seq. (“RCRA”); the Federal Water Pollution Control Act, 33 USC § 1251 et seq; the Toxic Substances Control Act, 15 USC § 2601 et seq; the Clean Air Act, 42 USC § 7401 et seq.; the Safe Drinking Water Act, 42 USC § 3803 et seq.; the Oil Pollution Act of 1990, 33 USC § 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC § 11001 et seq.; the Hazardous Material Transportation Act, 49 USC § 1801 et seq.; and the Occupational Safety and Health Act, 29 USC §651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time.

“Environmental Liabilities and Costs” means all liabilities, monetary obligations, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand, or Remedial Action required, by any Governmental Authority or any third party, and which relate to any Environmental Action.

“Environmental Lien” means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs.

“Equipment” means equipment (as that term is defined in the Code), and includes machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), computer hardware, tools, parts, and goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto.

“ERISA Affiliate” means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of Parent, a Borrower or any other Subsidiary of Parent under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Parent, a Borrower or any other Subsidiary of Parent under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which a Borrower or a Subsidiary of a Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with Parent, a Borrower or any other Subsidiary of Parent and whose employees are aggregated with the employees of Parent, a Borrower or any other Subsidiary of Parent under IRC Section 414(o).

“Event of Default” has the meaning set forth in Section 8.

“Excess Cash Flow” means, with respect to Parent and its Subsidiaries for any period, (a) EBITDA of Parent and its Subsidiaries for such period, less (b) all scheduled and optional cash principal payments on the Term Loans made during such period, and all scheduled and mandatory cash principal payments on other Indebtedness (including Capitalized Lease Obligations) of Borrower or any of its Subsidiaries during such period to the extent such other Indebtedness is permitted to be incurred, and such payments are permitted to be made, under this Agreement or any other Loan Document, less (c) the cash portion of Capital Expenditures made by Borrower and its Subsidiaries during such period to the extent permitted to be made under this Agreement.

“Exchange Act” means the Securities Exchange Act of 1934, as in effect from time to time.

“Excluded Assets” means the Designated Stock, solely to the extent that any Indebtedness in respect of the Existing Seller Notes and Earn-Out Obligations, Seller Notes or Earn-Out Arrangements that is secured by such Designated Stock remains outstanding and

has not expired; provided, however, that to the extent that all such Indebtedness in respect of the Existing Seller Notes and Earn-Out Obligations, Seller Notes or Earn-Out Arrangements that is secured by any Designated Stock but is no longer outstanding or has expired, thereafter the Excluded Assets shall not include (and therefore Borrower Collateral shall include) such Designated Stock without any further action on the part of the owner of such Designated Stock or Agent.

“Existing Lenders” means South Louisiana Bank and Fifth Third Bank.

“Existing Seller Notes and Earn-Out Obligations” means those obligations described on Schedule E-1.

“Extraordinary Receipts” means any Collections received by a Person or any of its Subsidiaries not in the ordinary course of business (and not consisting of proceeds described in Section 2.4(c)(i) hereof), including, (a) foreign, United States, state or local tax refunds, (b) pension plan reversions, (c) proceeds of insurance (including proceeds of key man life insurance policies), (d) proceeds of judgments, proceeds of settlements, or other consideration of any kind in connection with any cause of action, (e) condemnation awards (and payments in lieu thereof), (f) indemnity payments, and (g) any purchase price adjustment received in connection with any purchase agreement.

“Family Member” means, with respect to any individual, any other individual having a relationship by blood (to the second degree of consanguinity), marriage, or adoption to such individual.

“Family Trusts” means, with respect to any individual, trusts or other estate planning vehicles established for the benefit of such individual or Family Members of such individual and in respect of which such individual serves as trustee or in a similar capacity.

“Fee Letter” means that certain fee letter, dated as of even date herewith, between Borrowers and Agent, in form and substance satisfactory to Agent.

“Filing Authorization Letter” means a letter duly executed by each Borrower and each Guarantor authorizing Agent to file appropriate financing statements without the signature of such Borrower or such Guarantor, as applicable, in such office or offices as may be necessary or, in the opinion of Agent, desirable to perfect the security interests purported to be created by the Loan Documents.

“Free Cash Flow” means with respect to Parent and its Subsidiaries for any period, the result of (a) EBITDA for such period minus (b) the aggregate amount of all payments required to be made during such period in respect of (i) Indebtedness in respect of Earn-Out Arrangements, (ii) Existing Seller Notes and Earn-Out Obligations, or (iii) Indebtedness evidenced by Seller Notes.

“Funded Debt” of any Person means Indebtedness of such Person that by its terms matures more than one year after the date of creation or matures within one year from

such date but is renewable or extendible, at the option of such Person, to a date more than one year after such date or arises under a revolving credit or similar agreement that obligates the lender or lenders to extend credit during a period of more than one year after such date, including all amounts of Funded Debt of such Person required to be paid or prepaid within one year after the date of determination.

“Funding Date” means the date on which a Borrowing occurs.

“Funding Losses” has the meaning set forth in Section 2.13(b)(ii).

“GAAP” means generally accepted accounting principles as in effect from time to time in the United States, consistently applied.

“General Intangibles” means general intangibles (as that term is defined in the Code), including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trade secrets, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, insurance premium rebates, tax refunds, and tax refund claims and any other personal property other than Accounts, Deposit Accounts, goods, Investment Property, and Negotiable Collateral.

“Georgia Surgical” means Georgia Surgical Center, Inc., a Georgia corporation.

“Governing Documents” means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person.

“Governmental Authority” means any federal, state, local, or other governmental or administrative body, instrumentality, board, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body.

“Governmental Receivables” means Accounts owing to Parent or any of its Subsidiaries on which any Governmental Authority is the Account Debtor.

“Guarantors” means (a) Parent and each Subsidiary of Parent that is not a Borrower and “Guarantor” means any one of them.

“Guarantor Security Agreement” means one or more security agreements executed and delivered by each Guarantor other than Canadian Guarantor in favor of Agent, in each case, in form and substance satisfactory to Agent.

“Guaranty” means that certain general continuing guaranty executed and delivered by each Guarantor other than Canadian Guarantor in favor of Agent, in form and substance satisfactory to Agent.

“Hazardous Materials” means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as “hazardous substances,” “hazardous materials,” “hazardous wastes,” “toxic substances,” or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or “EP toxicity”, (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million.

“HBK” means HBK Investments L.P., a Texas limited partnership.

“Hedge Agreement” means any and all agreements, or documents now existing or hereafter entered into by Parent or any of its Subsidiaries that provide for an interest rate, credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging Parent’s or any of its Subsidiaries’ exposure to fluctuations in interest or exchange rates, loan, credit exchange, security or currency valuations or commodity prices.

“Holdout Lender” has the meaning set forth in Section 15.2(a).

“Indebtedness” means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations as a lessee under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of a Person or its Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations to pay the deferred purchase price of assets (including all Existing Seller Notes and Earn-Out Obligations, and Seller Notes and Earn-Out Arrangements but excluding trade payables incurred in the ordinary course of business and repayable in accordance with customary trade practices), (f) all obligations owing under Hedge Agreements, and (g) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse) any obligation of any other Person that constitutes Indebtedness under any of clauses (a) through (f) above.

“Indebtedness Documents” means any agreement or other document executed or delivered with respect to or in connection with the Indebtedness described in Section 7.1(b) of this Agreement, which shall be in form and substance satisfactory to Agent.

“Indemnified Liabilities” has the meaning set forth in Section 11.3.

“Indemnified Person” has the meaning set forth in Section 11.3.

“Insolvency Proceeding” means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief.

“Intercompany Subordination Agreement” means a subordination agreement executed and delivered by Parent, Borrowers and each of their respective Subsidiaries and Agent, the form and substance of which is satisfactory to Agent.

“Interest Period” means, with respect to each LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR Rate Loan (or the continuation of a LIBOR Rate Loan or the conversion of a Base Rate Loan to a LIBOR Rate Loan) and ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrowers (or Administrative Borrower on behalf thereof) may not elect an Interest Period which will end after the Maturity Date.

“Inventory” means inventory (as that term is defined in the Code).

“Investment” means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising in the ordinary course of business consistent with past practice), purchases or other acquisitions of Indebtedness, Stock, or all or substantially all of the assets of such other Person (or of any division or business line of such other Person), and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP.

“Investment Property” means investment property (as that term is defined in the Code).

“IRC” means the Internal Revenue Code of 1986, as in effect from time to time.

“Lender” and “Lenders” have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1.

“Lender Group” means, individually and collectively, each of the Lenders and Agent.

“Lender Group Expenses” means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by a Borrower or its Subsidiaries under any of the Loan Documents that are paid, advanced, or incurred by the Lender Group, (b) fees or charges paid or incurred by Agent in connection with the Lender Group’s transactions with Borrowers or their Subsidiaries, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic collateral appraisals or business valuations to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Agent in the disbursement of funds to or for the account of Borrowers or other members of the Lender Group (by wire transfer or otherwise), (d) charges paid or incurred by Agent resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Agent related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group’s relationship with any Borrower or any Subsidiary of a Borrower, (h) Agent’s and each Lender’s reasonable costs and expenses (including reasonable attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, syndicating, or amending the Loan Documents, and (i) Agent’s and each Lender’s reasonable costs and expenses (including reasonable attorneys, accountants, consultants, and other advisors fees and expenses) incurred in terminating, enforcing (including reasonable attorneys, accountants, consultants, and other advisors fees and expenses incurred in connection with a “workout,” a “restructuring,” or an Insolvency Proceeding concerning any Borrower or any Subsidiary of a Borrower or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral.

“Lender-Related Person” means, with respect to any Lender, such Lender, together with such Lender’s Affiliates, officers, directors, employees, attorneys, and agents.

“Leverage Ratio” means, on any date with respect Parent and its Subsidiaries, the ratio of (a) the outstanding balance of the Obligations on such date, to (b) the TTM EBITDA of Parent and its Subsidiaries as of such date.

“LIBOR Deadline” has the meaning set forth in Section 2.13(b)(i).

“LIBOR Notice” means a written notice in the form of Exhibit L-1.

“LIBOR Option” has the meaning set forth in Section 2.13(a).

“LIBOR Rate” means, for each Interest Period for each LIBOR Rate Loan, the rate per annum determined by Agent (rounded upwards, if necessary, to the next 1/100%) by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage.

“LIBOR Rate Loan” means each portion of the Term Loans that bears interest at a rate determined by reference to the LIBOR Rate.

“LIBOR Rate Term Loan Margin” means 7.25 percentage points.

“Lien” means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, irrespective of whether (a) such interest is based on the common law, statute, or contract, (b) such interest is recorded or perfected, and (c) such interest is contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances. Without limiting the generality of the foregoing, the term “Lien” includes the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also includes reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property.

“Loan Account” has the meaning set forth in Section 2.10.

“Loan Documents” means this Agreement, the Canadian Guarantor Security Agreement, the Canadian Guaranty, the Cash Management Agreements, the Control Agreements, the Disbursement Letter, the Fee Letter, the Guarantor Security Agreement, the Guaranty, the Intercompany Subordination Agreement, the Stock Pledge Agreement, the Subordination Agreement, any note or notes executed by a Borrower in connection with this Agreement and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by any Borrower and the Lender Group in connection with this Agreement.

“Management Agreements” means those certain management agreements entered into from time to time by a Borrower and a Person which owns or operates a Medical Practice which the business operations are managed (in whole or in part) by Parent or any of its Subsidiaries.

“Market Capitalization” means, as of any date, the product of (a) the aggregate number of shares of common Stock of Parent outstanding as of such date times (b) the price per share at which the common Stock of Parent is available on any public stock exchange as of the close of business on such date.

“Material Adverse Change” means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, (b) a material impairment of a Borrower’s or any of its Subsidiaries’ ability to perform its obligations under the Loan Documents to which it is a party or of the Lender Group’s ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Agent’s Liens with respect to the Collateral.

“Maturity Date” has the meaning set forth in Section 3.4.

“Medical PC” means a medical professional corporation, association or limited liability company which has entered into a Management Agreement with Parent or any of its Subsidiaries in connection with an Acquisition.

“Medical Practice” means a Person that provides medical services (including without limitation a Diagnostic Center and a Surgery Practice).

“Negotiable Collateral” means letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper).

“Net Cash Proceeds” means, (i) with respect to any disposition by any Person or any of its Subsidiaries, the amount of cash received (directly or indirectly) from time to time (whether as initial consideration or through the payment or disposition of deferred consideration) by or on behalf of such Person or such Subsidiary, in connection therewith after deducting therefrom only (A) the amount of any Indebtedness secured by any Permitted Lien on any asset (other than Indebtedness assumed by the purchaser of such asset) which is required to be, and is, repaid in connection with such disposition (other than Indebtedness under this Agreement), (B) reasonable expenses related thereto incurred by such Person or such Subsidiary in connection therewith, (C) transfer taxes paid to any taxing authorities by such Person or such Subsidiary in connection therewith, and (D) net income taxes to be paid in connection with such disposition (after taking into account any tax credits or deductions and any tax sharing arrangements) and (ii) with respect to the issuance or incurrence of any Indebtedness by any Person or any of its Subsidiaries, or the sale or issuance by any Person or any of its Subsidiaries of any shares of its Stock, the aggregate amount of cash received (directly or indirectly) from time to time (whether as initial consideration or through the

payment or disposition of deferred consideration) by or on behalf of such Person or such Subsidiary in connection therewith, after deducting therefrom only (A) reasonable expenses related thereto incurred by such Person or such Subsidiary in connection therewith, (B) transfer taxes paid by such Person or such Subsidiary in connection therewith and (C) net income taxes to be paid in connection therewith (after taking into account any tax credits or deductions and any tax sharing arrangements); in each case of clause (i) and (ii) to the extent, but only to the extent, that the amounts so deducted are (x) actually paid to a Person that, except in the case of reasonable out-of-pocket expenses, is not an Affiliate of such Person or any of its Subsidiaries and (y) properly attributable to such transaction or to the asset that is the subject thereof.

“Obligations” means all loans (including the Term Loans), debts, principal, interest (including any interest that accrues after the commencement of an Insolvency Proceeding, regardless of whether allowed or allowable in whole or in part as a claim in any such Insolvency Proceeding), premiums, liabilities (including all amounts charged to Borrowers’ Loan Account pursuant hereto), obligations (including indemnification obligations), fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that accrue after the commencement of an Insolvency Proceeding, regardless of whether allowed or allowable in whole or in part as a claim in any such Insolvency Proceeding), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrowers to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrowers are required to pay or reimburse by the Loan Documents, by law, or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all extensions, modifications, renewals, or alterations thereof, both prior and subsequent to any Insolvency Proceeding.

“Originating Lender” has the meaning set forth in Section 14.1(e).

“Overadvance” has the meaning set forth in Section 2.5.

“Parent” has the meaning set forth in the preamble to this Agreement.

“Participant” has the meaning set forth in Section 14.1(e).

“Pay-Off Letters” means one or more letters, each in form and substance satisfactory to Agent, from each Existing Lender to Agent respecting the amount necessary to repay in full all of the obligations of Parent, Borrowers and their respective Subsidiaries owing to such Existing Lender and obtain a release of all of the Liens (if any) existing in favor of such Existing Lender in and to the assets of Parent, Borrowers and their respective Subsidiaries.

“PCRL” means PCRL Investments L.P., a Texas limited partnership.

“Permitted Acquired Indebtedness” means Indebtedness assumed in connection with an Acquisition so long as (a) such Indebtedness is Funded Debt, and (b) such Indebtedness exists at the time the Stock or assets are acquired and is not created in anticipation of such Acquisition.

“Permitted Acquisition” means any Acquisition so long as:

(a) after giving effect to the proposed Acquisition, Borrower has Qualified Cash of at least $2,000,000,

(b) the consideration is payable in cash (except for any Earn-Out Arrangements, Seller Notes or Permitted Acquired Indebtedness) or in Stock in Parent, which shall be allocated as follows, unless the prior written consent of Agent is obtained (which consent shall not be unreasonably withheld):

(i) with respect to an Acquisition of a Medical Practice that does not constitute a Surgery Practice or a Diagnostic Center: (A) up to 75% of the purchase price consideration is payable at the closing of such Acquisition (the “Closing Consideration”), (B) between 40% and 60% of the Closing Consideration is payable in cash and the balance of the Closing Consideration is payable in Stock of Parent, (C) the balance of the consideration is payable in cash over time in between two and four annual installments (the “Installment Payments”), and (D) between 40% and 60% of the Installment Payments are payable in cash and the balance of such Installment Payments are payable in Stock of Parent; (ii) with respect to an Acquisition of a Surgery Practice or a Diagnostic Center: (A) up to 100% of the purchase price consideration is payable at the closing of such Acquisition in any combination of cash and Stock of Parent, and (B) the balance, if any, of such consideration is payable in up to four annual installments of any combination of cash and Stock of Parent;

(c) the total value of the consideration (including any Earn-Out Arrangements, Seller Notes, or Permitted Acquired Indebtedness) payable by Parent or its Subsidiaries in connection with the proposed Acquisition and all other related Acquisitions does not exceed $40,000,000 in the aggregate (of which not more than $20,000,000 is payable in cash or Cash Equivalents),

(d) the total value of the consideration (including any Earn-Out Arrangements, Seller Notes or Permitted Acquired Indebtedness) payable by Parent or its Subsidiaries in connection with all Acquisitions (including the proposed Acquisition) consummated since the Closing Date does not exceed $200,000,000 in the aggregate (of which not more than $100,000,000 is payable in cash or Cash Equivalents),

(e) no Default or Event of Default has occurred and is continuing as of the date of consummation of the proposed Acquisition or would result therefrom,

(f) the assets being acquired, or the Person whose Stock is being acquired, (i) are useful in or engaged in, as applicable, the health care services performed by Parent and its Subsidiaries as of the date of this Agreement, and (ii) shall be located or organized, as applicable, within the United States or Canada,

(g) Parent has provided Agent with written confirmation, supported by reasonably detailed calculations (unless Agent determines in its Permitted Discretion that the delivery of such calculations is not warranted), that (i) on a pro forma basis (with giving effect to all Indebtedness and Fixed Charges of the Person being acquired but not the historical EBITDA of such Person), Parent and its Subsidiaries will be in compliance with each of the financial covenants in Section 7.18 hereof, and an Event of Default under Section 8.14 will not have occurred, in each case, after giving effect to such Acquisition and as of the last day of each quarter during the 12 month period following the date of such acquisition, and (ii) the EBITDA of such Person being acquired is projected to be greater than zero for each twelve month period ending on the last day of any fiscal quarter during the following twelve months,

(h) Agent has completed any due diligence as it determines in its Permitted Discretion to be appropriate with respect to the assets or Person that is to be the subject of the proposed Acquisition and the results thereof are reasonably satisfactory to Agent, with the understanding that unless the Agent provides written notice of its objection to such Acquisition to the Administrative Borrower within 15 days after the date when Agent has received (i) the documents required to be delivered pursuant to clause (i)(i) below, and (ii) the written notice required to be delivered pursuant to subsection (r) below, then such proposed Acquisition shall deemed to be satisfactory solely for the purposes of this clause (h) (and subject to the satisfaction of each of the other conditions set forth in this definition),

(i) (i) promptly following a request therefor, Agent has received copies of such information or documents relating to such Acquisition as Agent shall have reasonably requested, and (ii) within 30 days after the consummation of such Acquisition, Agent shall have received certified copies of the agreements, instruments and documents in connection with such Acquisition, which shall be substantively identical to the documents provided pursuant to subclause (i) of this clause (i),

(j) in the case of an Asset Acquisition, the subject assets are being acquired by a Borrower,

(k) in the case of a Stock Acquisition, the subject Stock is being acquired in such Acquisition directly by a Borrower,

(l) the Pro Forma TTM EBITDA of the subject Person(s) of the Acquisition, shall be positive (on a combined basis for all Persons subject of the Acquisition) as determined based upon such Person’s financial statements for its most recently completed interim financial period as of the consummation of the Acquisition,

(m) in the case of an Asset Acquisition, the applicable Borrower shall have executed and delivered or authorized, as applicable, any and all security agreements, UCC-1 financing statements, fixture filings, and other documentation reasonably requested by Agent in order to include the newly acquired assets within the Collateral,

(n) in the case of a Stock Acquisition, the applicable Borrower shall have executed and delivered a supplement to the Stock Pledge Agreement in order to include the Stock being acquired thereunder (or in the case of a merger whereby a Subsidiary of Parent is the surviving Person, the Stock of such Subsidiary) and shall have delivered to Agent possession of the original Stock certificates respecting all of the issued and outstanding shares of Stock of such acquired Person (or in the case of a merger whereby a Subsidiary of Parent is the surviving Person, the Stock of such Subsidiary), together with stock powers with respect thereto endorsed in blank, in each case, to the extent that such Stock does not constitute Excluded Assets,

(o) in the case of a Wholly Owned Stock Acquisition, the applicable Borrower shall have caused such acquired Person (or in the case of a merger whereby a Subsidiary of Parent is the surviving Person, such Subsidiary) to execute and deliver a joinder to the Guaranty in order to make such Person a party thereto, together with a joinder to the Guarantor Security Agreement (or a joinder to this Agreement, if the acquired Person (or in the case of a merger whereby a Subsidiary of Parent is the surviving Person, such Subsidiary) is to become a Borrower hereunder), any and all UCC-1 financing statements, fixture filings, and other documentation reasonably requested by Agent in order to cause such cause acquired Person (or in the case of a merger whereby a Subsidiary of Parent is the surviving Person, such Subsidiary) to be obligated with respect to the Obligations and to include the assets of the acquired Person (or in the case of a merger whereby a Subsidiary of Parent is the surviving Person, such Subsidiary) within the Collateral; provided, that in each case, such security documents shall not include any assets in the Collateral that constitute Excluded Assets,

(p) any Indebtedness or Liens assumed in connection with the proposed Acquisition are otherwise permitted under Section 7.1 or 7.2, respectively and no additional Indebtedness or other liabilities shall be incurred, assumed or otherwise be reflected on a consolidated balance sheet of Parent and its Subsidiaries after giving effect to such Acquisition, except to the extent expressly permitted by the terms of the Agreement,

(q) the proposed Acquisition shall be consensual and shall have been approved by the board of directors of the Person whose Stock or assets are proposed to be acquired and shall not have been preceded by an unsolicited tender offer for such Stock by, or proxy contest initiated by, Parent or any of its Subsidiaries,

(r) Parent shall provide Agent and each Lender with prior written notice (which notice shall not be less than 15 days prior to the closing date of the proposed Acquisition and which notice shall include, without limitation, a reasonably detailed description of such Acquisition) of such Acquisition, together with copies of all financial information, financial analysis, documentation and other information relating to such acquisition as Agent or any Lender shall reasonably request,

(s) on or prior to the date of the proposed Acquisition, Agent and each Lender shall have received copies of the acquisition agreement, related contracts and instruments and all opinions, certificates, lien search results and other documents reasonably requested by Agent and any Lender and any such opinion shall be addressed to Agent and Lenders or accompanied by a written authorization from the firm or Persons delivering such opinion stating that Agent and Lenders may rely on such opinion as though it were addressed to them,

(t) at the time of the proposed Acquisition and after giving effect thereto, all representations and warranties contained in Section 5 of this Agreement and in the other Loan Documents shall be true and correct in all respects (which in each case shall be deemed to have been made on the date of such Acquisition after giving effect thereto), and

(u) prior to the closing of the proposed Acquisition, the chief executive officer or the chief financial officer of Borrower shall have delivered to Agent a certificate as to each of the items set for in the foregoing clauses (a), (b), (c), (d), (e), (f), (g), (l), (p), (q) and (t).

“Permitted Discretion” means a determination made in the exercise of reasonable (from the perspective of a secured lender) business judgment.

“Permitted Dispositions” means (a) sales or other dispositions of Equipment that is substantially worn, damaged, no longer in use or obsolete in the ordinary course of business, (b) sales of Inventory to buyers and patients in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, and (d) the licensing, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of business.

“Permitted Holders” means Randy Lubinsky, Mark Szporka, Ronald Riewold, their respective Family Members, and Family Trusts.

“Permitted Investments” means (a) Investments in cash and Cash Equivalents, (b) Investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) Investments received in settlement of amounts due to a Borrower or any Subsidiary of a Borrower effected in the ordinary course of business or owing to a Borrower or any Subsidiary of a Borrower as a result of Insolvency Proceedings involving an Account Debtor or upon the foreclosure or enforcement of any Lien in favor of a Borrower or any Subsidiary of a Borrower, and (e) Permitted Acquisitions.

“Permitted Liens” means (a) Liens held by Agent, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default hereunder

and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of Borrowers’ business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens on amounts deposited in connection with obtaining worker’s compensation or other unemployment insurance, (h) Liens on amounts deposited in connection with the making or entering into of bids, tenders, or leases in the ordinary course of business and not in connection with the borrowing of money, (i) Liens on amounts deposited as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of business, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, (k) with respect to any Real Property, easements, rights of way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof, (l) Liens granted in and to the Excluded Assets, solely to the extent that such assets constitute Excluded Assets, and (m) Liens securing Permitted Acquired Indebtedness in an aggregate outstanding amount not in excess of $200,000.

“Permitted Protest” means the right of Administrative Borrower or any of its Subsidiaries to protest any Lien (other than any Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Administrative Borrower or any of its Subsidiaries, as applicable, in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Agent’s Liens.

“Permitted Purchase Money Indebtedness” means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate amount outstanding at any one time not in excess of $4,800,000.

“Person” means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof.

“Projections” means Parent’s forecasted (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a basis consistent with Parent’s historical financial statements, together with appropriate supporting details and a statement of underlying assumptions.

“Pro Forma EBITDA” means, with respect to any Person that is the subject of a Permitted Acquisition for any period ending on or before the date of the consummation of such Permitted Acquisition, (a) such Person’s EBITDA for such period, plus (b) the aggregate amount of expenditures deducted in the calculation of such Person’s EBITDA for such period that constitute compensation, benefits or perquisites paid to or for the benefit of the owners of such Person or one of the doctors employed by such Person, minus (c) the salary projected to be paid to the doctors who will be employed by the acquired Person after giving effect to the proposed Acquisition (for a period comparable to the applicable measurement period), and as further adjusted in a manner which is mutually acceptable to Agent and Parent, by taking into consideration such other reasonable assumptions, events and conditions as are mutually acceptable to Agent and Parent.

“Pro Rata Share” means, as of any date of determination:

(a) with respect to a Lender’s obligation to make a Term Loan and receive payments of interest, fees, and principal with respect thereto, (i) prior to the Term Loan Expiration Date, the percentage obtained by dividing (y) the sum of (A) such Lender’s remaining Term Loan Commitment, and (B) the outstanding principal balance of such Lender’s Term Loans, by (z) the sum of (A) the aggregate amount of all Lenders’ remaining Term Loan Commitments, and (B) the aggregate outstanding principal balance of all Term Loans, and (ii) from and after the Term Loan Expiration Date, the percentage obtained by dividing (y) the outstanding principal balance of such Lender’s Term Loans by (z) the aggregate outstanding principal balance of all Term Loans, and

(b) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) the sum of (A) such Lender’s remaining Term Loan Commitment (if any), and (B) the outstanding principal balance of such Lender’s Term Loans, by (ii) the sum of (A) the aggregate amount of all Lenders’ remaining Term Loan Commitments (if any), and (B) the aggregate outstanding principal balance of all Term Loans.

“Purchase Agreement” means an agreement entered into by Parent or any of its Subsidiaries and a Medical Practice or a manager of Medical Practices whereby Parent or such Subsidiary has acquired or will acquire all or substantially all of the assets or stock of such Medical Practice or such manager of Medical Practices.

“Purchase Money Indebtedness” means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 20 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof.

“Qualified Cash” means, as of any date of determination, the amount of unrestricted cash and Cash Equivalents of Borrowers and their Subsidiaries that is in Deposit Accounts or in Securities Accounts, or any combination thereof, and which such Deposit Account or Securities Account is the subject of a Control Agreement and is maintained by a branch office of the bank or securities intermediary located within the United States.

“Real Property” means any estates or interests in real property now owned or hereafter acquired by any Borrower or a Subsidiary of any Borrower and the improvements thereto.

“Record” means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form.

“Related Fund” means a fund, money market account, investment account or other account managed by a Lender or an Affiliate of a Lender or its investment manager or an Affiliate of its investment manager.

“Remedial Action” means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) restore or reclaim natural resources or the environment, (d) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (e) conduct any other actions with respect to Hazardous Materials authorized by Environmental Laws.

“Replacement Lender” has the meaning set forth in Section 15.2(a).

“Report” has the meaning set forth in Section 16.17.

“Required Lenders” means, at any time, Lenders whose aggregate Pro Rata Shares (calculated under clause (b) of the definition of Pro Rata Shares) equal or exceed 50.1%.

“Required Liquidity” means that the result of (a) Borrowers’ Qualified Cash minus (b) the aggregate amount, if any, of all trade payables of Parent and its Subsidiaries aged in excess of historical levels with respect thereto and all book overdrafts of Parent and its Subsidiaries in excess of historical practices with respect thereto, in each case as determined by Agent in its Permitted Discretion, exceeds $2,500,000.

“Required Locations” means the locations of Borrowers representing, in the aggregate, at least 67% of the EBITDA of Parent and its Subsidiaries for the fiscal year ending December 31, 2004.

“Reserve Percentage” means, on any day, for any Lender, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as “eurocurrency liabilities”) of that Lender, but so long as such Lender is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero.

“SEC” means the United States Securities and Exchange Commission and any successor thereto.

“Securities Account” means a “securities account” as that term is defined in the Code.

“Seller Notes” shall mean those promissory notes delivered by Parent or a Borrower in connection with the closing of an acquisition pursuant to a Purchase Agreement.

“Solvent” means, with respect to any Person on a particular date, that, at fair valuations, the sum of such Person’s assets is greater than all of such Person’s debts.

“Stock” means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act).

“Stock Acquisition” means (a) a Wholly Owned Stock Acquisition, or (b) solely with respect to an acquisition of a Surgery Practice or a Diagnostic Center, the purchase or other acquisition by Parent or its wholly-owned Subsidiaries of at least (i) 51% of the Stock in the Person which is the owner of such Surgery Practice or Diagnostic Center, or (ii) if such Person is a limited partnership, at least 100% of the general partnership interest in such Person.

“Stock Pledge Agreement” means a stock pledge agreement, in form and substance satisfactory to Agent, executed and delivered by each Borrower and each Guarantor.

“Subordination Agreement” means that certain subordination agreement dated contemporaneously herewith by and between Agent and Subordinated Lenders, which is in form and substance satisfactory to Agent.

“Subordinated Lenders” means Midsummer Investment, Ltd., a Bermuda limited partnership, and Islandia, L.P., a Delaware limited partnership.

“Subsidiary” of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity.

“Supporting Obligation” means a letter-of-credit right or secondary obligation that supports the payment or performance of an Account, chattel paper, document, General Intangible, instrument, or Investment Property.

“Surgery” means PainCare Surgery Centers, Inc., a Florida corporation.

“Surgery Practice” means a Person which provides surgical services.

“Taxes” has the meaning set forth in Section 16.11.

“Term Loan” and “Term Loans” have the respective meanings set forth in Section 2.2.

“Term Loan Amount” means $25,000,000.

“Term Loan Commitment” means, with respect to each Lender, its Term Loan Commitment, and, with respect to all Lenders, their Term Loan Commitments, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 14.1.

“Term Loan Expiration Date” means the earlier to occur of (a) November 10, 2006, and (b) the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration.

“Total Commitment” means, with respect to each Lender, its Total Commitment, and, with respect to all Lenders, their Total Commitments, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 attached hereto or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 14.1.

“TTM EBITDA” means, as of any date of determination with respect to any Person, the EBITDA of such Person and its Subsidiaries for the 12 consecutive month period most recently ended on or prior to such date of determination.

“United States” means the United States of America.

“Voidable Transfer” has the meaning set forth in Section 17.6.

“Wholly Owned Stock Acquisition” means the purchase or other acquisition by Parent or its wholly-owned Subsidiaries of all of the Stock of any other Person.

“Yield Maintenance Amount” means, as of any date prior to the first anniversary of the Closing Date, an amount equal to the product of (a) the greater of (i) $10,000,000 and (ii) the outstanding principal balance of the Term Loan as of such date times (b) a per annum rate for the period between such date and the first anniversary of the Closing Date equal to the LIBOR Rate as of such date plus the LIBOR Rate Term Loan Margin.

1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term “financial statements” shall include the notes and schedules thereto. Whenever the term “Borrowers” or the term “Parent” is used in respect of a financial covenant or a related definition, it shall be understood to mean Parent and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise.

1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein, provided, however, that to the extent that the Code is used to define any term herein and such term is defined differently in different Articles of the Code, the definition of such term contained in Article 9 shall govern.

1.4 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the terms “includes” and “including” are not limiting, and the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to the satisfaction or repayment in full of the Obligations shall mean the repayment in full in cash of all Obligations. Any reference herein to any Person shall be construed to include such Person’s successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein.

1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference.

2.	LOAN AND TERMS OF PAYMENT.

2.1 [Intentionally Omitted]

2.2 Term Loans. Subject to the terms and conditions of this Agreement, each Lender with a Term Loan Commitment agrees (severally, not jointly or jointly and severally) to make term loans (each a “Term Loan” and collectively, the “Term Loans”) to Borrowers from time to time from the Closing Date until the Term Loan Expiration Date, or until the earlier reduction of its Term Loan Commitment to zero in accordance with the terms hereof,

in an aggregate principal amount not to exceed the unused portion of such Lender’s Term Loan Commitment. The aggregate principal amount of the Term Loans (based on initial principal amount) shall not exceed the Term Loan Amount. The Term Loan Commitment of each Lender shall (x) automatically and permanently be reduced to the extent that such Lender makes a Term Loan to Borrowers, and (y) automatically and permanently be reduced to zero on the Term Loan Expiration Date. Each Term Loan requested by Borrowers pursuant to this Section 2.2 shall be in a minimum amount of $2,500,000. Any principal amount of the Term Loans that is repaid or prepaid may not be reborrowed. The outstanding principal of the Term Loans shall be repayable by the Borrowers in consecutive quarterly installments, on the first day of each April, July, October and January, commencing on April 1, 2006 and ending on the Maturity Date (or if earlier than the Maturity Date, the date that the Term Loans have been repaid in full) consisting of (i) during the period from April 1, 2006 to January 1, 2007, quarterly payments of $625,000, (ii) during the period from April 1, 2007 to January 1, 2008, quarterly payments of $1,250,000, and (iii) during the period from April 1, 2008 to the Maturity Date, equal quarterly payments which, in the aggregate, equal the remaining outstanding principal balance of the Term Loans; provided, that the last such installment shall be in the amount necessary to repay in full the unpaid principal amount of the Term Loans; provided, further, for the avoidance of doubt, no installment shall be due during any period where the outstanding principal amount of the Term Loans has been repaid in full. The outstanding unpaid principal balance and all accrued and unpaid interest under the Term Loans shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under the Term Loans shall constitute Obligations.

2.3

Borrowing Procedures and Settlements.

(a) Procedure for Borrowing. Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent. Such notice must be received by Agent no later than 11:00 a.m. (Texas time) on the Business Day that is three (3) Business Days prior to the requested Funding Date specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. At Agent’s election, in lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time. In such circumstances, Borrowers agree that any such telephonic notice will be confirmed in writing within 24 hours of the giving of such telephonic notice, but the failure to provide such written confirmation shall not affect the validity of the request.

(b) [Intentionally Omitted]

(i) Promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall notify the Lenders, not later than 2:00 p.m. (Texas time) on the Business Day that is three (3) Business Days prior to the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing. Each

Lender shall make the amount of such Lender’s Pro Rata Share of the requested Borrowing available to Agent in immediately available funds, to Agent’s Account, not later than 10:00 a.m. (Texas time) on the Funding Date applicable thereto. After Agent’s receipt of the proceeds of such Borrowing, Agent shall make the proceeds thereof available to Administrative Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Administrative Borrower’s Designated Account; provided, however, that, subject to the provisions of Section 2.3(i), Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Term Loan if Agent shall have actual knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the unused portion of the Term Loan Commitments.

(ii) Unless Agent receives notice from a Lender prior to 5:00 p.m. (Texas time) on the Business Day immediately preceding the Funding Date with respect to such Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Administrative Borrower the amount of that Lender’s Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds, Agent shall not be obligated to make such amount available to Borrowers. The failure of any Lender to make any Term Loan on any Funding Date shall not relieve any other Lender of any obligation hereunder to make its Term Loan on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the its Term Loan to be made by such other Lender on any Funding Date.

(iii) Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrowers to Agent for the Defaulting Lender’s benefit, and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payments to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender’s Term Loan was funded by the other members of the Lender Group) or, if so directed by Administrative Borrower and if no Default or Event of Default had occurred and is continuing (and to the extent such Defaulting Lender’s Term Loan was not funded by the Lender Group), retain same to be re-advanced to Borrower as if such Defaulting Lender had made such Term Loan to Borrowers. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrowers for the account of such Defaulting Lender the amount of all such payments received and retained by Agent for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a “Lender” and such Lender’s Commitment shall be deemed to be zero. This Section shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent, and Administrative Borrower shall have waived such Defaulting Lender’s default in writing, or (z) the Defaulting Lender makes its Pro Rata Share of the applicable Term Loan and pays to Agent

all amounts owing by Defaulting Lender in respect thereof. The operation of this Section shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder, or to relieve or excuse the performance by Borrowers of their duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Administrative Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder, and agrees to execute and deliver a completed form of Assignment and Acceptance in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations without any premium or penalty of any kind whatsoever; provided, however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups’ or Borrowers’ rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund.

(d) [Intentionally Omitted]

(e) Agent Advances.

(i) Agent hereby is authorized by Borrowers and the Lenders, from time to time in Agent’s sole discretion, (1) after the occurrence and during the continuance of a Default or an Event of Default, or (2) at any time that any of the other applicable conditions precedent set forth in Section 3 have not been satisfied, to make additional term loans to Borrowers on behalf of the Lenders that Agent, in its Permitted Discretion deems necessary or desirable (A) to preserve or protect the Collateral, or any portion thereof, (B) to enhance the likelihood of repayment of the Obligations, or (C) to pay any other amount chargeable to Borrowers pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section 10 (any of the term loans described in this Section 2.3(e) shall be referred to as “Agent Advances”). Each Agent Advance shall be deemed to be a portion of the Term Loans hereunder, except that (without the prior written consent of Agent) no such Agent Advance shall be eligible to be a LIBOR Rate Loan and all payments thereon shall be payable to Agent solely for its own account.

(ii) The Agent Advances shall be repayable on demand, secured by the Agent’s Liens granted to Agent under the Loan Documents, constitute Obligations hereunder, and bear interest at the rate applicable from time to time to portions of the Term Loans that are Base Rate Loans.

(f) [Intentionally Omitted]

(g) Notation. Agent shall record on its books the principal amount of the Term Loans owing to each Lender, including Agent Advances owing to Agent, and the

interests therein of each Lender, from time to time and such records shall, absent manifest error, conclusively be presumed to be correct and accurate. In addition, each Lender is authorized, at such Lender’s option, to note the date and amount of each payment or prepayment of principal of such Lender’s Term Loans in its books and records, including computer records.

(h) Lenders’ Failure to Perform. All Term Loans (other than Agent Advances) shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Term Loan (or other extension of credit) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder.

2.4

Payments.

(a) Payments by Borrowers.

(i) (i) Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent’s Account for the account of the Lender Group and shall be made in immediately available funds, no later than 2:00 p.m. (Texas time) on the date specified herein. Any payment received by Agent later than 2:00 p.m. (Texas time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day.

(ii) Unless Agent receives notice from Administrative Borrower prior to the date on which any payment is due to the Lenders that Borrowers will not make such payment in full as and when required, Agent may assume that Borrowers have made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrowers do not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid.

(b) Apportionment and Application.

(i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including agreements between Agent and individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations to which such payments relate held by each Lender) and payments of fees and expenses (other than fees or expenses that are for Agent’s separate account, after giving effect to any agreements between Agent and individual Lenders) shall be apportioned ratably

among the Lenders having a Pro Rata Share of the type of Commitment or Obligation to which a particular fee relates. All payments shall be remitted to Agent and all such payments, and all proceeds of Collateral received by Agent, shall be applied as follows:

(A) first, to pay any Lender Group Expenses then due to Agent under the Loan Documents, until paid in full,

(B) second, to pay any Lender Group Expenses then due to the Lenders under the Loan Documents, on a ratable basis, until paid in full,

(C) third, to pay any fees then due to Agent (for its separate accounts, after giving effect to any agreements between Agent and individual Lenders) under the Loan Documents until paid in full,

(D) fourth, to pay any fees then due to any or all of the Lenders (after giving effect to any agreements between Agent and individual Lenders) under the Loan Documents, on a ratable basis, until paid in full,

(E) fifth, to pay interest due in respect of all Agent Advances, until paid in full,

(F) sixth, ratably to pay interest due in respect of the Term Loans (other than portions of the Term Loans consisting of Agent Advances) until paid in full,

(G) seventh, to pay the principal of all Agent Advances until paid in full,

(H) eighth, ratably to pay all principal amounts then due and payable (other than as a result of an acceleration thereof) with respect to the Term Loans until paid in full,

(I) ninth, if an Event of Default has occurred and is continuing, to pay the outstanding principal balance of the Term Loans (in the inverse order of the maturity of the installments due thereunder) until the Term Loans are paid in full,

(J) tenth, if an Event of Default has occurred and is continuing, to pay any other Obligations, and

(K) eleventh, to Borrowers (to be wired to the Designated Account) or such other Person entitled thereto under applicable law.

(ii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive.

(iii) In each instance, so long as no Event of Default has occurred and is continuing, this Section 2.4(b) shall not apply to any payment made by Borrowers to Agent and specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement.

(iv) For purposes of the foregoing, “paid in full” means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not any of the foregoing would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding.

(v) In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern.

(c)

Mandatory Prepayments.

(i) Immediately upon any sale or disposition by Parent or any of its Subsidiaries of property or assets (other than sales or dispositions which qualify as Permitted Dispositions under clauses (b) and (c) of the definition of Permitted Dispositions), Borrowers shall prepay the Term Loans in an amount equal to 100% of the Net Cash Proceeds received by such Person in connection with such sales or dispositions. Nothing contained in this subclause (ii) shall permit Parent or any of its Subsidiaries to sell or otherwise dispose of any property or assets other than in accordance with Section 7.4.

(ii) Immediately upon the receipt by Parent or any of its Subsidiaries of any Extraordinary Receipts, Borrowers shall prepay the Term Loans in an amount equal to 100% of such Extraordinary Receipts, net of any reasonable expenses incurred in collecting such Extraordinary Receipts.

(iii) Immediately upon (A) the issuance or incurrence by Parent or any of its Subsidiaries of any Indebtedness (other than Indebtedness permitted to be incurred pursuant to Section 7.1), or (B) the sale or issuance by Borrower or any of its Subsidiaries of any shares of its Stock, Borrower shall prepay the Term Loans in an amount equal to 100% of the Net Cash Proceeds received by Parent or its Subsidiaries in connection with such sale, issuance, or incurrence. The provisions of this subsection (iv) shall not be deemed to be implied consent to any such sale, issuance, or incurrence otherwise prohibited by the terms and conditions of this Agreement.

(iv) Each prepayment of the Term Loans pursuant to Section 2.4(c) shall be accompanied by the payment of interest accrued to the date of such prepayment on the amount prepaid, and shall be applied against the remaining installments of principal of the Term Loans in the inverse order of maturity.

2.5

[Intentionally Omitted].

2.6

Interest Rates: Rates, Payments, and Calculations.

(a) Interest Rates. Except as provided in clause (c) below, all Obligations that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows (i) if the relevant Obligation is a portion of the Term Loans that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Term Loan Margin and (ii) if the relevant Obligation is a portion of the Term Loans that is a Base Rate Loan, at a per annum rate equal to the Base Rate plus the Base Rate Term Loan Margin.

(b) [Intentionally Omitted]

(c) Default Rate. Upon the occurrence and during the continuation of an Event of Default (and at the election of Agent or the Required Lenders), all Obligations that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 3 percentage points above the per annum rate otherwise applicable hereunder.

(d) Payment. Except as provided to the contrary in Section 2.11, interest, and all other fees payable hereunder shall be due and payable, in arrears, on the first day of each month at any time that Obligations or Commitments are outstanding. Borrowers hereby authorize Agent, from time to time, without prior notice to Borrowers, to charge all interest and fees (when due and payable), all Lender Group Expenses (as and when incurred), all fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document (including the amounts due and payable with respect to the Term Loans) to Borrowers’ Loan Account, which amounts thereafter shall constitute Term Loans hereunder and shall accrue interest at the rate then applicable to the Term Loans hereunder. Any interest not paid when due shall be compounded by being charged to Borrowers’ Loan Account and shall thereafter accrue interest at the rate then applicable to the Term Loans that are Base Rate Loans hereunder.

(e) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate.

(f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrowers and the

Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrowers in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess.

2.7

Cash Management.

(a) Administrative Borrower shall establish and maintain cash management services of a type and on terms satisfactory to Agent at one or more of the banks set forth on Schedule 2.7(a) (each, a “Cash Management Bank”), and deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all Collections received by Administrative Borrower into a bank account in Administrative Borrower’s name (a “Cash Management Account”) at one of the Cash Management Banks.

(b) Each Cash Management Bank shall establish and maintain Cash Management Agreements with Agent and Borrower, in form and substance acceptable to Agent. Each such Cash Management Agreement shall provide, among other things, that (i) all items of payment deposited in such Cash Management Account and proceeds thereof are held by such Cash Management Bank as agent or bailee-in-possession for Lender, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, and (iii) from and after the giving of notice by Agent to the Cash Management Bank, the Cash Management Bank shall immediately comply with any instructions originated by Agent directing the disposition of the funds in the Cash Management Account without further consent of Parent or any of its Subsidiaries. Agent agrees that it will not give such notice to the Cash Management Bank unless an Event of Default has occurred and is continuing. Except as set forth in Section 2.7(c), no arrangement contemplated by this Section 2.7 shall be modified without the prior written consent of Agent. Upon the occurrence and during the continuance of an Event of Default, Agent may elect to notify the Cash Management Bank (without notice to any Borrower, to any Guarantor or to any other Person) to remit all amounts received in the Cash Management Account to the Agent’s Account.

(c) At any time that the balance in any Deposit Account or Securities Account of Parent or any of its Subsidiaries (other a Deposit Account or Securities Account that is subject to a Control Agreement) exceeds the amount set forth on Schedule 2.7(c) with respect to such Subsidiary of Parent, Administrative Borrower shall immediately (i) transfer or cause to be transferred into the Cash Management Account all such excess amounts in

such Deposit Account or Securities Account, or (ii) deliver a Control Agreement to Agent with respect to such Deposit Account or Securities Account.

(d) So long as no Default or Event of Default has occurred and is continuing, Administrative Borrower may amend Schedule 2.7(a) to add or replace a Cash Management Bank or Cash Management Account; provided, however, that (i) such prospective Cash Management Bank shall be reasonably satisfactory to Agent, and (ii) prior to the time of the opening of such Cash Management Account, Parent (or its Subsidiary, as applicable) and such prospective Cash Management Bank shall have executed and delivered to Agent a Cash Management Agreement. Parent (or its Subsidiaries, as applicable) shall close any of its Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 30 days of notice from Agent that the creditworthiness of any Cash Management Bank is no longer acceptable in Agent’s reasonable judgment, or as promptly as practicable and in any event within 60 days of notice from Agent that the operating performance, funds transfer, or availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or Agent’s liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Agent’s reasonable judgment.

(e) The Cash Management Accounts shall be cash collateral accounts subject to a Control Agreement, with all cash, checks and similar items of payment in such accounts securing payment of the Obligations, and in which each Borrower hereby grants a Lien to Agent.

2.8 Crediting Payments. The receipt of any payment item by Agent (whether from transfers to Agent by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Agent’s Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is received into the Agent’s Account on a Business Day on or before 11:00 a.m. (Texas time). If any payment item is received into the Agent’s Account on a non-Business Day or after 11:00 a.m. (Texas time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day.

2.9 Designated Account. Agent is authorized to make the Term Loans under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person or, without instructions, if pursuant to Section 2.6(d). Administrative Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Term Loans requested by Borrowers and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Administrative Borrower, any Agent Advance or the Term Loans requested by Borrowers and made by Agent or the Lenders hereunder shall be made to the Designated Account.

2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrowers (the “Loan Account”) on which Borrowers will be charged with the Term Loans (including Agent Advances) made by Agent or the Lenders to Borrowers or for Borrowers’ account and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest, fees and expenses, and Lender Group Expenses. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Agent from Borrowers or for Borrowers’ account, including all amounts received in the Agent’s Account from any Cash Management Bank. Agent shall render statements regarding the Loan Account to Administrative Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements, absent manifest error, shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and the Lender Group unless, within 30 days after receipt thereof by Administrative Borrower, Administrative Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements.

2.11 Fees. Borrowers shall pay to Agent the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter) and shall be apportioned among the Lenders in accordance with the terms of agreements between Agent and individual Lenders:

(a) Fee Letter Fees. As and when due and payable under the terms of the Fee Letter, the fees set forth in the Fee Letter, and

(b) Audit, Appraisal, and Valuation Charges. Audit, appraisal, and valuation fees and charges as follows (i) a fee of $850 per day, per auditor, plus out-of-pocket expenses for each financial audit of a Borrower performed by personnel employed by Agent, (ii) if implemented, a fee of $850 per day, per applicable individual, plus out of pocket expenses for the establishment of electronic collateral reporting systems, (iii) a fee of $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral, or any portion thereof, performed by personnel employed by Agent, and (iv) the actual charges paid or incurred by Agent if it elects to employ the services of one or more third Persons to perform financial audits of Borrowers or their Subsidiaries, to establish electronic collateral reporting systems, to appraise the Collateral, or any portion thereof, or to assess Borrowers’ and their Subsidiaries’ business valuation; provided, however, that so long as no Default or Event of Default has occurred and is continuing, Borrowers shall not be required to reimburse Agent for more than two (2) such financial audits or appraisals and two (2) such business valuations during any fiscal year of Parent.

2.12

[Intentionally Omitted]

2.13

LIBOR Option.

(a) Interest and Interest Payment Dates. In lieu of having interest charged at the rate based upon the Base Rate, Borrowers shall have the option (the “LIBOR Option”) to have interest on all or a portion of the Term Loans be charged at a rate of interest based upon the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable in accordance with Section 2.6(d). On the last day of each applicable Interest Period, unless Administrative Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrowers no longer shall have the option to request that the Term Loans bear interest at a rate based upon the LIBOR Rate and Agent shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder.

(b) LIBOR Election.

(i) Administrative Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Agent prior to 11:00 a.m. (Texas time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the “LIBOR Deadline”). Notice of Administrative Borrower’s election of the LIBOR Option for a permitted portion of the Term Loans and an Interest Period pursuant to this Section shall be made by delivery to Agent of a LIBOR Notice received by Agent before the LIBOR Deadline, or by telephonic notice received by Agent before the LIBOR Deadline (to be confirmed by delivery to Agent of a LIBOR Notice received by Agent prior to 5:00 p.m. (Texas time) on the same day). Promptly upon its receipt of each such LIBOR Notice, Agent shall provide a copy thereof to each of the Lenders.

(ii) Each LIBOR Notice shall be irrevocable and binding on Borrowers. In connection with each LIBOR Rate Loan, each Borrower shall indemnify, defend, and hold Agent and the Lenders harmless against any loss, cost, or expense incurred by Agent or any Lender as a result of (a) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, “Funding Losses”). Funding Losses shall, with respect to Agent or any Lender, be deemed to equal the amount determined by Agent or such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period therefor), minus (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which Agent or such Lender would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and

period in the London interbank market. A certificate of Agent or a Lender delivered to Administrative Borrower setting forth any amount or amounts that Agent or such Lender is entitled to receive pursuant to this Section 2.13 shall be conclusive absent manifest error.

(iii) Borrowers shall have not more than 5 LIBOR Rate Loans in effect at any given time. Borrowers only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof.

(c) Prepayments. Borrowers may prepay LIBOR Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are prepaid on any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Agent of proceeds of Borrowers’ and their Subsidiaries’ Collections in accordance with Section 2.4(b) or for any other reason, including early termination of the term of this Agreement or acceleration of all or any portion of the Obligations pursuant to the terms hereof, each Borrower shall indemnify, defend, and hold Agent and the Lenders and their Participants harmless against any and all Funding Losses in accordance with clause (b)(ii) above.

(d) Special Provisions Applicable to LIBOR Rate.

(i) The LIBOR Rate may be adjusted by Agent with respect to any Lender on a prospective basis to take into account any additional or increased costs to such Lender of maintaining or obtaining any eurodollar deposits or increased costs, in each case, due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, the affected Lender shall give Administrative Borrower and Agent notice of such a determination and adjustment and Agent promptly shall transmit the notice to each other Lender and, upon its receipt of the notice from the affected Lender, Administrative Borrower may, by notice to such affected Lender (y) require such Lender to furnish to Administrative Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above).

(ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of any Lender, make it unlawful or impractical for such Lender to fund or maintain LIBOR Rate Loans or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, such Lender shall give notice of such changed circumstances to Agent and Administrative Borrower and Agent promptly shall transmit the notice to each other Lender and (y) in the case of any LIBOR Rate Loans of such Lender that are outstanding, the date

specified in such Lender’s notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of such Lender thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrowers shall not be entitled to elect the LIBOR Option until such Lender determines that it would no longer be unlawful or impractical to do so.

(e) No Requirement of Matched Funding. Anything to the contrary contained herein notwithstanding, neither Agent, nor any Lender, nor any of their Participants, is required actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if each Lender or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans.

2.14 Capital Requirements. If, after the date hereof, any Lender determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by such Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on such Lender’s or such holding company’s capital as a consequence of such Lender’s Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender’s or such holding company’s then existing policies with respect to capital adequacy and assuming the full utilization of such entity’s capital) by any amount deemed by such Lender to be material, then such Lender may notify Administrative Borrower and Agent thereof. Following receipt of such notice, Borrowers agree to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender’s calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, such Lender may use any reasonable averaging and attribution methods. The foregoing to the contrary notwithstanding, no Lender shall make any such demand for payment if such demand is not generally consistent with such Lender’s treatment of similarly situated customers of such Lender whose transactions with such Lender are similarly affected by the change in circumstances giving rise to such demand for payment.

2.15

Joint and Several Liability of Borrowers.

(a) Each Borrower is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by the Lender Group under this Agreement, for the mutual benefit, directly and indirectly, of each Borrower and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Obligations.

(b) Each Borrower, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 2.15), it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each Borrower without preferences or distinction among them.

(c) If and to the extent that any Borrower shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Obligation.

(d) The Obligations of each Borrower under the provisions of this Section 2.15 constitute the absolute and unconditional, full recourse Obligations of each Borrower enforceable against each Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever.

(e) Except as otherwise expressly provided in this Agreement, each Borrower hereby waives notice of acceptance of its joint and several liability, notice of any Term Loan issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by Agent or Lenders under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement (except as otherwise provided in this Agreement). Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Agent or Lenders at any time or times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by Agent or Lenders in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any other action or delay in acting or failure to act on the part of any Agent or Lender with respect to the failure by any Borrower to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.15 afford grounds for terminating, discharging or relieving any Borrower, in whole or in part, from any of its Obligations under this Section 2.15, it being the intention of each Borrower that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of each Borrower under this Section 2.15 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each Borrower under this Section

2.15 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or any Agent or Lender.

(f) Each Borrower represents and warrants to Agent and Lenders that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower further represents and warrants to Agent and Lenders that such Borrower has read and understands the terms and conditions of the Loan Documents. Each Borrower hereby covenants that such Borrower will continue to keep informed of Borrowers’ financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations.

(g) Each Borrower waives all rights and defenses arising out of an election of remedies by Agent or any Lender, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Agent’s or such Lender’s rights of subrogation and reimbursement against such Borrower by the operation of Section 580(d) of the California Code of Civil Procedure or otherwise:

(h) Each Borrower waives all rights and defenses that such Borrower may have because the Obligations are secured by Real Property. This means, among other things:

(i) Agent and Lenders may collect from such Borrower without first foreclosing on any Collateral pledged by Borrowers.

(ii) If Agent or any Lender forecloses on any Real Property pledged by Borrowers:

(A) The amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price.

(B) Agent and Lenders may collect from such Borrower even if Agent or Lenders, by foreclosing on the Real Property Collateral, has destroyed any right such Borrower may have to collect from the other Borrowers.

This is an unconditional and irrevocable waiver of any rights and defenses such Borrower may have because the Obligations are secured by Real Property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure.

(i) The provisions of this Section 2.15 are made for the benefit of Agent, Lenders and their respective successors and assigns, and may be enforced by it or them from time to time against any or all Borrowers as often as occasion therefor may arise and without requirement on the part of any such Agent, Lender, successor or assign first to marshal any

of its or their claims or to exercise any of its or their rights against any Borrower or to exhaust any remedies available to it or them against any Borrower or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this Section 2.15 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by any Agent or Lender upon the insolvency, bankruptcy or reorganization of any Borrower, or otherwise, the provisions of this Section 2.15 will forthwith be reinstated in effect, as though such payment had not been made.

(j) Each Borrower hereby agrees that it will not enforce any of its rights of contribution or subrogation against any other Borrower with respect to any liability incurred by it hereunder or under any of the other Loan Documents, any payments made by it to Agent or Lenders with respect to any of the Obligations or any collateral security therefor until such time as all of the Obligations have been paid in full in cash. Any claim which any Borrower may have against any other Borrower with respect to any payments to any Agent or Lender hereunder or under any other Loan Documents are hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made to any other Borrower therefor.

(k) Each Borrower hereby agrees that, after the occurrence and during the continuance of any Default or Event of Default, the payment of any amounts due with respect to the indebtedness owing by any Borrower to any other Borrower is hereby subordinated to the prior payment in full in cash of the Obligations. Each Borrower hereby agrees that after the occurrence and during the continuance of any Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any indebtedness of any other Borrower owing to such Borrower until the Obligations shall have been paid in full in cash. If, notwithstanding the foregoing sentence, such Borrower shall collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such Borrower as trustee for Agent, and such Borrower shall deliver any such amounts to Agent for application to the Obligations in accordance with Section 2.4(b).

2.16 Registration of Notes. Agent, acting solely for this purpose as a non-fiduciary agent for Borrowers, agrees to record each Term Loan on the Register referred to in Section 14.1(h). Each Term Loan recorded on the Register may not be evidenced by promissory notes other than Registered Notes (as defined below). Upon the registration of each Term Loan, each Borrower agrees, at the request of any Lender, to execute and deliver to such Lender a promissory note, in conformity with the terms of this Agreement, in registered form to evidence such Registered Loan, in form and substance reasonably

satisfactory to such Lender, and registered as provided in Section 14.1(h) (a “Registered Note”), payable to the order of such Lender and otherwise duly completed. Once recorded on the Register (or comparable register), each Term Loan may not be removed from the Register (or comparable register) so long as it or they remain outstanding, and a Registered Note may not be exchanged for a promissory note that is not a Registered Note.

2.17 Securitization. Each Borrower hereby acknowledges that each Lender with a Term Loan Commitment and each of its Affiliates and Related Funds may sell or securitize the Term Loans (a “Securitization”) through the pledge of the Term Loans as collateral security for loans to such Lender or its Affiliates or Related Funds or through the sale of the Term Loans or the issuance of direct or indirect interests in the Term Loans, which loans to such Lender or its Affiliates or Related Funds or direct or indirect interests will be rated by Moody’s, S&P or one or more other rating agencies (the “Rating Agencies”). Borrowers agree to cooperate with such Lenders and their Affiliates and Related Funds to effect the Securitization by (a) executing such additional documents, as reasonably requested by such Lenders in connection with the Securitization, provided that (i) any such additional documentation does not, in the aggregate, impose additional costs or liabilities on Borrowers (other than costs or liabilities of a de minimis nature), and (ii) any such additional documentation does not, in the aggregate, adversely affect the rights (other than affects of a de minimis nature), or increase the obligations, of Borrowers under the Loan Documents (other than increases of a de minimis nature) or change or affect in a manner adverse to Borrowers the financial terms of the Term Loans (other than changes or affects of a de minimis nature) and (b) providing such written information as may be reasonably requested by such Lenders in connection with the rating of the Term Loans or the Securitization.

3.	CONDITIONS; TERM OF AGREEMENT.

3.1 Conditions Precedent to the Initial Extension of Credit. The obligation of each Lender to make its initial extension of credit provided for hereunder, is subject to the fulfillment, to the satisfaction of Agent and each Lender (the making of such initial extension of credit by a Lender being conclusively deemed to be its satisfaction or waiver of the following), of each of the following conditions precedent:

(a) the Closing Date shall occur on or before May 11, 2005;

(b) Agent shall have received a Filing Authorization Letter, duly executed by each Borrower and each Guarantor, together with appropriate financing statements duly filed in such office or offices as may be necessary or, in the opinion of Agent, desirable to perfect the Agent’s Liens in and to the Collateral, and Agent shall have received searches reflecting the filing of all such financing statements;

(c) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect:

(i) the Canadian Guarantor Security Agreement,

(ii) the Canadian Guaranty,

(iii) the Cash Management Agreements,

(iv) the Disbursement Letter,

(v) the Fee Letter,

(vi) the Guarantor Security Agreement,

(vii) the Guaranty,

(viii) the Intercompany Subordination Agreement,

(ix) the Pay-Off Letters, together with termination statements and other documentation evidencing the termination by Existing Lenders of their Liens in and to the properties and assets of Borrowers and their Subsidiaries,

(x) the Stock Pledge Agreement, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank,

(xi) the Subordination Agreement, and

(d) Agent shall have received a certificate from the Secretary of each Borrower (i) attesting to the resolutions of such Borrower’s Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Borrower is a party, (ii) authorizing specific officers of such Borrower to execute the same, and (iii) attesting to the incumbency and signatures of such specific officers of such Borrower;

(e) Agent shall have received copies of each Borrower’s Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower;

(f) Agent shall have received a certificate of status with respect to each Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction;

(g) Agent shall have received certificates of status with respect to each Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Borrower is in good standing in such jurisdictions;

(h) Agent shall have received a certificate from the Secretary of each Guarantor (i) attesting to the resolutions of such Guarantor’s board of directors authorizing its execution, delivery, and performance of the Loan Documents to which such Guarantor is a party, (ii) authorizing specific officers of such Guarantor to execute the same, and (iii) attesting to the incumbency and signatures of such specific officers of such Guarantor;

(i) Agent shall have received copies of each Guarantor’s Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Guarantor;

(j) Agent shall have received a certificate of status with respect to each Guarantor, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Guarantor, which certificate shall indicate that such Guarantor is in good standing in such jurisdiction;

(k) Agent shall have received certificates of status with respect to each Guarantor, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Guarantor) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Guarantor is in good standing in such jurisdictions;

(l) [Intentionally Omitted]

(m) [Intentionally Omitted]

(n) Agent shall have received opinions of Borrowers’ counsel in form and substance satisfactory to Agent;

(o) Agent shall have received satisfactory evidence (including a certificate of the chief financial officer of Parent) that all tax returns required to be filed by Borrowers and their Subsidiaries have been timely filed (or if not filed, extensions for such tax returns have been filed) and all taxes upon Borrowers and their Subsidiaries or their properties, assets, income, and franchises (including Real Property taxes, sales taxes, and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest;

(p) Borrowers shall have the Required Liquidity after the payment of all fees and expenses required to be paid by Borrowers on the Closing Date under this Agreement or the other Loan Documents, and after giving effect to the payments and transactions contemplated by this Agreement;

(q) Agent shall have completed its business, legal, and collateral due diligence, the results of which shall be satisfactory to Agent;

(r) Agent shall have received completed reference checks with respect to Borrowers’ senior management, the results of which are satisfactory to Agent in its sole discretion;

(s) Agent shall have received Borrowers’ Closing Date Business Plan;

(t) Borrowers shall have paid all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement;

(u) Agent shall have received copies of each of the Acquisition Documents, the Management Agreements, the Employment Agreements, and the Indebtedness Documents, together with a certificate of the Secretary of Parent certifying each such document as being a true, correct, and complete copy thereof;

(v) Borrowers and each of their Subsidiaries shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the execution and delivery by Borrowers or their Subsidiaries of the Loan Document or with the consummation of the transactions contemplated thereby; and

(w) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent.

3.2 Conditions Subsequent to the Initial Extension of Credit. The obligation of the Lender Group (or any member thereof) to continue to make the Term Loans (or otherwise extend credit hereunder) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions subsequent set forth below (the failure by Borrowers to so perform or cause to be performed constituting an Event of Default):

(a) within 10 days of the Closing Date, deliver to Agent opinions of counsel to Parent and its Subsidiaries which is reasonably satisfactory to Agent with respect to (i) the due incorporation, valid existence and good standing of Georgia Surgical, the power and authority of Georgia Surgical to execute the Loan Documents to which it is a party, the execution of such Loan Documents by Georgia Surgical, the perfection of the Liens granted by Georgia Surgical to Agent, the lack of any conflict between the Loan Documents executed by Georgia Surgical with any of its Governing Documents, and any other matters with respect to Georgia Surgical as may be reasonably requested by Agent (each such opinion being provided under the laws of the state of Georgia), in form and substance satisfactory to Agent, and (ii) with respect to each Borrower and each Guarantor, such opinions as Agent shall require with respect to Regulations T, U and X of the Board of Governors of the Federal Reserve System of the United States, in form and substance satisfactory to Agent;

(b) within 30 days of the Closing Date, Agent shall have received such evidence as it shall require to evidence the termination of the following Uniform Commercial Code financing statements: (i) the initial financing statement filed by Fleet National Bank

with the Main Secretary of State on or about March 14, 2003, identified as initial filing number 2030001583778-94 and naming Bejamin Zolper, M.D., LLC as the debtor, (ii) the initial financing statement filed by CIT Financial USA Inc. in Barrow County, Georgia with the Georgia Cooperative Authority on or about June 29, 2005, identified as initial filing number 007-2000-007840 and naming Georgia Pain Physicians, P.C. as the debtor, and (iii) any and all filings in respect of tax liens or other judgments naming Christopher E. Cenac M.D. as the debtor;

(c) within 30 days of the Closing Date, Parent shall cause the Governing Documents of Parent or any of its Subsidiaries that provide for preemptive rights for such Person’s shareholders to be amended to eliminate any such provision, in each case in form and substance satisfactory to Agent;

(d) Parent and Borrowers shall use their best efforts to deliver to Agent within 60 days of the Closing Date Collateral Access Agreements with respect to the location of Parent’s chief executive office, as well as each of the Required Locations; and

(e) within 60 days of the Closing Date, deliver to Agent certificates of insurance, together with certified copies of the policies of insurance, together with the endorsements thereto, in each case as are required by Section 6.8, the form and substance of each of which shall be satisfactory to Agent and its counsel.

3.3 Conditions Precedent to all Extensions of Credit. The obligation of the Lender Group (or any member thereof) to make the Term Loans hereunder at any time (or to extend any other credit hereunder) shall be subject to the following conditions precedent:

(a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date);

(b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof;

(c) no injunction, writ, restraining order, or other order of any nature restricting or prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against any Borrower, Agent, any Lender, or any of their Affiliates; and

(d) no Material Adverse Change shall have occurred.

3.4 Term. This Agreement shall continue in full force and effect for a term ending on May 10, 2009 (the “Maturity Date”). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default.

3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrowers or their Subsidiaries of their duties, Obligations, or covenants hereunder or under any other Loan Document and the Agent’s Liens in the Collateral shall remain in effect until all Obligations have been paid in full and the Lender Group’s obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been paid in full and the Lender Group’s obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will, at Borrowers’ sole expense, execute and deliver any termination statements, lien releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Agent’s Liens and all notices of security interests and liens previously filed by Agent with respect to the Obligations.

3.6 Early Termination by Borrowers. Borrowers have the option, at any time upon 30 days prior written notice by Administrative Borrower to Agent, to terminate this Agreement by paying to Agent, in cash, the Obligations, in full, together with the Applicable Prepayment Premium (to be allocated based upon agreements between Agent and individual Lenders). If Administrative Borrower has sent a notice of termination pursuant to the provisions of this Section, then the Commitments shall terminate and Borrowers shall be obligated to repay the Obligations, in full, together with the Applicable Prepayment Premium, on the date set forth as the date of termination of this Agreement in such notice. In the event of the termination of this Agreement and repayment of the Obligations at any time prior to the Maturity Date, for any other reason, including (a) termination upon the election of the Required Lenders to terminate after the occurrence and during the continuation of an Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the Collateral in any Insolvency Proceeding, or (d) restructure, reorganization or compromise of the Obligations by the confirmation of a plan of reorganization or any other plan of compromise, restructure, or arrangement in any Insolvency Proceeding, then, in view of the impracticability and extreme difficulty of ascertaining the actual amount of damages to the Lender Group or profits lost by the Lender Group as a result of such early termination, and by mutual agreement of the parties as to a reasonable estimation and calculation of the lost profits or damages of the Lender Group, Borrowers shall pay the Applicable Prepayment Premium to Agent (to be allocated based upon agreements between Agent and individual Lenders), measured as of the date of such termination.

4.	CREATION OF SECURITY INTEREST.

4.1 Grant of Security Interest. Each Borrower hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Borrower Collateral in order to secure prompt repayment of any and all of the Obligations in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by Borrowers of each of their covenants and duties under the Loan Documents. The Agent’s Liens in and

to the Borrower Collateral shall attach to all Borrower Collateral without further act on the part of Agent or Borrowers. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrowers and their Subsidiaries have no authority, express or implied, to dispose of any item or portion of the Collateral.

4.2 Negotiable Collateral. In the event that any Borrower Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that Agent determines that perfection or priority of Agent’s security interest is dependent on or enhanced by possession, the applicable Borrower, promptly upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent.

4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent’s designee may (a) notify Account Debtors of Borrowers that Borrowers’ Accounts, chattel paper, or General Intangibles have been assigned to Agent or that Agent has a security interest therein, or (b) collect Borrowers’ Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Upon the occurrence and during the continuance of and Event of Default, each Borrower agrees that it will hold in trust for the Lender Group, as the Lender Group’s trustee, any of its or its Subsidiaries’ Collections that it receives and immediately will deliver such Collections to Agent or a Cash Management Bank in their original form as received by such Borrower or its Subsidiaries (except for those amounts required by mandatory provisions of applicable law or by a Governmental Authority to be retained by such Borrower).

4.4 Filing of Financing Statements; Commercial Tort Claims; Delivery of Additional Documentation Required.

(a) Borrowers authorize Agent to file any financing statement necessary or desirable to effectuate the transactions contemplated by the Loan Documents, and any continuation statement or amendment with respect thereto, in any appropriate filing office without the signature of Borrowers where permitted by applicable law. Borrowers hereby ratify the filing of any financing statement filed without the signature of Borrowers prior to the date hereof.

(b) If Borrowers or their Subsidiaries acquire any commercial tort claims after the date hereof, Borrowers shall promptly (but in any event within 3 Business Days after such acquisition) deliver to Agent a written description of such commercial tort claim and shall deliver a written agreement, in form and substance satisfactory to Agent, pursuant to which such Borrower or its Subsidiary, as applicable, shall grant a perfected security interest in all of its right, title and interest in and to such commercial tort claim to Agent, as security for the Obligations (a “Commercial Tort Claim Assignment”).

(c) At any time upon the request of Agent, Borrowers shall execute or deliver to Agent and shall cause their Subsidiaries to execute or deliver to Agent any and all financing statements, original financing statements in lieu of continuation statements,

amendments to financing statements, fixture filings, security agreements, pledges, assignments, Commercial Tort Claim Assignments, endorsements of certificates of title, and all other documents (collectively, the “Additional Documents”) that Agent may request in its Permitted Discretion, in form and substance satisfactory to Agent, to create, perfect, and continue perfected or to better perfect the Agent’s Liens in the assets of Borrowers and their Subsidiaries (whether now owned or hereafter arising or acquired, tangible or intangible, real or personal), to create and perfect Liens in favor of Agent in any owned Real Property acquired after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, each Borrower authorizes Agent to execute any such Additional Documents in the applicable Borrower’s name and authorizes Agent to file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Agent shall require, Borrowers shall (i) provide Agent with a report of all new material patentable, copyrightable, or trademarkable materials acquired or generated by any Borrower or its Subsidiaries during the prior period, (ii) cause all material patents, copyrights, and trademarks acquired or generated by Borrowers or their Subsidiaries that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of such Borrower’s or such Subsidiary’s ownership thereof, and (iii) cause to be prepared, executed, and delivered to Agent supplemental schedules to the applicable Loan Documents to identify such patents, copyrights, and trademarks as being subject to the security interests created thereunder; provided, however, that none of Borrowers or their Subsidiaries shall register with the U.S. Copyright Office any unregistered copyrights (whether in existence on the Closing Date or thereafter acquired, arising, or developed) unless (i) the applicable Person provides Agent with written notice of its intent to register such copyrights not less than 30 days prior to the date of the proposed registration, and (ii) prior to such registration, the applicable Person executes and delivers to Agent a copyright security agreement in form and substance satisfactory to Agent, supplemental schedules to any existing copyright security agreement, or such other documentation as Agent reasonably deems necessary in order to perfect and continue perfected Agent’s Liens on such copyrights following such registration.

4.5 Power of Attorney. Each Borrower hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent’s officers, employees, or agents designated by Agent) as such Borrower’s true and lawful attorney, with power to (a) if such Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of such Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign such Borrower’s name on any invoice or bill of lading relating to the Borrower Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Borrowers’ or their Subsidiaries’ Accounts, (d) endorse such Borrower’s name on any of its payment items (including all of its Collections) that may come into the Lender Group’s possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Borrower’s policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of

Default has occurred and is continuing, settle and adjust disputes and claims respecting Borrowers’ or their Subsidiaries’ Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as each Borrower’s attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group’s obligations to extend credit hereunder are terminated.

4.6 Right to Inspect. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect the Books and make copies or abstracts thereof and to check, test, and appraise the Collateral, or any portion thereof, in order to verify Borrowers’ and their Subsidiaries’ financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral.

4.7 Control Agreements. Borrowers agree that they will and will cause their Subsidiaries to take any or all reasonable steps in order for Agent to obtain control in accordance with Sections 8-106, 9-104, 9-105, 9-106, and 9-107 of the Code with respect to (subject to the proviso contained in Section 7.12) all of their Securities Accounts, Deposit Accounts, electronic chattel paper, Investment Property, and letter-of-credit rights. Upon the occurrence and during the continuance of a Default or Event of Default, Agent may notify any bank or securities intermediary to liquidate the applicable Deposit Account or Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Agent’s Account.

4.8 Governmental Receivables. Notwithstanding any provision in the Loan Documents to the contrary, neither the Agent nor any Lender shall have any rights (whether by power of attorney or other provision of any Loan Document) with respect to any Governmental Receivables or any Deposit Account into which any proceeds of any Governmental Receivables are initially deposited, solely to the extent of such proceeds of Governmental Receivables (it being understood that the foregoing shall not limit the rights of the Agent or the Lenders with respect to proceeds of Governmental Receivables which have been transferred from the Deposit Account into which such Governmental Receivables were initially deposited to any other Deposit Account (including without limitation, any Cash Management Account)).

5.	REPRESENTATIONS AND WARRANTIES.

In order to induce the Lender Group to enter into this Agreement, Parent and each Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Term Loan (or other extension of credit) made thereafter, as though made on and as of the date of such Term Loan (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement:

5.1 No Encumbrances. Parent, each Borrower and their respective Subsidiaries each have good and indefeasible title to, or a valid leasehold interest in, their personal property assets and good and marketable title to, or a valid leasehold interest in, their Real Property, in each case, free and clear of Liens except for Permitted Liens.

5.2 [Intentionally Omitted].

5.3 [Intentionally Omitted].

5.4 Equipment. All of the Equipment of Parent, Borrowers and their respective Subsidiaries is used or held for use in their business and is fit for such purposes, ordinary wear and tear excepted.

5.5 Location of Equipment. The Equipment of Parent, Borrowers and their respective Subsidiaries are not stored with a bailee, warehouseman, or similar party and are located only at, or in-transit between, the locations identified on Schedule 5.5 (as such Schedule may be updated pursuant to Section 6.9).

5.6 [Intentionally Omitted].

5.7 State of Incorporation; Location of Chief Executive Office; Organizational Identification Number; Commercial Tort Claims.

(a) The jurisdiction of organization of Parent, each Borrower and each of their respective Subsidiaries is set forth on Schedule 5.7(a).

(b) The chief executive office of Parent, each Borrower and each of their respective Subsidiaries is located at the address indicated on Schedule 5.7(b) (as such Schedule may be updated pursuant to Section 6.9).

(c) Parent, each Borrower’s and each of their respective Subsidiaries’ organizational identification number, if any, are identified on Schedule 5.7(c).

(d) As of the Closing Date, Parent, Borrowers and their respective Subsidiaries do not hold any commercial tort claims, except as set forth on Schedule 5.7(d).

5.8 Due Organization and Qualification; Subsidiaries.

(a) Parent and each Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to result in a Material Adverse Change.

(b) Set forth on Schedule 5.8(b), is a complete and accurate description of the authorized capital Stock of Parent and each Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 5.8(b), there are no subscriptions, options, warrants, or calls relating to any shares of Parent’s and each Borrower’s capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. None of Parent or any Borrower is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock.

(c) Set forth on Schedule 5.8(c), is a complete and accurate list of Parent’s direct and indirect Subsidiaries (other than Borrowers), showing: (i) the jurisdiction of their organization, (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries, and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Parent. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable.

(d) Except as set forth on Schedule 5.8(c), there are no subscriptions, options, warrants, or calls relating to any shares of Parent’s Subsidiaries’ capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. None of Parent, any Borrower or any of their respective Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of Parent’s or any Borrower’s Subsidiaries’ capital Stock or any security convertible into or exchangeable for any such capital Stock.

5.9

Due Authorization; No Conflict.

(a) As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the other Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Borrower.

(b) As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the other Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to any Borrower, the Governing Documents of any Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on any Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of any Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of any Borrower’s interestholders or any approval or consent of any Person under any material contractual obligation of any Borrower, other than consents or approvals that have been obtained and that are still in force and effect.

(c) Other than the filing of financing statements, the execution, delivery, and performance by each Borrower of this Agreement and the other Loan Documents to which such Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect.

(d) As to each Borrower, this Agreement and the other Loan Documents to which such Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally.

(e) The Agent’s Liens are validly created, perfected, and first priority Liens, subject only to Permitted Liens.

(f) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Guarantor.

(g) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to such Guarantor, the Governing Documents of such Guarantor, or any order, judgment, or decree of any court or other Governmental Authority binding on such Guarantor, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of such Guarantor, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Guarantor, other than Permitted Liens, or (iv) require any approval of such Guarantor’s interestholders or any approval or consent of any Person under any material contractual obligation of such Guarantor, other than consents or approvals that have been obtained and that are still in force and effect.

(h) Other than the filing of financing statements, the execution, delivery, and performance by each Guarantor of the Loan Documents to which such Guarantor is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect.

(i) The Loan Documents to which each Guarantor is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Guarantor will be the legally valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally.

5.10 Litigation. Other than those matters disclosed on Schedule 5.10, and other than matters arising after the Closing Date that reasonably could not be expected to result in a Material Adverse Change, there are no actions, suits, or proceedings pending or, to the best knowledge of Parent and each Borrower, threatened against Parent, any Borrower or any of their respective Subsidiaries.

5.11 No Material Adverse Change. All financial statements relating to Borrowers and their Subsidiaries or Guarantors that have been delivered by Borrowers to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrowers’ and their Subsidiaries’ (or any Guarantor’s, as applicable) financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrowers and their Subsidiaries (or any Guarantor, as applicable) since the date of the latest financial statements submitted to Agent on or before the Closing Date.

5.12 Fraudulent Transfer.

(a) Parent and each of its Subsidiaries is Solvent.

(b) No transfer of property is being made by Parent or any of its Subsidiaries and no obligation is being incurred by Parent or any of its Subsidiaries in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Parent or any of its Subsidiaries.

5.13 Employee Benefits. None of Parent, Borrowers, any of their respective Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan.

5.14 Environmental Condition. Except as set forth on Schedule 5.14, (a) to Parent’s or Borrowers’ knowledge, none of Parent, Borrowers’ or their respective Subsidiaries’ properties or assets has ever been used by Parent, Borrowers, their respective Subsidiaries, or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transport was in violation, in any material respect, of applicable Environmental Law, (b) to Parent’s or Borrowers’ knowledge, none of Parent’s, Borrowers’ nor their respective Subsidiaries’ properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, (c) none of Parent, Borrowers nor any of their respective Subsidiaries have received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by Parent, Borrowers or their respective Subsidiaries, and (d) none of Parent, Borrowers nor any of their respective Subsidiaries have received a summons, citation, notice, or directive from the United States Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Parent, any Borrower or any Subsidiary of Parent or a Borrower resulting in the releasing or disposing of Hazardous Materials into the environment.

5.15 Brokerage Fees. Except as set forth on Schedule 5.15, Parent, Borrowers and their respective Subsidiaries have not utilized the services of any broker or finder in connection with obtaining financing from the Lender Group under this Agreement and no brokerage commission or finders fee is payable by Parent, Borrowers or their respective Subsidiaries in connection herewith.

5.16 Intellectual Property. Parent, each Borrower and each Subsidiary of Parent or a Borrower owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of its business as currently conducted, and attached hereto as Schedule 5.16 (as updated from time to time) is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which Parent, any Borrower or one of their respective Subsidiaries is the owner or is an exclusive licensee.

5.17 Leases. Parent, Borrowers and their respective Subsidiaries are in possession of all leased properties under all leases material to their business and to which they are parties or under which they are operating (which possession has not been interrupted, interfered with or otherwise disturbed (whether by an action by the owner of the leased premises to regain possession of such premises or otherwise)) and all of such leases are valid and subsisting and no material default by Parent, Borrowers or their respective Subsidiaries exists under any of them.

5.18 Deposit Accounts and Securities Accounts. Set forth on Schedule 5.18 is a listing of all of Parent’s, Borrowers’ and their respective Subsidiaries’ Deposit Accounts and Securities Accounts, including, with respect to each bank or securities intermediary (a) the name and address of such Person, and (b) the account numbers of the Deposit Accounts or Securities Accounts maintained with such Person.

5.19 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Parent, Borrowers or their respective Subsidiaries in writing to Agent or any Lender (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Parent, Borrowers or their respective Subsidiaries in writing to Agent or any Lender will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Closing Date Projections represent, and as of the date on which any other Projections are delivered to Agent, such additional Projections represent Borrowers’ good faith best estimate of Parent’s and its Subsidiaries’ future performance for the periods covered thereby.

5.20 Indebtedness. Set forth on Schedule 5.20 is a true and complete list of all Indebtedness of Parent or any of its Subsidiaries outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and describes the principal terms thereof.

6.	AFFIRMATIVE COVENANTS.

Parent and each Borrower covenants and agrees that, until termination of all of the Commitments and payment in full of the Obligations, Parent and Borrowers shall and shall cause each of their respective Subsidiaries to do all of the following:

6.1 Accounting System. Maintain a system of accounting that enables Parent and its Subsidiaries to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent.

6.2 Collateral Reporting. Provide Agent (and if so requested by Agent, with copies for each Lender) with the following documents at the following times in form satisfactory to Agent:

Monthly (not later

than the 10th day

of each month)

(a) a detailed list of all Medical PCs and new medical offices or laboratories opened or acquired by Parent or its Subsidiaries during such period,

(b) a detailed list of all Doctor Departures since the Closing Date, and

(c) a detailed report regarding Borrowers’ and their Subsidiaries’ cash and Cash Equivalents including an indication of which amounts constitute Qualified Cash, and

Upon request by

Agent

(d) such other reports as to the Collateral or the financial condition of Borrowers and their Subsidiaries, as Agent may reasonably request.

6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender:

(a) as soon as available, but in any event within 45 days after the end of each month during each of Parent’s fiscal years,

(i) an unaudited consolidated and consolidating balance sheet, income statement, and statement of cash flow covering Parent’s and its Subsidiaries’ operations during such period, and

(ii) a Compliance Certificate,

(b) as soon as available, but in any event within 90 days after the end of each of Parent’s fiscal years,

(i) consolidated and consolidating financial statements of Parent and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, (including any (A) ”going concern” or like qualification or exception, (B) qualification or exception as to the scope of such audit, or (C) qualification which relates to the treatment or classification of any item and which, as a condition to the removal of such qualification, would require an adjustment to such item, the effect of which would be to cause any noncompliance with the provisions of Section 7.18 or 8.14), by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants’ letter to management),

(ii) a certificate of such accountants addressed to Agent and the Lenders stating that such accountants do not have knowledge of the existence of any Default or Event of Default under Section 7.18 or 8.14, and

(iii) a Compliance Certificate,

(c) as soon as available, but in any event within 30 days prior to the start of each of Parent’s fiscal years, copies of Borrowers’ Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its Permitted Discretion, for the forthcoming 4 years, year by year, and for the forthcoming fiscal year, quarter by quarter, certified by the chief financial officer of Parent as being such officer’s good faith estimate of the financial performance of Parent and its Subsidiaries during the period covered thereby,

(d) if and when filed by any Borrower,

(i) Form 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports,

(ii) any other filings made by any Borrower with the SEC,

(iii) copies of Borrowers’ federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and

(iv) any other information that is provided by Parent to its shareholders generally,

(e) promptly, but in any event within 5 Business Days after Parent or any Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrowers propose to take with respect thereto,

(f) promptly, but in any event within 1 Business Day after Parent has knowledge of any event or condition that would result in the obligation of Parent to make a payment to a Subordinated Lender which constitutes Liquidated Damages (as such term is defined in the Subordination Agreement),

(g) promptly after the commencement thereof, but in any event within 5 Business Days after the service of process with respect thereto on Parent or any Borrower or any Subsidiary of a Borrower, notice of all actions, suits, or proceedings brought by or against any Borrower or any Subsidiary of a Borrower before any Governmental Authority which, if determined adversely to such Borrower or such Subsidiary, reasonably could be expected to result in a Material Adverse Change, and

(h) upon the request of Agent, any other information reasonably requested relating to the financial condition of Parent, Borrowers or their respective Subsidiaries.

In addition, Parent agrees that no Subsidiary of Parent will have a fiscal year different from that of Parent. Borrowers agree to cooperate with Agent to allow Agent to consult with their independent certified public accountants if Agent reasonably requests the right to do so and that, in such connection, their independent certified public accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning Borrowers or their Subsidiaries that Agent reasonably may request.

6.4 Guarantor Reports. Cause each Guarantor to deliver its annual financial statements at the time when Parent provides its audited financial statements to Agent, but only to the extent such Guarantor’s financial statements are not consolidated with Parent’s financial statements, and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law.

6.5 [Intentionally Omitted].

6.6 Maintenance of Properties. Maintain and preserve all of their properties which are necessary or useful in the proper conduct to their business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder.

6.7 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Parent, Borrowers, their respective Subsidiaries, or any of their respective assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Parent and Borrowers will and will cause their respective Subsidiaries to make timely payment or deposit of all tax payments and withholding taxes required of them by applicable laws, including those laws

concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that Parent, the applicable Borrower or Subsidiary of Parent or a Borrower has made such payments or deposits.

6.8 Insurance.

(a) At Borrowers’ expense, maintain insurance respecting their and their Subsidiaries’ assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses in the same or similar geographic location. Parent and Borrowers also shall maintain business interruption, public liability, and malpractice insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrowers shall deliver copies of all such policies to Agent with an endorsement naming Agent as the sole (or if another Person is also required to be a loss payee, an additional) loss payee (under a satisfactory lender’s loss payable endorsement) or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever.

(b) Administrative Borrower shall give Agent prompt notice of any loss covered by such insurance. Agent shall have the exclusive right to adjust any losses claimed under any such insurance policies in excess of $250,000 (or in any amount after the occurrence and during the continuation of an Event of Default), without any liability to Borrowers whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations or shall be disbursed to Administrative Borrower under staged payment terms reasonably satisfactory to the Required Lenders for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction.

(c) Parent and Borrowers will not, and will not suffer or permit their respective Subsidiaries to, take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.8, unless Agent is included thereon as an additional insured or loss payee under a lender’s loss payable endorsement. Administrative Borrower promptly shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Agent.

6.9 Location of Equipment. Keep Parent’s Borrowers’ and their respective Subsidiaries’ Equipment only at the locations identified on Schedule 5.5 and their chief

executive offices only at the locations identified on Schedule 5.7(b); provided, however, that Administrative Borrower may amend Schedule 5.5 and Schedule 5.7 so long as such amendment occurs by written notice to Agent not less than 30 days prior to the date on which such Equipment is moved to such new location or such chief executive office is relocated, so long as such new location is within the continental United States, and so long as, at the time of such written notification, the applicable Borrower provides Agent a Collateral Access Agreement with respect thereto.

6.10 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority (including, without limitation, Section 1877 of Title 18 of the Social Security Act, 42 U.S.C. §1320a-7b, the Health Insurance Portability and Accountability Act of 1996, Fla. Stat. §456.053, and any other federal, state or local “anti-kickback statutes” or “self-referral” statutes applicable to Parent or any of its Subsidiaries), other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change.

6.11 Leases. Pay when due all rents and other amounts payable under any material leases to which Parent, any Borrower or any of their respective Subsidiaries is a party or by which Parent’s, any Borrower’s or any of their respective Subsidiaries’ properties and assets are bound, unless such payments are the subject of a Permitted Protest.

6.12 Existence. At all times preserve and keep in full force and effect Parent’s, each Borrower’s and each of their respective Subsidiaries’ valid existence and good standing and any rights and franchises material to their businesses.

6.13 Environmental.

(a) Keep any property either owned or operated by Parent, any Borrower or any of their respective Subsidiaries free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, (c) promptly notify Agent of any release of a Hazardous Material in any reportable quantity from or onto property owned or operated by Parent, any Borrower or any of their respective Subsidiaries and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Law, and (d) promptly, but in any event within 5 Business Days of its receipt thereof, provide Agent with written notice of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of Parent, any Borrower or any of their respective Subsidiaries, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against Parent, any Borrower or any of their respective Subsidiaries, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change.

6.14 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, notify Agent if any written information, exhibit, or report furnished to the Lender Group contained, at the time it was furnished, any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made. The foregoing to the contrary notwithstanding, any notification pursuant to the foregoing provision will not cure or remedy the effect of the prior untrue statement of a material fact or omission of any material fact nor shall any such notification have the affect of amending or modifying this Agreement or any of the Schedules hereto.

6.15 Formation of Subsidiaries; Additional Collateral.

(a) At the time that any Borrower or any Guarantor forms any direct or indirect Subsidiary or acquires any direct or indirect Subsidiary after the Closing Date, such Borrower or such Guarantor shall (i) cause such new Subsidiary to provide to Agent a joinder to this Agreement or the Guaranty and the Guarantor Security Agreement, together with such other security documents (including mortgages or deeds of trust with respect to any Real Property of such new Subsidiary), as well as appropriate financing statements (and with respect to all Real Property that forms part of the Collateral, fixture filings), all in form and substance satisfactory to Agent (including being sufficient to grant Agent a first priority Lien (subject to Permitted Liens) in and to the assets of such newly formed or acquired Subsidiary), (ii) other than with respect to Excluded Assets (subject to the provisions of Section 6.15(b) below), provide to Agent a pledge agreement and appropriate certificates and powers or financing statements, hypothecating all of the direct or beneficial ownership interest in such new Subsidiary, in form and substance satisfactory to Agent, and (iii) provide to Agent all other documentation, including one or more opinions of counsel satisfactory to Agent, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above (including policies of title insurance or other documentation with respect to all Real Property that forms part of the Collateral). Any document, agreement, or instrument executed or issued pursuant to this Section 6.15(a) shall be a Loan Document.

(b) At any time that any Designated Stock no longer constitutes a portion of the Excluded Assets, each Borrower or Guarantor which has an interest in such Designated Stock shall (i) provide to Agent a pledge agreement and appropriate certificates and powers or financing statements, hypothecating all of the direct or beneficial ownership interest in such Designated Stock, in form and substance satisfactory to Agent, and (ii) provide to Agent all other documentation, including one or more opinions of counsel satisfactory to Agent, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above. Any document, agreement, or instrument executed or issued pursuant to this Section 6.15(b) shall be a Loan Document.

7.	NEGATIVE COVENANTS.

Parent and each Borrower covenants and agrees that, until termination of all of the Commitments and payment in full of the Obligations, Parent and Borrowers will not and will not permit any of their respective Subsidiaries to do any of the following:

7.1 Indebtedness. Create, incur, assume, suffer to exist, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except:

(a) Indebtedness evidenced by this Agreement and the other Loan Documents,

(b) Indebtedness set forth on Schedule 5.20,

(d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not, in Agent’s reasonable judgment, materially impair the prospects of repayment of the Obligations by Borrowers or materially impair Borrowers’ creditworthiness, (ii) such refinancings, renewals, or extensions do not result in an increase in the principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed, or extended or add one or more Borrowers as liable with respect thereto if such additional Borrowers were not liable with respect to the original Indebtedness, (iii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions, that, taken as a whole, are materially more burdensome or restrictive to the applicable Borrower, (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed, or extended Indebtedness, and (v) the Indebtedness that is refinanced, renewed, or extended is not recourse to any Person that is liable on account of the Obligations other than those Persons which were obligated with respect to the Indebtedness that was refinanced, renewed, or extended,

(e) Existing Seller Notes and Earn-Out Obligations,

(f) Earn-Out Arrangements and Seller Notes not in excess of the amounts set forth in clause (c) and (d) of the definition of Permitted Acquisition and to the extent permitted under Section 7.12,

(g) Indebtedness constituting Permitted Acquired Indebtedness not in excess of the amounts set forth in clause (c) and (d) of the definition of Permitted Acquisition,

(h) endorsement of instruments or other payment items for deposit, and

(i) Indebtedness composing Permitted Investments.

7.2 Liens. Create, incur, assume, or suffer to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under Section 7.1(d) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness).

7.3 Restrictions on Fundamental Changes.

(a) Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its Stock, other than in connection with Permitted Acquisitions (so long as (x) with respect to any merger, consolidation, reorganization, or recapitalization involving a Borrower, either such Borrower is the survivor thereof or the survivor thereof is joined to this Agreement and each other Loan Document to which a Borrower is a party as a Borrower, (y) with respect to any merger, consolidation, reorganization, or recapitalization involving a Guarantor and any Person other than a Borrower or another Guarantor, such Guarantor is the survivor thereof or the survivor thereof is joined to the Guaranty and each other Loan Document to which a Guarantor (other than Parent) is a party as a Guarantor, and (z) any such merger, consolidation, reorganization, or recapitalization does not impair or otherwise impact the corporate existence of Parent or PainCare, Inc.), and stock splits (forward or reverse) involving the Stock of the Parent.

(b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution).

(c) Convey, sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its assets.

7.4 Disposal of Assets. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of any of the assets of Parent, any Borrower or any of their respective Subsidiaries.

7.5 Change Name. Change Parent’s, any Borrower’s or any of their respective Subsidiaries’ name, organizational identification number, state of organization, or organizational identity; provided, however, that Parent, a Borrower or a Subsidiary of Parent or a Borrower may change its name upon at least 30 days prior written notice by Administrative Borrower to Agent of such change and so long as, at the time of such written notification, Parent, such Borrower or such Subsidiary provides any financing statements necessary to perfect and continue perfected the Agent’s Liens.

7.6 Nature of Business. Make any material change in the principal nature of their business.

7.7 Prepayments and Amendments; Agreements With Medical PCs.

(a) Except in connection with a refinancing permitted by Section 7.1(d),

(i) optionally prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of any Borrower or any Subsidiary of a Borrower, other than the Obligations in accordance with this Agreement, or

(ii) directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Section 7.1(b), (c), (e), (f) or (g) in a manner that is adverse to the interests of Parent or any of its Subsidiaries or to the interests of the Lender Group,

(b) Make any payments in respect of any Indebtedness that is owed by Parent to any Subordinated Lender in any form other than the issuance of common Stock of Parent to such Subordinated Lenders, to the extent that such payments in respect of such Indebtedness may be paid by Parent in the form of common Stock in Parent,

(c) directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, or other writing evidencing or concerning the relationship between each Medical PC and Parent or any of its Subsidiaries except (i) to the extent required by any Governmental Authority’s interpretation of law or regulatory determination if disclosed to Borrowers after the Closing Date, (ii) required by mandatory provisions of applicable law effective after the Closing Date, or (iii) such other amendments, modifications, alterations, increases, or changes that do not adversely affect the interests of the Agent or any Lender in any respect, or

(d) enter into a new Management Agreement or other agreement with a Medical PC which is on terms materially less favorable to Parent and its Subsidiaries or the Lender Group than the agreements previously entered into with other Medical PCs prior to the Closing Date.

7.8 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control.

7.9 [Intentionally Omitted]

7.10 Distributions. Other than distributions or declaration and payment of dividends by a Borrower or a Guarantor to a Borrower, or distributions or declaration and payment of dividends by a Borrower or a Guarantor to a Guarantor for the purpose of (x) funding the purchase price permitted to be paid hereunder with respect to a Permitted Acquisition or (y) making payments in respect to administrative expenses incurred on behalf of the Borrowers in an aggregate amount not in excess of $30,000,000, make any distribution or declare or pay any dividends (in cash or other property, other than common Stock) on, or purchase, acquire, redeem, or retire any of Parent’s, any Borrower’s or any of their respective Subsidiaries’ Stock, of any class, whether now or hereafter outstanding.

7.11 Accounting Methods. Modify or change their fiscal year or their method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Parent’s, Borrowers’ or their respective Subsidiaries’ accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding Parent’s, Borrowers’ and their respective Subsidiaries’ financial condition.

7.12 Investments. Except for Permitted Investments, directly or indirectly, make or acquire any Investment, or incur any liabilities (including contingent obligations) for or in connection with any Investment; provided, however, that Parent and its Subsidiaries shall not have Permitted Investments (other than in the Cash Management Accounts) in Deposit Accounts or Securities Accounts in an aggregate amount with respect to any Medical Practice in excess of the applicable amount set forth on Schedule 2.7(c) at any one time unless Parent or its Subsidiary, as applicable, and the applicable securities intermediary or bank have entered into Control Agreements governing such Permitted Investments in order to perfect (and further establish) the Agent’s Liens in such Permitted Investments. Subject to the foregoing proviso, Borrowers shall not and shall not permit their Subsidiaries to establish or maintain any Deposit Account or Securities Account unless Agent shall have received a Control Agreement in respect of such Deposit Account or Securities Account.

7.13 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any transaction with any Affiliate of any Borrower except for transactions that (a) are in the ordinary course of Borrowers’ business, (b) are upon fair and reasonable terms, (c) if they involve one or more payments by Parent, any Borrower or any of their respective Subsidiaries in excess of $250,000, are fully disclosed to Agent, and (d) are no less favorable to Parent, Borrowers or their respective Subsidiaries, as applicable, than would be obtained in an arm’s length transaction with a non-Affiliate.

7.14 Suspension. Suspend or go out of a substantial and material portion of their business.

7.15 Compensation. Increase the annual fee or per-meeting fees paid to the members of its board of directors during any year by more than 25% over the prior year; pay or accrue total cash compensation, during any year, to its officers and senior management employees in an aggregate amount in excess of the amount provided for in the Employment Agreements (as the Employment Agreements are in effect on the date hereof), or amend or agree to amend any such Employment Agreement to the extent that such amendment would permit such compensation to be increased, or would otherwise be materially adverse to the interests of Parent and its Subsidiaries or the Lender Group.

7.16 Use of Proceeds. Use the proceeds of the Term Loans for any purpose other than (a) on the Closing Date, (i) to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lenders, and (ii) to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents,

and the transactions contemplated hereby and thereby, and (b) to finance Permitted Acquisitions described on Schedule 7.16 or which are consummated on or after the Closing Date (including costs and expenses incurred in connection therewith).

7.17 Equipment with Bailees. Store the Equipment of Parent, Borrowers or their respective Subsidiaries at any time now or hereafter with a bailee, warehouseman, or similar party.

7.18 Financial Covenants.

(a) Fail to maintain or achieve:

(i) Minimum EBITDA. EBITDA for Parent and its Subsidiaries, measured on a month-end basis, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto:


Applicable Amount		Applicable Period
$4,700,000.00		For the 3 month period ending June 30, 2005
$6,000,000.00		For the 3 month period ending September 30, 2005
$7,000,000.00		For the 3 month period ending December 31, 2005
$8,000,000.00		For the 3 month period ending March 31, 2006
$8,000,000.00		For the 3 month period ending June 30, 2006
$8,000,000.00		For the 3 month period ending September 30, 2006
$9,000,000.00		For the 3 month period ending December 31, 2006
$10,000,000.00		For the 3 month period ending March 31, 2007
$10,000,000.00		For the 3 month period ending June 30, 2007
$11,000,000.00		For the 3 month period ending September 30, 2007
$11,000,000.00		For the 3 month period ending December 31, 2007
$11,000,000.00		For the 3 month period ending March 31, 2008
$12,000,000.00		For the 3 month period ending June 30, 2008, and for each 3 month period ending on the last day of any fiscal quarter thereafter

(ii) Minimum Free Cash Flow. Free Cash Flow, measured on a month-end basis, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto:


Applicable Amount		Applicable Period
$9,000,000.00		For the 12 month period ending June 30, 2005
$12,000,000.00		For the 12 month period ending September 30, 2005
$13,000,000.00		For the 12 month period ending December 31, 2005
$17,000,000.00		For the 12 month period ending March 31, 2006
$19,000,000.00		For the 12 month period ending June 30, 2006
$20,000,000.00		For the 12 month period ending September 30, 2006
$20,000,000.00		For the 12 month period ending December 31, 2006
$20,000,000.00		For the 12 month period ending March 31, 2007
$20,000,000.00		For the 12 month period ending June 30, 2007
$24,000,000.00		For the 12 month period ending September 30, 2007
$25,000,000.00		For the 12 month period ending December 31, 2007, and for each 12 month period ending on the last day of any fiscal quarter thereafter

(iii) Leverage Ratio. A Leverage Ratio of not more than 2.25:1.00 as of any date.

(iv) Market Capitalization. A Market Capitalization of at least $50,000,000 as of any date.

(b) Make:

(i) Capital Expenditures. Capital Expenditures in any fiscal year in excess of the amount set forth in the following table for the applicable period:

Fiscal Year

2005

Fiscal Year
2006

Fiscal Year
2007

Fiscal Year
2008

Fiscal Year
2009

$2,250,000.00

3,500,000.00

4,000,000.00

4,500,000.00

(c) Trading of Stock. Permit, at any time, the trading of the common Stock of Parent to be halted or suspended for more than five (5) consecutive Business Days, or for such common Stock to be delisted (and not be listed for trading on another similar public stock exchange within five (5) Business Days of such delisting), in each case by any public stock exchange on which its shares of common Stock were being traded at the time of such halt, suspension or delisting.

8.	EVENTS OF DEFAULT.

Any one or more of the following events shall constitute an event of default (each, an “Event of Default”) under this Agreement:

8.1 If Borrowers fail to pay (a) within 3 days of the date when due and payable or when declared due and payable, all or any portion of the Obligations in respect of interest, fees or reimbursement of Lender Group Expenses (including any of the foregoing that accrue after the commencement of an Insolvency Proceeding, regardless of whether allowed or allowable in whole or in part as a claim in any such Insolvency Proceeding) and said amount remains unpaid for 3 days after the date when such amount is due and payable, or (b) when due and payable or when declared due and payable, all or any portion of the Obligations in respect of principal or any other amount constituting Obligations;

8.2 If Parent, Borrowers or any of their respective Subsidiaries (a) fail to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Sections 6.6, 6.9, 6.10 or 6.11 of this Agreement and such failure continues for a period of 5 days, or (b) fail to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement or in any of the other Loan Documents not described above in Section 8.2(a);

8.3 If any material portion of Parent’s, any Borrower’s or any of their respective Subsidiaries’ assets, taken as a whole, is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person;

8.4 If an Insolvency Proceeding is commenced by Parent, any Borrower or any of their respective Subsidiaries;

8.5 If an Insolvency Proceeding is commenced against Parent, any Borrower or any of their respective Subsidiaries, and any of the following events occur: (a) Parent, the

applicable Borrower or the applicable Subsidiary consents to the institution of the Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted; provided, however, that, during the pendency of such period, each member of the Lender Group shall be relieved of its obligations to extend credit hereunder, (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, each member of the Lender Group shall be relieved of its obligation to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Parent, any Borrower or any of their respective Subsidiaries, or (e) an order for relief shall have been entered therein;

8.6 If Parent, any Borrower or any of their respective Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs;

8.7 If a notice of Lien, levy, or assessment is filed of record with respect to Parent’s, any Borrower’s or any of their respective Subsidiaries’ assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon Parent’s, any Borrower’s or any of their respective Subsidiaries’ assets and the same is not paid before such payment is delinquent;

8.8 If a judgment or other claim for the payment of money exceeding $1,000,000 in the aggregate becomes a Lien or encumbrance upon any portion of Parent’s, any Borrower’s or any of their respective Subsidiaries’ assets;

8.9 If there is a default in any material agreement to which Parent, any Borrower or any of their respective Subsidiaries is a party (including, in the case of the Subordinated Debt Documents (as such term is defined in the Subordination Agreement), any default thereunder, and failure to comply therewith, or any other event which results in an obligation of the Parent to make one or more payments to any Subordinated Lender which constitute Liquidated Damages (as such term is defined in the Subordination Agreement)), and such default, failure or event (a) occurs at the final maturity of the obligations thereunder, (b) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of Parent, the applicable Borrower’s or the applicable Subsidiary’s obligations thereunder, or to terminate such agreement, or (c) in the case of Indebtedness owed by Parent to the Subordinated Lenders, such default, failure or event results in an obligation of Parent to make any payment which constitutes Liquidated Damages (as such term is defined in the Subordination Agreement);

8.10 If Parent, any Borrower or any of their respective Subsidiaries makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness;

8.11 If any misstatement or misrepresentation exists as of the date when made or deemed made, in any warranty, representation, statement, or Record made to the Lender Group by Parent, any Borrower, or any their respective Subsidiaries, or any officer, employee, agent, or director of Parent, any Borrower or any of their respective Subsidiaries;

8.12 If the obligation of any Guarantor under the Guaranty is limited or terminated by operation of law or by such Guarantor thereunder;

8.13 If this Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby, except as a result of a disposition of the applicable Collateral in a transaction permitted under this Agreement;

8.14 If, at any time (each, a “Measurement Time”), the aggregate number of Doctor Departures since the Closing Date exceeds 33% of the aggregate number of doctors employed by Parent, any of its Subsidiaries or any Medical PC at such Measurement Time;

8.15 If (a) at any time on or after the 2003 Subordinated Note Refinance Date, any Indebtedness owing to any Subordinate Lender and evidenced by the 2003 Subordinated Notes has not been converted into common Stock of Parent, refinanced in its entirety on terms that are satisfactory to Agent and the Required Lenders, or amended such that no portion of the principal balance of such Indebtedness is due and payable on or before the date that is 90 days after the 2003 Subordinated Note Refinance Date, or (b) at any time on or after the 2004 Subordinated Note Refinance Date, any Indebtedness owing to any Subordinate Lender evidenced by the 2004 Subordinated Notes has not been converted into common Stock of Parent, refinanced in its entirety on terms that are satisfactory to Agent and the Required Lenders, or amended such that no portion of the principal balance of such Indebtedness is due and payable on or before the date that is 90 days after the 2004 Subordinated Note Refinance Date; or

8.16 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Parent, any Borrower or any of their respective Subsidiaries, or a proceeding shall be commenced by Parent, any Borrower or any of their respective Subsidiaries, or by any Governmental Authority having jurisdiction over Parent, any Borrower or any of their respective Subsidiaries, seeking to establish the invalidity or unenforceability thereof, or Parent, any Borrower or any of their respective Subsidiaries shall deny that it has any liability or obligation purported to be created under any Loan Document.

9.	THE LENDER GROUP’S RIGHTS AND REMEDIES.

9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrowers:

(a) Declare all or any portion of the Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable;

(b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between Borrowers and the Lender Group;

(c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Agent’s Liens in the Collateral and without affecting the Obligations;

(d) Settle or adjust disputes and claims directly with Borrowers’ Account Debtors for amounts and upon terms which Agent considers advisable, and in such cases, Agent will credit the Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith;

(e) Cause Borrowers to hold all of their returned Inventory in trust for the Lender Group and segregate all such Inventory from all other assets of Borrowers or in Borrowers’ possession;

(f) Without notice to or demand upon any Borrower, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interests in the Collateral. Each Borrower agrees to assemble the Collateral if Agent so requires, and to make the Collateral available to Agent at a place that Agent may designate which is reasonably convenient to both parties. Each Borrower authorizes Agent to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in Agent’s determination appears to conflict with the priority of the Agent’s Liens in and to the Collateral and to pay all expenses incurred in connection therewith and to charge Borrowers’ Loan Account therefor. With respect to any of Borrowers’ owned or leased premises, each Borrower hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Lender Group’s rights or remedies provided herein, at law, in equity, or otherwise;

(g) Without notice to any Borrower (such notice being expressly waived), and without constituting an acceptance of any collateral in full or partial satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all

(i) balances and deposits of any Borrower held by the Lender Group (including any amounts received in the Cash Management Accounts), or (ii) Indebtedness at any time owing to or for the credit or the account of any Borrower held by the Lender Group;

(h) Hold, as cash collateral, any and all balances and deposits of any Borrower held by the Lender Group, and any amounts received in the Cash Management Accounts, to secure the full and final repayment of all of the Obligations;

(i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Borrower Collateral. Each Borrower hereby grants to Agent a license or other right to use, without charge, such Borrower’s labels, patents, copyrights, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Borrower Collateral, in completing production of, advertising for sale, and selling any Borrower Collateral and such Borrower’s rights under all licenses and all franchise agreements shall inure to the Lender Group’s benefit;

(j) Sell the Borrower Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers’ premises) as Agent determines is commercially reasonable. It is not necessary that the Borrower Collateral be present at any such sale;

(k) Except in those circumstances where no notice is required under the Code, Agent shall give notice of the disposition of the Borrower Collateral as follows:

(i) Agent shall give Administrative Borrower (for the benefit of the applicable Borrower) a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Borrower Collateral, the time on or after which the private sale or other disposition is to be made; and

(ii) The notice shall be personally delivered or mailed, postage prepaid, to Administrative Borrower as provided in Section 12, at least 10 days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Borrower Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market;

(l) Agent, on behalf of the Lender Group may credit bid and purchase at any public sale;

(m) Agent may seek the appointment of a receiver or keeper to take possession of all or any portion of the Borrower Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing; and

(n) The Lender Group shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document.

The foregoing to the contrary notwithstanding, upon the occurrence of any Event of Default described in Section 8.4 or Section 8.5, in addition to the remedies set forth above, without any notice to Borrowers or any other Person or any act by the Lender Group, the Commitments shall automatically terminate and the Obligations then outstanding, together with all accrued and unpaid interest thereon and all fees and all other amounts due under this Agreement and the other Loan Documents, shall automatically and immediately become due and payable, without presentment, demand, protest, or notice of any kind, all of which are expressly waived by Borrowers.

9.2 Remedies Cumulative. The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it.

10.	TAXES AND EXPENSES.

If any Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to any Borrower, may do any or all of the following: (a) make payment of the same or any part thereof, or (b) in the case of the failure to comply with Section 6.8 hereof, obtain and maintain insurance policies of the type described in Section 6.8 and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing.

11. WAIVERS; INDEMNIFICATION.

11.1 Demand; Protest; etc. Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which any such Borrower may in any way be liable.

11.2 The Lender Group’s Liability for Borrower Collateral. Each Borrower hereby agrees that: (a) so long as Agent complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Borrower Collateral, (ii) any loss or damage thereto occurring or arising

in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Borrower Collateral shall be borne by Borrowers.

11.3 Indemnification. Each Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons, and each Participant (each, an “Indemnified Person”) harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith or in connection with the enforcement of this indemnification (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration (including any restructuring or workout with respect hereto) of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby or the monitoring of Borrowers’ and their Subsidiaries’ compliance with the terms of the Loan Documents, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all the foregoing, collectively, the “Indemnified Liabilities”). The foregoing to the contrary notwithstanding, Borrowers shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrowers were required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrowers with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON.

12.	NOTICES.

Unless otherwise provided in this Agreement, all notices or demands by Borrowers or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Administrative Borrower or Agent, as applicable,

may designate to each other in accordance herewith), or telefacsimile to Borrowers in care of Administrative Borrower or to Agent, as the case may be, at its address set forth below:


If to Administrative Borrower:		PAINCARE SURGERY CENTERS, INC.
		1030 North Orange Avenue Suite 105 Orlando, Florida 32801 Attn: Randy Lubinsky, Chief Executive Officer Fax No.: (407) 926-6616 Email: randy@paincare.com

with copies to:		E. Nicholas Davis, III 12200 West Colonial Drive, Suite 303 Winter Garden, Florida 34787 Fax No.: (407) 905-9695 Email: ndavis@cloverleafcapital.com

If to Agent:		HBK INVESTMENTS L.P. 300 Crescent Court Suite 700 Dallas, Texas 75201 Attn: Legal Department Fax No.: (214) 758-1207

with copies to:		PAUL, HASTINGS, JANOFSKY & WALKER, LLP Twenty-Fifth Floor 515 South Flower Street Los Angeles, CA 90071 Attn: John Francis Hilson, Esq. Fax No.: (213) 996-3300

Agent and Borrowers may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12, other than notices by Agent in connection with enforcement rights against the Borrower Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail. Each Borrower acknowledges and agrees that notices sent by the Lender Group in connection with the exercise of enforcement rights against Borrower Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above.

13.	CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

(a) PURSUANT TO THE PROVISIONS OF THE SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAWS, THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

(b) PURSUANT TO THE PROVISIONS OF THE SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAWS, THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWERS AND EACH MEMBER OF THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b).

(c) BORROWERS AND EACH MEMBER OF THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWERS AND EACH MEMBER OF THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

14.	ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.

14.1

Assignments and Participations.

(a) Any Lender may assign and delegate to one or more assignees (each an “Assignee”) that are Eligible Transferees all, or any ratable part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000 (except such minimum amount shall not apply to (x) an assignment or delegation by any Lender to any other Lender or an Affiliate of any Lender or any Related Fund or (y) a group of new Lenders, each of whom is an Affiliate of each other or a fund or account managed by any such new Lender or an Affiliate of such new Lender to the extent that the aggregate amount to be assigned to all such new Lenders is at least $5,000,000); provided, however, that Borrowers and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Administrative Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Administrative Borrower and Agent an Assignment and Acceptance, and (iii) the assigning Lender or Assignee has paid to Agent for Agent’s separate account a processing fee in the amount of $5,000. Anything contained herein to the contrary notwithstanding, the payment of any fees shall not be required and the Assignee need not be an Eligible Transferee if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of the assigning Lender.

(b) From and after the date that Agent notifies the assigning Lender that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assigning Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from any future obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall effect a novation between Borrowers and the Assignee; provided, however, that nothing contained herein shall release any assigning Lender from obligations that survive the termination of this Agreement, including such assigning Lender’s obligations under Article 16 and Section 17.7 of this Agreement.

(c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment

and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrowers or the performance or observance by Borrowers of any of their obligations under this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (5) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

(d) Immediately upon Agent’s receipt of the required processing fee payment and the fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto.

(e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a “Participant”) participating interests in all or any portion of its Obligations, the Commitment, and the other rights and interests of that Lender (the “Originating Lender”) hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a “Lender” for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not constitute a “Lender” hereunder or under the other Loan Documents and the Originating Lender’s obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrowers, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender’s rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A)

extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or substantially all of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrowers hereunder shall be determined as if such Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrowers, the Collections of Borrowers or their Subsidiaries, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves.

(f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may, subject to the provisions of Section 17.7, disclose all documents and information which it now or hereafter may have relating to Borrowers and their Subsidiaries and their respective businesses.

(g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of (i) any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR § 203.24, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law, and (ii) any Person providing financing or other credit support to a Lender or any of its Affiliates or Related Funds, including as contemplated by Section 2.17.

(h) Agent (acting solely for this purpose as a non-fiduciary agent for Borrowers) shall maintain, or cause to be maintained, a register (the “Register”) on which it enters the name of a Lender as the registered owner of each Term Loan held by such Lender. Other than in connection with an assignment by a Lender of all or any portion of its Term Loan to an Affiliate of such Lender or a Related Fund of such Lender (i) a Registered Loan (and the Registered Note, if any, evidencing the same) may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register (and each Registered Note shall expressly so provide) and (ii) any assignment or sale of all or part of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by registration of such assignment or sale on the Register, together with the surrender of the

Registered Note, if any, evidencing the same duly endorsed by (or accompanied by a written instrument of assignment or sale duly executed by) the holder of such Registered Note, whereupon, at the request of the designated assignee(s) or transferee(s), one or more new Registered Notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s). Prior to the registration of assignment or sale of any Registered Loan (and the Registered Note, if any evidencing the same), Borrowers shall treat the Person in whose name such Loan (and the Registered Note, if any, evidencing the same) is registered as the owner thereof for the purpose of receiving all payments thereon and for all other purposes, notwithstanding notice to the contrary.

(i) In the event that a Lender sells participations in the Registered Loan, such Lender, acting solely for this purpose as a non-fiduciary agent for Borrowers, shall maintain a register on which it enters the name of all participants in the Registered Loans held by it (the “Participant Register”). A Registered Loan (and the Registered Note, if any, evidencing the same) may be participated in whole or in part only by registration of such participation on the Participant Register (and each Registered Note shall expressly so provide). Any participation of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by the registration of such participation on the Participant Register.

14.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrowers may not assign this Agreement or any rights or duties hereunder without the Lenders’ prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release any Borrower from its Obligations unless otherwise agreed in writing by each member of the Lender Group. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by any Borrower is required in connection with any such assignment.

15.	AMENDMENTS; WAIVERS.

15.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrowers therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Administrative Borrower (on behalf of all Borrowers) and then any such waiver or consent shall be effective, but only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all of the Lenders affected thereby and Administrative Borrower (on behalf of all Borrowers) and acknowledged by Agent, do any of the following:

(a) increase or extend any Commitment of any Lender,

(b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document,

(c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document,

(d) change the Pro Rata Share that is required to take any action hereunder,

(e) amend or modify this Section or any provision of the Agreement providing for consent or other action by all Lenders,

(f) other than as permitted by Section 16.12, release Agent’s Lien in and to any of the Collateral,

(g) change the definition of “Required Lenders” or “Pro Rata Share”,

(h) contractually subordinate any of the Agent’s Liens,

(i) release any Borrower or any Guarantor from any obligation for the payment of money,

(j) change the definition of Term Loan Amount or Term Loan Expiration Date, or

(k) amend any of the provisions of Section 16.

and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, affect the rights or duties of Agent under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrowers, shall not require consent by or the agreement of Borrowers.

15.2

Replacement of Holdout Lender.

(a) If any action to be taken by the Lender Group or Agent hereunder requires the unanimous consent, authorization, or agreement of all Lenders, and a Lender (“Holdout Lender”) fails to give its consent, authorization, or agreement, then Agent, upon at least 5 Business Days prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a “Replacement Lender”), and the Holdout Lender shall have no right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given.

(b) Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance, subject only to the Holdout Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 14.1. Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender’s Pro Rata Share of the Term Loans.

15.3 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement or any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or any Lender on any occasion shall affect or diminish Agent’s and each Lender’s rights thereafter to require strict performance by Borrowers of any provision of this Agreement. Agent’s and each Lender’s rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have.

16.	AGENT; THE LENDER GROUP.

16.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints HBK as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to execute and deliver each of the other Loan Documents on its behalf and to take such other action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 16. The provisions of this Section 16 (other than the proviso to Section 16.11(a)) are solely for the benefit of Agent, and the Lenders, and Borrowers and their Subsidiaries shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word “Agent” is for convenience only, that HBK is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from

exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections of Borrowers and their Subsidiaries, and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Term Loans, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections of Borrowers and their Subsidiaries as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management arrangements as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections of Borrowers and their Subsidiaries, (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrowers, the Obligations, the Collateral, the Collections of Borrowers and their Subsidiaries, or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents.

16.2 Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys in fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney in fact that it selects as long as such selection was made without gross negligence or willful misconduct.

16.3 Liability of Agent. None of the Agent Related Persons shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (b) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by any Borrower or any Subsidiary or Affiliate of any Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of any Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrowers or the books or records or properties of any of Borrowers’ Subsidiaries or Affiliates.

16.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, telefacsimile or other electronic method of transmission, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrowers or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the requisite Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders.

16.5 Notice of Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders and, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Administrative Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a “notice of default.” Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable.

16.6 Credit Decision. Each Lender acknowledges that none of the Agent Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrowers and their Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this

Agreement and to extend credit to Borrowers. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrowers and any other Person party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrowers and any other Person party to a Loan Document that may come into the possession of any of the Agent Related Persons.

16.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, attorneys fees and expenses, fees and expenses of financial accountants, advisors, consultants, and appraisers, costs of collection by outside collection agencies, auctioneer fees and expenses, and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrowers are obligated to reimburse Agent or Lenders for such expenses pursuant to this Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from the Collections of Borrowers and their Subsidiaries received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from the Collections of Borrowers and their Subsidiaries received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender’s Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent Related Persons (to the extent not reimbursed by or on behalf of Borrowers and without limiting the obligation of Borrowers to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent Related Person of any portion of such Indemnified Liabilities resulting solely from such Person’s gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make a Term Loan or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender’s Pro Rata Share of any costs or out of pocket expenses (including attorneys, accountants, advisors, and consultants fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrowers. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent.

16.8 Agent in Individual Capacity. HBK and its Affiliates and Related Funds may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with Borrowers and their Subsidiaries and Affiliates and any other Person party to any Loan Documents as though HBK were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, HBK or its Affiliates or Related Funds may receive information regarding Borrowers or their Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Borrowers or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms “Lender” and “Lenders” include HBK in its individual capacity.

16.9 Successor Agent. Agent may resign as Agent upon 45 days notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term “Agent” shall mean such successor Agent and the retiring Agent’s appointment, powers, and duties as Agent shall be terminated. After any retiring Agent’s resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above.

16.10 Lender in Individual Capacity. Any Lender and its respective Affiliates and Related Funds may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrowers and their Subsidiaries and Affiliates and any other Person party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates and Related Funds may receive information regarding Borrowers or their Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Borrowers or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such

circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender shall not be under any obligation to provide such information to them.

16.11 Withholding Taxes.

(a) All payments made by any Borrower hereunder or under any note or other Loan Document will be made without setoff, counterclaim, or other defense. In addition, all such payments will be made free and clear of, and without deduction or withholding for, any present or future Taxes, and in the event any deduction or withholding of Taxes is required, each Borrower shall comply with the penultimate sentence of this Section 16.11(a). “Taxes” shall mean, any taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein measured by or based on the net income or net profits of Lender) and all interest, penalties or similar liabilities with respect thereto. If any Taxes are so levied or imposed, each Borrower agrees to pay the full amount of such Taxes and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement, any note, or Loan Document, including any amount paid pursuant to this Section 16.11(a) after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrowers shall not be required to increase any such amounts if the increase in such amount payable results from Agent’s or such Lender’s own willful misconduct or gross negligence (as finally determined by a court of competent jurisdiction). Each Borrower will furnish to Lender as promptly as possible after the date the payment of any Tax is due pursuant to applicable law certified copies of tax receipts evidencing such payment by any Borrower.

(b) If a Lender claims an exemption from United States withholding tax, Lender agrees with and in favor of Agent, to deliver to Agent:

(i) if such Lender claims an exemption from United States withholding tax pursuant to its portfolio interest exception, (A) a statement of the Lender, signed under penalty of perjury, that it is not a (I) a “bank” as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder of any Borrower (within the meaning of Section 871(h)(3)(B) of the IRC), or (III) a controlled foreign corporation related to any Borrower within the meaning of Section 864(d)(4) of the IRC, and (B) a properly completed and executed IRS Form W-8BEN, before receiving its first payment under this Agreement and at any other time reasonably requested by Agent;

(ii) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed and executed IRS Form W-8BEN before receiving its first payment under this Agreement and at any other time reasonably requested by Agent;

(iii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before receiving its first payment under this Agreement and at any other time reasonably requested by Agent; or

(iv) such other form or forms, including IRS Form W-9, as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding or backup withholding tax before receiving its first payment under this Agreement and at any other time reasonably requested by Agent.

Lender agrees promptly to notify Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction.

(c) If a Lender claims an exemption from withholding tax in a jurisdiction other than the United States, Lender agrees with and in favor of Agent, to deliver to Agent any such form or forms, as may be required under the laws of such jurisdiction as a condition to exemption from, or reduction of, foreign withholding or backup withholding tax before receiving its first payment under this Agreement and at any other time reasonably requested by Agent.

Lender agrees promptly to notify Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction.

(d) If any Lender claims exemption from, or reduction of, withholding tax and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrowers to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrowers to such Lender. To the extent of such percentage amount, Agent will treat such Lender’s documentation provided pursuant to Sections 16.11(b) or 16.11(c) as no longer valid. With respect to such percentage amount, Lender may provide new documentation, pursuant to Sections 16.11(b) or 16.11(c), if applicable.

(e) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (b) or (c) of this Section 16.11 are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax.

(f) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender due to a failure on the part of the Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall

indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent, as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section 16.11, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent.

16.12 Collateral Matters.

(a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrowers of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Administrative Borrower certifies to Agent that the sale or disposition is permitted under Section 7.4 of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which no Borrower or its Subsidiaries owned any interest at the time the Agent’s Lien was granted nor at any time thereafter, or (iv) constituting property leased to a Borrower or its Subsidiaries under a lease that has expired or is terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders. Upon request by Agent or Administrative Borrower at any time, the Lenders will confirm in writing Agent’s authority to release any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent’s opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrowers in respect of) all interests retained by Borrowers, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral.

(b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrowers or is cared for, protected, or insured or has been encumbered, or that the Agent’s Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent’s own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein.

16.13 Restrictions on Actions by Lenders; Sharing of Payments.

(a) Each of the Lenders agrees that it shall not, without the express written consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the written request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrowers or any deposit accounts of Borrowers now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so in writing by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral.

(b) If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender’s ratable portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that to the extent that such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment.

16.14 Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent’s Liens in assets which, in accordance with Article 8 or Article 9, as applicable, of the Code can be perfected only by possession or control. Should any Lender obtain possession or control of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent’s request therefor shall deliver possession or control of such Collateral to Agent or in accordance with Agent’s instructions.

16.15 Payments by Agent to the Lenders. All payments to be made by Agent to the Lenders shall be made by bank wire transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, fees, or interest of the Obligations.

16.16 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other

Loan Documents. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders.

16.17

Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By becoming a party to this Agreement, each Lender:

(a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a “Report” and collectively, “Reports”) prepared by Agent, and Agent shall so furnish each Lender with such Reports,

(b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report,

(c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrowers and will rely significantly upon the Books, as well as on representations of Borrowers’ personnel,

(d) agrees to keep all Reports and other material, non-public information regarding Borrowers and their Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner in accordance with Section 17.7, and

(e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any such other Lender preparing a Report harmless from any action the indemnifying Lender may take or fail to take or any conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrowers, or the indemnifying Lender’s participation in, or the indemnifying Lender’s purchase of, a loan or loans of Borrowers; and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender.

In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrowers to Agent that has not been contemporaneously provided by Borrowers to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan

Documents, to request additional reports or information from Borrowers, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender’s notice to Agent, whereupon Agent promptly shall request of Administrative Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Administrative Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Administrative Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender.

16.18 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 16.7, no member of the Lender Group shall have any liability for the acts or any other member of the Lender Group. No Lender shall be responsible to any Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein.

16.19 Legal Representation of Agent. In connection with the negotiation, drafting, and execution of this Agreement and the other Loan Documents, or in connection with future legal representation relating to loan administration, amendments, modifications, waivers, or enforcement of remedies, Paul, Hastings, Janofsky & Walker LLP (“PHJW”) only has represented and only shall represent HBK in its capacity as Agent and PCRL in its capacity as a Lender. Each other Lender hereby acknowledges that PHJW does not represent it in connection with any such matters.

17.	GENERAL PROVISIONS.

17.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrowers, Agent, and each Lender whose signature is provided for on the signature pages hereof.

17.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement.

17.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against the Lender Group or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto.

17.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

17.5 Counterparts; Electronic Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis.

17.6 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by any Borrower or any Guarantor or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors’ rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a “Voidable Transfer”), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrowers or Guarantors automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made.

17.7 Confidentiality. Agent and Lenders each individually (and not jointly or jointly and severally) agree that material, non-public information regarding Borrowers and their Subsidiaries, their operations, assets, and existing and contemplated business plans shall be treated by Agent and the Lenders in a confidential manner, and shall not be disclosed by Agent and the Lenders to Persons who are not parties to this Agreement, except: (a) to attorneys for and other advisors, accountants, auditors, and consultants to any member of the Lender Group, (b) to Subsidiaries, Affiliates and Related Funds of any member of the Lender Group, provided that any such Subsidiary, Affiliate or Related Fund shall have agreed to receive such information hereunder subject to the terms of this Section 17.7, (c) as may be required by statute, decision, or judicial or administrative order, rule, or regulation, (d) as

may be agreed to in advance by Administrative Borrower or its Subsidiaries or as requested or required by any Governmental Authority pursuant to any subpoena or other legal process, (e) as to any such information that is or becomes generally available to the public (other than as a result of prohibited disclosure by Agent or the Lenders), (f) in connection with any assignment, prospective assignment, sale, prospective sale, participation or prospective participations, or pledge or prospective pledge of any Lender’s interest under this Agreement, provided that any such assignee, prospective assignee, purchaser, prospective purchaser, participant, prospective participant, pledgee, or prospective pledgee shall have agreed in writing to receive such information hereunder subject to the terms of this Section, and (g) in connection with any litigation or other adversary proceeding involving parties hereto which such litigation or adversary proceeding involves claims related to the rights or duties of such parties under this Agreement or the other Loan Documents. The provisions of this Section 17.7 shall survive for 2 years after the payment in full of the Obligations.

17.8 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof.

17.9 Surgery as Agent for Borrowers. Each Borrower hereby irrevocably appoints Surgery as the borrowing agent and attorney-in-fact for all Borrowers (the “Administrative Borrower”) which appointment shall remain in full force and effect unless and until Agent shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Administrative Borrower. Each Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (i) to provide Agent with all notices with respect to the Term Loans obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (ii) to take such action as the Administrative Borrower deems appropriate on its behalf to obtain Term Loans and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and that Lender Group shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce the Lender Group to do so, and in consideration thereof, each Borrower hereby jointly and severally agrees to indemnify each member of the Lender Group and hold each member of the Lender Group harmless against any and all liability, expense, loss or claim of damage or injury, made against the Lender Group by any Borrower or by any third party whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral of Borrowers as herein provided, (b) the Lender Group’s relying on any instructions of the Administrative Borrower, or (c) any other action taken by the Lender Group hereunder or under the other Loan Documents, except that Borrowers will have no liability to the relevant

Agent-Related Person or Lender-Related Person under this Section 17.9 with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of such Agent-Related Person or Lender-Related Person, as the case may be.

[Signature pages to follow.]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.


PAINCARE HOLDINGS, INC. a Florida corporation

By:
Name:
Title:
PAINCARE SURGERY CENTERS, INC. a Florida corporation

By:
Name:
Title:
ADVANCED ORTHOPAEDICS OF SOUTH FLORIDA II, INC., a Florida corporation

By:
Name:
Title:
PAIN AND REHABILITATION NETWORK, INC., a Florida corporation

By:
Name:
Title:
MEDICAL REHABILITATION SPECIALISTS II, INC., a Florida corporation

By:
Name:
Title:


PAINCARE ACQUISITION COMPANY V, INC., a Florida corporation

By:
Name:
Title:
PAINCARE ACQUISITION COMPANY VI, INC., a Florida corporation

By:
Name:
Title:
HEALTH CARE CENTER OF TAMPA, INC., a Florida corporation

By:
Name:
Title:
PAINCARE ACQUISITION COMPANY VIII, INC., a Florida corporation

By:
Name:
Title:
PAINCARE ACQUISITION COMPANY IX, INC. a Florida corporation

By:
Name:
Title:


PAINCARE ACQUISITION COMPANY X, INC. a Florida corporation

By:
Name:
Title:
PAINCARE ACQUISITION COMPANY XI, INC. a Florida corporation

By:
Name:
Title:

GEORGIA SURGICAL CENTERS, INC. a Georgia corporation

By:
Name:
Title:
PAINCARE ACQUISITION COMPANY XIII, INC., a Florida corporation

By:
Name:
Title:
BENJAMIN ZOLPER, M.D., INC. a Florida corporation

By:
Name:
Title:


PAINCARE ACQUISITION COMPANY XV, INC. a Florida corporation
By:
Name:
Title:
PAINCARE ACQUISITION COMPANY XVII, INC. a Florida corporation
By:
Name:
Title:
PAINCARE ACQUISITION COMPANY XIX, INC. a Florida corporation
By:
Name:
Title:
PAINCARE ACQUISITION COMPANY XVIII, INC. a Florida corporation
By:
Name:
Title:
PAINCARE SURGERY CENTERS I, INC. a Florida corporation
By:
Name:
Title:


HBK INVESTMENTS L.P., a Texas limited partnership, as Agent

By:

Its authorized signatory

PCRL INVESTMENTS L.P., a Texas limited partnership, as Lender

By:

Its authorized signatory

EXHIBITS AND SCHEDULES



Exhibit A-1		Form of Assignment and Acceptance
Exhibit C-1		Form of Compliance Certificate
Exhibit L-1		Form of LIBOR Notice

Schedule A-1		Agent’s Account
Schedule C-1		Commitments
Schedule D-1		Designated Account
Schedule E-1		Existing Seller Notes and Earn-Out Obligations
Schedule P-1		Permitted Liens
Schedule 2.7(a)		Cash Management Banks
Schedule 2.7(c)		Excess Deposits
Schedule 5.5		Locations of Inventory and Equipment
Schedule 5.7(a)		States of Organization
Schedule 5.7(b)		Chief Executive Offices
Schedule 5.7(c)		Organizational Identification Numbers
Schedule 5.7(d)		Commercial Tort Claims
Schedule 5.8(b)		Capitalization of Borrowers
Schedule 5.8(c)		Capitalization of Borrowers’ Subsidiaries
Schedule 5.10		Litigation
Schedule 5.14		Environmental Matters
Schedule 5.15		Broker Fees
Schedule 5.16		Intellectual Property
Schedule 5.18		Deposit Accounts and Securities Accounts
Schedule 5.20		Permitted Indebtedness
Schedule 7.16		Pre-Closing Permitted Acquisitions

Schedule A-1

Agent’s Account

An account at a bank designated by Agent from time to time as the account into which Borrowers shall make all payments to Agent for the benefit of the Lender Group and into which the Lender Group shall make all payments to Agent under this Agreement and the other Loan Documents; unless and until Agent notifies Administrative Borrower and the Lender Group to the contrary, Agent’s Account shall be that certain deposit account bearing account number 8900562668 (Ref: Paincare Holdings, Inc.) and maintained by Agent with The Bank of New York, ABA #021-000-018.

Schedule C-1

Commitments


Lender	Term Loan Commitment	Total Commitment
PCRL INVESTMENTS L.P.	$25,000,000.00	$25,000,000.00




All Lenders	$25,000,000.00	$25,000,000.00

Schedule D-1

Designated Account

Account number of Administrative Borrower maintained with Administrative Borrower’s Designated Account Bank, or such other deposit account of Administrative Borrower (located within the United States) that has been designed as such, in writing, by Administrative Borrower to Agent.

“Designated Account Bank” means , whose office is located at , and whose ABA number is .

EX-10.09 3 dex1009.htm AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT Amendment Number One to Loan and Security Agreement

Exhibit 10.09

AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this “Amendment”), dated as of September 15, 2005, is entered into by and among PAINCARE HOLDINGS, INC., a Florida corporation (“Parent”), and each of Parent’s Subsidiaries identified on the signature pages hereof (such Subsidiaries are referred to hereinafter each individually as a “Borrower”, and individually and collectively, jointly and severally, as the “Borrowers”), each of the lenders that is a signatory to this Amendment (together with their respective successors and permitted assigns, individually, “Lender” and, collectively, “Lenders”), and HBK INVESTMENTS L.P., a Delaware limited partnership, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors, if any, in such capacity, “Agent”; and together with each of the Lenders, individually and collectively, the “Lender Group”), in light of the following:

W I T N E S S E T H

WHEREAS, Parent, each Borrower and the Lender Group are parties to that certain Loan and Security Agreement, dated as of May 10, 2005 (as amended, restated, supplemented, or modified from time to time, the “Loan Agreement”);

WHEREAS, Parent and each Borrower has requested that the Lender Group agree to amend the Loan Agreement in accordance with the provisions of this Amendment; and

WHEREAS, subject to the terms and conditions set forth in this Amendment, the Lender Group is willing to so amend the Loan Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to amend the Loan Agreement as follows:

1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement, as amended hereby.

2. AMENDMENTS TO LOAN AGREEMENT.

(a) Section 1.1 of the Loan Agreement is hereby amended by inserting the following new definitions in proper alphabetical order:

“First Amendment” means that certain Amendment Number One to Loan and Security Agreement dated as of September 15, 2005, by and among Parent, the Borrowers and the Lender Group.

“First Amendment Effective Date” means the date, if ever, that all of the conditions set forth in Section 3 of the First Amendment shall be satisfied (or waived by Agent in its sole discretion).

“Term Loan A” has the meaning set forth in Section 2.2(a).

“Term Loan A Amount” means $25,000,000.

“Term Loan A Commitment” means, with respect to each Lender, its Term Loan A Commitment, and, with respect to all Lenders, their Term Loan A Commitments, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 14.1.

“Term Loan A Yield Maintenance Amount” means, as of any date prior to the first anniversary of the Closing Date, an amount equal to the product of (a) the greater of (i) $10,000,000 and (ii) the outstanding principal balance of the Term Loan A as of such date times (b) a per annum rate for the period between such date and the first anniversary of the Closing Date equal to the LIBOR Rate as of such date plus the LIBOR Rate Term Loan Margin.

“Term Loan B” has the meaning set forth in Section 2.2(b).

“Term Loan B Amount” means $5,000,000.

“Term Loan B Closing Fee” has the meaning set forth in Section 2.11(c).

“Term Loan B Commitment” means, with respect to each Lender, its Term Loan B Commitment, and, with respect to all Lenders, their Term Loan B Commitments, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 14.1.

“Term Loan B Yield Maintenance Amount” means, as of any date prior to the first anniversary of the First Amendment Effective Date, an amount equal to the product of (a) the outstanding principal balance of the Term Loan B as of such date times (b) a per annum rate for the period between such date and the first anniversary of the First Amendment Effective Date equal to the LIBOR Rate as of such date plus the LIBOR Rate Term Loan Margin.

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(b) Section 1.1 of the Loan Agreement is hereby amended by amending and restating the following definitions in their entirety as follows:

“Applicable Prepayment Premium” means, as of any date of determination, an amount equal to the sum of (a) with respect to Term Loan A, (i) during the period from and after the date of the execution and delivery of this Agreement up to the date that is the first anniversary of the Closing Date, the greater of (A) the Term Loan A Yield Maintenance Amount, and (B) $750,000, (ii) during the period from and including the date that is the first anniversary of the Closing Date up to the date that is the second anniversary of the Closing Date, $500,000, and (iii) during the period of time from and including the date that is the second anniversary of the Closing Date up to the date that is the third anniversary of the Closing Date, $250,000, plus (b) with respect to Term Loan B, (i) during the period from and after the First Amendment Effective Date up to the date that is the first anniversary of the First Amendment Effective Date, the greater of (A) the Term Loan B Yield Maintenance Amount, and (B) $150,000, (ii) during the period from and including the date that is the first anniversary of the First Amendment Effective Date up to the date that is the second anniversary of the First Amendment Effective Date, $100,000, and (iii) during the period of time from and including the date that is the second anniversary of the First Amendment Effective Date up to the date that is the third anniversary of the First Amendment Effective Date, $50,000.

“Commitment” means, with respect to each Lender, its Term Loan A Commitment, its Term Loan B Commitment or its Total Commitment, as the context requires, and, with respect to all Lenders, their Term Loan A Commitments, their Term Loan B Commitments, or their Total Commitments, as the context requires, in each case as such Dollar amounts are set forth beside such Lender’s name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder, as such amounts may be reduced or increased from time to time pursuant to assignments made in accordance with the provisions of Section 14.1.

“Pro Rata Share” means, as of any date of determination:

(a) with respect to a Lender’s obligation to make a Term Loan A and receive payments of interest, fees, and principal with respect thereto, (i) priort to the Term Loan Expiration Date, the percentage obtained by dividing (y) the sum of (A) such Lender’s remaining Term Loan A Commitment, and (B) the outstanding principal balance of such Lender’s Term Loans A, by (z) the sume of (A) the aggregate amount of all Lenders’ remaining Term Loan A Commitments, and (B) the aggregate outstanding principal balance of all Term Loans A, and (ii) from and after the Term Loan Expiration Date, the percentage obtained by dividing (y) the outstanding principal balance of such Lender’s Term Loans A by (z) the aggregate outstanding principal balance of all Term Loans A,

(b) with respect to a Lender’s obligation to make a Term Loan B and receive payments of interest, fees, and principal with respect thereto, (i) prior to the Term Loan Expiration Date, the percentage obtained by dividing (y) the sum of (A) such Lender’s remaining Term Loan B Commitment, and (B) the outstanding principal balance of such Lender’s Term Loans B, by (z) the sum of (A) the aggregate amount of

- 3 -

all Lenders’ remaining Term Loan B Commitments, and (B) the aggregate outstanding principal balance of all Term Loan B, and (ii) from and after the Term Loan Expiration Date, the percentage obtained by dividing (y) the outstanding principal balance of such Lender’s Term Loans B by (z) the aggregate outstanding principal balance of all Term Loans B, or

(c) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) the sum of (A) such Lender’s remaining Term Loan A Commitment and Term Loan B Commitment (if any), and (B) the outstanding principal balance of such Lender’s Term Loans A and Term Loans B, by (ii) the sum of (A) the aggregate amount of all Lenders’ remaining Term Loan A Commitments and Term Loan B Commitments (if any), and (B) the aggregate outstanding principal balance of all Term Loans A and Term Loans B.

“Term Loan” and “Term Loans” means Term Loan A and/or Term Loan B, as the context requires.

(c) Section 1.1 of the Loan Agreement is hereby amended by deleting the definitions of the terms “Term Loan Amount”, “Term Loan Commitment”, and “Yield Maintenance Amount” in their entirety.

(d) Section 2.2 of the Loan Agreement is hereby amended and restated in its entirety as follows:

“2.2 Term Loans.

(a) Term Loan A. Subject to the terms and conditions of this Agreement, each Lender with a Term Loan A Commitment agrees (severally, not jointly or jointly and severally) to make term loans A (collectively, “Term Loan A”) to Borrowers from time to time from the Closing Date until the Term Loan Expiration Date, or until the earlier reduction of its Term Loan A Commitment to zero in accordance with the terms hereof, in an aggregate principal amount not to exceed the unused portion of such Lender’s Term Loan A Commitment. The aggregate principal amount of Term Loan A (based on the initial principal amount) shall not exceed the Term Loan A Amount. The Term Loan A Commitment of each Lender shall (x) automatically and permanently be reduced to the extent that such Lender makes a Term Loan A to Borrowers, and (y) automatically and permanently be reduced to zero on the Term Loan Expiration Date. Each Term Loan A requested by Borrowers pursuant to this Section 2.2(a) shall be in a minimum amount of $2,500,000. Any principal amount of Term Loan A that is repaid or prepaid may not be reborrowed. The outstanding principal of the Term Loan A shall be repayable by the Borrowers in consecutive quarterly installments, on the first day of each April, July, October and January, commencing on April 1, 2006 and ending on the Maturity Date (or if earlier than the Maturity Date, the date that the Term Loans have been repaid in full) consisting of (i) during the period from April 1, 2006 through January 1, 2007, quarterly payments of $625,000, (ii) during the period from April 1, 2007 through January 1, 2008, quarterly payments of $1,250,000, and

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(iii) during the period from April 1, 2008 through the Maturity Date, equal quarterly payments which, in the aggregate, equal the remaining outstanding principal balance of Term Loan A; provided, that the last such installment shall be in the amount necessary to repay in full the unpaid principal amount of Term Loan A; provided, further, for the avoidance of doubt, no installment shall be due during any period where the outstanding principal amount of Term Loan A has been repaid in full. The outstanding unpaid principal balance and all accrued and unpaid interest under Term Loan A shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under Term Loan A shall constitute Obligations.

(b) Term Loan B. Subject to the terms and conditions of this Agreement, each Lender with a Term Loan B Commitment agrees (severally, not jointly or jointly and severally) to make term loans B (collectively, “Term Loan B”) to Borrowers from time to time from the First Amendment Effective Date until the Term Loan Expiration Date, or until the earlier reduction of its Term Loan B Commitment to zero in accordance with the terms hereof, in an aggregate principal amount not to exceed the unused portion of such Lender’s Term Loan B Commitment. The aggregate principal amount of Term Loan B (based on the initial principal amount) shall not exceed the Term Loan B Amount. The Term Loan B Commitment of each Lender shall (x) automatically and permanently be reduced to the extent that such Lender makes a Term Loan B to Borrowers, and (y) automatically and permanently be reduced to zero on the Term Loan Expiration Date. Each Term Loan B requested by Borrowers pursuant to this Section 2.2(b) shall be in a minimum amount of $2,500,000. Any principal amount of Term Loan B that is repaid or prepaid may not be reborrowed. The outstanding principal of the Term Loan B shall be repayable by the Borrowers in consecutive quarterly installments, on the first day of each April, July, October and January, commencing on April 1, 2006 and ending on the Maturity Date (or if earlier than the Maturity Date, the date that the Term Loans have been repaid in full) consisting of (i) during the period from April 1, 2006 through January 1, 2007, quarterly payments of $125,000, (ii) during the period from April 1, 2007 through January 1, 2008, quarterly payments of $250,000, and (iii) during the period from April 1, 2008 through the Maturity Date, equal quarterly payments which, in the aggregate, equal the remaining outstanding principal balance of Term Loan B; provided, that the last such installment shall be in the amount necessary to repay in full the unpaid principal amount of Term Loan B; provided, further, for the avoidance of doubt, no installment shall be due during any period where the outstanding principal amount of Term Loan B has been repaid in full. The outstanding unpaid principal balance and all accrued and unpaid interest under Term Loan B shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under Term Loan B shall constitute Obligations.”

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(e) Section 2.3(c)(i)(2) of the Loan Agreement is hereby amended and restated in its entirety as follows:

“(2) the requested Borrowing would exceed the unused portion of the Term Loan A Commitments or the Term Loan B Commitments, as applicable.”

(f) Section 2.11 of the Loan Agreement is hereby amended (i) by deleting the word “and” at the end of clause (a), (ii) by deleting the period at the end of clause (b) and replacing it with “, and”, and (iv) by adding the following new clause (c):

“(c) Term Loan B Closing Fee. An amendment fee in the amount of $100,000 (the “Term Loan B Closing Fee”), which amendment fee shall be fully earned on the First Amendment Effective Date, and shall be charged to Borrowers’ Loan Account on such date.”

(g) Section 2.17 of the Loan Agreement is hereby amended by deleting the phrase “each Lender with a Term Loan Commitment” and replacing it with the phrase “each Lender with a Term Loan A Commitment or a Term Loan B Commitment”.

(h) Section 15.1(j) of the Loan Agreement is hereby amended and restated in its entirety as follows:

“(j) change the definition of Term Loan A Amount, Term Loan B Amount or Term Loan Expiration Date, or”

(i) Schedule C-1 to the Loan Agreement is hereby amended and restated in its entirety as set forth on Exhibit A to this Amendment.

3. CONDITIONS PRECEDENT TO THIS AMENDMENT. The satisfaction of each of the following shall constitute conditions precedent to the effectiveness of this Amendment and each and every provision hereof:

(a) After giving effect to this Amendment, the representations and warranties in this Amendment, the Loan Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date);

(b) Agent shall have received the reaffirmation and consent of each Guarantor attached hereto as Exhibit B (the “Consent”), duly executed and delivered by an authorized official of each Guarantor;

(c) Agent shall have received a certificate of status with respect to each Borrower and each Guarantor, dated within 10 days of the date hereof, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower or Guarantor, as applicable, which certificate shall indicate that such Borrower or Guarantor, as applicable, is in good standing in such jurisdiction;

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(d) Agent shall have received a certificate from the secretary of Parent certifying that, except as disclosed therein, the Governing Documents of the Borrowers and the Guarantors have not been amended since the Closing Date;

(e) After giving effect to this Amendment, no Default or Event of Default shall have occurred and be continuing on the date hereof or as of the date of the effectiveness of this Amendment; and

(f) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any Governmental Authority against any Borrower, any Guarantor or any member of the Lender Group.

4. REPRESENTATIONS AND WARRANTIES. Parent and each Borrower hereby represents and warrants to the Lender Group as follows:

(a) After giving effect to this Amendment, the representations and warranties in this Amendment, the Loan Agreement and the other Loan Documents are true and correct in all material respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date);

(b) The execution, delivery, and performance of this Amendment and of the Loan Agreement, as amended by this Amendment, are within Parent’s and each Borrower’s corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected,

(c) This Amendment and the Loan Agreement, as amended by this Amendment, constitute Parent’s and each Borrower’s legal, valid, and binding obligation, enforceable against Parent and such Borrower in accordance with its terms,

(d) This Amendment has been duly executed and delivered by Parent and each Borrower,

(e) The execution, delivery, and performance of the Consent is within each Guarantor’s corporate power, has been duly authorized by all necessary corporate action, and is not in contravention of any law, rule or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected,

(f) The Consent constitutes each Guarantor’s legal, valid, and binding obligations, enforceable against each such Person in accordance with its terms,

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(g) After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing on the date hereof or as of the date of the effectiveness of this Amendment,

(h) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein has been issued and remains in force by any Governmental Authority against any Borrower, any Guarantor, or any member of the Lender Group, and

(i) The Consent has been duly executed and delivered by each Guarantor.

5. CONSTRUCTION. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF NEW YORK.

6. ENTIRE AMENDMENT; EFFECT OF AMENDMENT. This Amendment, and terms and provisions hereof, constitute the entire agreement among the parties pertaining to the subject matter hereof and supersedes any and all prior or contemporaneous amendments relating to the subject matter hereof. Except for the amendments to the Loan Agreement expressly set forth in Section 2 hereof, the Loan Agreement and other Loan Documents shall remain unchanged and in full force and effect. The execution, delivery, and performance of this Amendment shall not operate as a waiver of or, except as expressly set forth herein, as an amendment of, any right, power, or remedy of the Lender Group as in effect prior to the date hereof. The amendments set forth herein are limited to the specifics hereof, shall not apply with respect to any facts or occurrences other than those on which the same are based, and except as expressly set forth herein, shall neither excuse any future non-compliance with the Loan Agreement, nor shall operate as a waiver of any Default or Event of Default. To the extent any terms or provisions of this Amendment conflict with those of the Loan Agreement or other Loan Documents, the terms and provisions of this Amendment shall control. This Amendment is a Loan Document.

7. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment.

8. MISCELLANEOUS.

(a) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to “this Agreement”, “hereunder”, “herein”, “hereof” or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment.

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(b) Upon the effectiveness of this Amendment, each reference in the Loan Documents to the “Loan Agreement”, “thereunder”, “therein”, “thereof” or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment.

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IN WITNESS WHEREOF, the parties have caused this Amendment to be executed and delivered as of the date first written above.


PAINCARE HOLDINGS, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE SURGERY CENTERS, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

ADVANCED ORTHOPAEDICS OF SOUTH FLORIDA II, INC., a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAIN AND REHABILITATION NETWORK, INC., a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

MEDICAL REHABILITATION SPECIALISTS II, INC., a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer


PAINCARE ACQUISITION COMPANY V, INC., a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE ACQUISITION COMPANY VI, INC., a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

HEALTH CARE CENTER OF TAMPA, INC., a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE ACQUISITION COMPANY VIII, INC., a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE ACQUISITION COMPANY IX, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer


PAINCARE ACQUISITION COMPANY X, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE ACQUISITION COMPANY XI, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

GEORGIA SURGICAL CENTERS, INC. a Georgia corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE ACQUISITION COMPANY XIII, INC., a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

BENJAMIN ZOLPER, M.D., INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE ACQUISITION COMPANY XV, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer


PAINCARE ACQUISITION COMPANY XVII, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE ACQUISITION COMPANY XIX, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE ACQUISITION COMPANY XVIII, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE SURGERY CENTERS I, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer

PAINCARE SURGERY CENTERS II, INC. a Florida corporation

By:		/s/ Randy Lubinsky
Name:		Randy Lubinsky
Title:		Chief Executive Officer


HBK INVESTMENTS L.P., a Delaware limited partnership, as Agent

By:		/s/ David C. Haly
Its authorized signatory

PCRL INVESTMENTS L.P., a Delaware limited partnership, as Lender

By:		/s/ David C. Haly
Its authorized signatory

Exhibit A

Schedule C-1

Commitments


Lender	Term Loan A Commitment		Term Loan B Commitment		Total Commitment
PCRL INVESTMENTS L.P.	$	25,000,000.00	$	5,000,000.00	$	30,000,000.00

All Lenders	$	25,000,000.00	$	5,000,000.00	$	30,000,000.00

Exhibit B

REAFFIRMATION AND CONSENT

All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in that certain Loan and Security Agreement by and among PAINCARE HOLDINGS, INC., a Florida corporation (“Parent”), and each of Parent’s Subsidiaries identified on the signature pages thereof (such Subsidiaries are referred to hereinafter each individually as a “Borrower”, and individually and collectively, jointly and severally, as the “Borrowers”), each of the lenders that is a signatory to thereto (together with their respective successors and permitted assigns, individually, “Lender” and, collectively, “Lenders”), and HBK INVESTMENTS L.P., a Delaware limited partnership, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors, if any, in such capacity, “Agent”; and together with each of the Lenders, individually and collectively, the “Lender Group”), dated as of May 10, 2005 (as amended, restated, supplemented or otherwise modified, the “Loan Agreement”), or in Amendment Number Three to Loan and Security Agreement, dated as of August , 2005 (the “Amendment”), among Parent, the Borrowers and the Lender Group. The undersigned each hereby (a) represents and warrants to the Lender Group that the execution, delivery, and performance of this Reaffirmation and Consent are within its powers, have been duly authorized by all necessary action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) consents to the amendment of the Loan Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing to the Lender Group under any Loan Documents to which it is a party; and (d) agrees that each of the Loan Documents to which it is a party is and shall remain in full force and effect. Although the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, it understands that the Lender Group has no obligations to inform it of such matters in the future or to seek its acknowledgment or agreement to future amendments, and nothing herein shall create such a duty. Delivery of an executed counterpart of this Reaffirmation and Consent by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Reaffirmation and Consent. Any party delivering an executed counterpart of this Reaffirmation and Consent by telefacsimile also shall deliver an original executed counterpart of this Reaffirmation and Consent but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Reaffirmation and Consent. This Reaffirmation and Consent shall be governed by the laws of the State of New York.

[signature page follows]

IN WITNESS WHEREOF, the undersigned have each caused this Reaffirmation and Consent to be executed as of the date of the Amendment.


PAINCARE HOLDINGS, INC.,
a Florida corporation

By:
Name:
Title:

PAINCARE, INC., a Nevada corporation

By:
Name:
Title:

PAINCARE MANAGEMENT SERVICES, INC., a Florida corporation

By:
Name:
Title:

CAPERIAN, INC., a Florida corporation

By:
Name:
Title:

EX-10.10 4 dex1010.htm AMENDED EMPLOYEE AGREEMENT Amended Employee Agreement

Exhibit 10.10

THIRD ADDENDUM TO

SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT

BY AND BETWEEN

PAINCARE HOLDINGS, INC.

AND

RANDY LUBINSKY

THIS THIRD ADDENDUM (hereinafter “Addendum”) TO THAT CERTAIN SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT BY AND BETWEEN PAINCARE HOLDINGS, INC. AND RANDY LUBINSKY dated August 1, 2003, as amended (the “Employment Agreement”), is executed as of May 26, 2006 (the “Execution Date”) by and between PainCare Holdings, Inc., a Florida corporation (the “Company”) and Randy Lubinsky (“Employee”).

WHEREAS, the parties are desirous of modifying Employee’s compensation package all as set forth herein.

NOW, THEREFORE, in consideration of the promises and undertakings contained herein, and other good and valuable consideration, the receipt and adequacy of which is acknowledged, the Company and Employee hereby agree as follows:

1. Terms. All defined terms in this Addendum shall have the same meaning as set forth in the Employment Agreement unless otherwise specifically stated herein.

2. Effective Date. The “Effective Date” of this Addendum shall be January 1, 2006.

3. Term of Employment. The “Scheduled Termination Date” shall be extended until December 31, 2010, unless renewed or earlier terminated pursuant to the provisions of the Employment Agreement. Assuming all conditions of the Employment Agreement have been satisfied and there has been no breach of the Employment Agreement during its initial term, Employee may extend the Term for an additional three year term at Employee’s election (“Extended Term”).

4. Vesting of Options. All options to purchase common stock of the Company that have been issued to Employee by the Company and remain outstanding shall be immediately vested in full as of the Execution Date.

5. Bonus. The Company shall pay Employee an annual cash bonus (the “Fixed Bonus”) equal to $200,000, payable in four equal installments commencing on March 31, 2006, and continuing on each June 30, September 30, December 31, and March 31 of each year during the Term and any Extended Term. Commencing on June 30, 2006, and continuing on each December 31 and June 30 during the Term and any Extended Term, the Board of Directors or the Compensation Committee thereof, shall

conduct a review of the Employee’s performance of his duties. Based on the outcome of said review, the Board of Directors or the Compensation Committee thereof, as the case may be, may award an additional discretionary bonus to Employee (the “Discretionary Bonus,” and together with the Fixed Bonus the “Bonus”). The total Bonus paid to Employee in any calendar year shall not exceed 150% of Employees base salary for said calendar year.

6. Waiver of Accrued Bonus. Employee received Bonuses from the Company in 2003, 2004, and 2005 in an amount less than that to which Employee was entitled pursuant to the terms of the Employment Agreement. Employee hereby waives any right Employee has to any additional Bonuses for 2003, 2004, or 2005, and accepts the Bonuses received to date with respect to those years as payment in full of any obligation the Company may have under the Employment Agreement to pay Employee a Bonus with respect to those years.

7. Equity Compensation. At the discretion of the Board of Directors, or the Compensation Committee thereof, Employee may be awarded equity compensation in the form of options, restricted stock, or any other form, from time to time during the Term or any Extended Term. Any such equity compensation shall in no way impact the calculation of the Bonus cap set forth in Section 6.

8. Entire Agreement. The Employment Agreement, as modified hereby, supersedes all prior and contemporaneous agreements and understandings between the parties hereto, oral or written, and may not be modified or terminated orally. No modification, termination or attempted waiver shall be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced. This Addendum was the subject of negotiation by the parties hereto. The parties agree that no prior drafts of this Addendum shall be admissible as evidence (whether in any arbitration or court of law) in any proceeding which involves the interpretation of any provisions of this Addendum.

9. Counterparts. This Addendum may be executed in counterparts, all of which taken together shall be deemed one original.

10. Effect of Addendum. The Company’s Board of Directors and the Compensation Committee thereof have approved this Addendum. Except as otherwise provided herein, the terms and conditions of the Employment Agreement shall remain unchanged and are hereby republished in their entirety.

IN WITNESS WHEREOF, the parties hereto have executed this Addendum effective as of the date first above written.


COMPANY

PainCare Holdings, Inc.

By:
		Mark Szporka, CFO

EMPLOYEE


Randy Lubinsky

EX-10.11 5 dex1011.htm AMENDED EMPLOYEE AGREEMENT Amended Employee Agreement

Exhibit 10.11

THIRD ADDENDUM TO

SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT

BY AND BETWEEN

PAINCARE HOLDINGS, INC.

AND

MARK SZPORKA

THIS THIRD ADDENDUM (hereinafter “Addendum”) TO THAT CERTAIN SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT BY AND BETWEEN PAINCARE HOLDINGS, INC. AND MARK SZPORKA dated August 1, 2003, as amended (the “Employment Agreement”), is executed as of May 26, 2006 (the “Execution Date”) by and between PainCare Holdings, Inc., a Florida corporation (the “Company”) and Mark Szporka (“Employee”).

WHEREAS, the parties are desirous of modifying Employee’s compensation package all as set forth herein.

1. Terms. All defined terms in this Addendum shall have the same meaning as set forth in the Employment Agreement unless otherwise specifically stated herein.

2. Effective Date. The “Effective Date” of this Addendum shall be January 1, 2006.

9. Counterparts. This Addendum may be executed in counterparts, all of which taken together shall be deemed one original.

IN WITNESS WHEREOF, the parties hereto have executed this Addendum effective as of the date first above written.


COMPANY

PainCare Holdings, Inc.

By:
		Randy Lubinsky, CEO

EMPLOYEE


Mark Szporka

EX-10.12 6 dex1012.htm AMENDED EMPLOYEE AGREEMENT Amended Employee Agreement

Exhibit 10.12

FOURTH ADDENDUM TO

EMPLOYMENT AGREEMENT

BY AND BETWEEN

PAINCARE HOLDINGS, INC.

AND

RONALD RIEWOLD

THIS FOURTH ADDENDUM (hereinafter “Addendum”) TO THAT CERTAIN EMPLOYMENT AGREEMENT BY AND BETWEEN PAINCARE HOLDINGS, INC. AND RONALD RIEWOLD dated February 7, 2003, as amended (the “Employment Agreement”), is executed as of May 26, 2006 (the “Execution Date”) by and between PainCare Holdings, Inc., a Florida corporation (the “Company”) and Ronald Riewold (“Employee”).

WHEREAS, the parties are desirous of modifying Employee’s compensation package all as set forth herein.

1. Terms. All defined terms in this Addendum shall have the same meaning as set forth in the Employment Agreement unless otherwise specifically stated herein.

2. Effective Date. The “Effective Date” of this Addendum shall be January 1, 2006.

3. Term of Employment. The “Scheduled Termination Date” shall be extended until December 31, 2010, unless renewed or earlier terminated pursuant to the provisions of the Employment Agreement. Assuming all conditions of the Employment Agreement have been satisfied and there has been no breach of the Employment Agreement during its initial term, the Company may extend the Term for two additional 5 year terms (“Extended Term”).

9. Counterparts. This Addendum may be executed in counterparts, all of which taken together shall be deemed one original.

IN WITNESS WHEREOF, the parties hereto have executed this Addendum effective as of the date first above written.


COMPANY

PainCare Holdings, Inc.

By:
		Randy Lubinsky, CEO

EMPLOYEE


Ronald Riewold

EX-14.1 7 dex141.htm CODE OF ETHICS FOR PAINCARE HOLDINGS, INC Code of Ethics for PainCare Holdings, Inc

EXHIBIT 14.1

PAINCARE HOLDINGS, INC.

CODE OF CONDUCT AND ETHICS

This document (“Code”) applies equally to employees at all levels of PainCare Holdings, Inc. (“PainCare”) and each subsidiary, partnership, joint venture or other business association that is effectively controlled by PainCare directly or indirectly (together called the “Company”), as well as to directors who are not employees of the Company. Accordingly, references below to employee or employees include the Company’s directors who are not employees.

Policies

1.	All employees are required to create and maintain a working environment that reflects the Company’s core values of honesty, integrity, trust, respect, teamwork and social responsibility. This includes creating a work environment in which discrimination, of any kind, is not tolerated.

The Company and its employees shall comply with all laws, rules and regulations that are applicable to the Company’s activities, including federal, state and local government healthcare laws and regulations. Guidance regarding compliance with laws, rules and regulations is available from our Chief Executive Officer or Chief Financial Officer.

It is both illegal and against Company policy for any employee who is aware of material nonpublic information relating to the Company to buy or sell any securities of the Company or recommend that another person buy, sell or hold any securities of the Company. This also includes posting or sharing nonpublic information about the Company in Internet discussion groups, chat rooms or bulletin boards.

All employees shall comply with the Company’s policy on insider trading discussed in more detail in memoranda circulated to employees and also available from the Chief Financial Officer.

4.	No funds, property, service or thing of value shall be received or made by the Company if is to be used for any unlawful purpose or other than as described in the documentation which evidences or supports the transaction.

5.	Compliance with accepted accounting rules and controls is required at all times.

No false, artificial or misleading entries in the books and records of the Company shall be made for any reason whatsoever. No fund or asset which is not fully and properly recorded and no accounting entries or books of account which do not truly reflect the transactions to which they relate shall be created or permitted to exist.

All employees who are involved in the Company’s public disclosure process are responsible for acting in furtherance of the policy that the information in the Company’s public disclosure communications, including SEC filings, be full, fair, accurate, timely, and understandable. In particular, these individuals are required to maintain familiarity with the disclosure requirements applicable to the Company and are prohibited from knowingly misrepresenting, omitting, or causing others to misrepresent or omit, material facts about the Company to others, whether

within or outside the Company, including the Company’s independent auditors. In addition, any employee who has a supervisory role in the Company’s disclosure process has an obligation to discharge his or her responsibilities diligently.

8.	Non-cash gifts, favors and entertainment may be given at Company expense or accepted by Company employees from an individual or firm doing or seeking to do business with the Company only if they meet all of the following criteria:

•

They are consistent with customary business practices and do not violate applicable law or ethical standards

•

They are not excessive in value

•

They cannot be construed as a bribe, payoff or improper inducement

•

Public disclosure of the facts would not embarrass the Company or the employee

9.	Payments or gifts of cash (or of cash equivalents such as liquid securities) to or from an individual or firm doing or seeking to do business with the Company (including any regulatory personnel) are never permitted and may not be solicited, offered, made or accepted by Company employees.

10.	Generally, the use of Company funds, property, services or things of value for or in aid of political parties or candidates for public office is prohibited. Any exception requires the prior written approval of the Company’s Chief Executive Officer.

11.

No corporate asset may be used for or in aid of any committee whose principal purpose is to influence the outcome of a referendum or other vote of the electorate on a public issue unless the legality is confirmed by the Company’s Counsel and the written approval of the Company’s Chief Executive Officer is obtained.

12.	Employees are encouraged to participate in political activities as they see fit, on their own time and at their own expense. No reward, compensation or reimbursement for such activity or the expense thereof shall be made by the Company directly or indirectly.

13.

All employees have a duty to be free form the influence of any conflicting interest when they represent the Company in negotiations or make recommendations with respect to dealings with third parties. They are expected to deal with vendors, regulatory personnel and all others doing business with the Company on the sole basis of what is in the best interest of the Company, without favor or preference to third parties based on personal considerations. In particular:

•

Employees who deal with parties doing or seeking to do business with the Company, or who make recommendations with respect to such dealings or pass judgment upon them, shall not own any interest in or have any personal agreement or understanding with such third parties that might tend to influence the decision of the employee with respect to the business of the Company, unless expressly authorized in writing by the

Company’s Chief Executive Officer after the interest, agreement or understanding has been disclosed.

•

No employee shall seek or accept, directly or indirectly, any personal loan or services from any individual or business concern doing or seeking to do business with the Company except from financial institutions or service providers offering like loans or services to third parties under similar terms in the ordinary course of their respective businesses.

•

No employee shall do business with his or her relative on behalf of the Company unless expressly authorized in writing by the company’s Chief Executive Officer after the relationship has been fully disclosed.

•

The requirement of freedom from conflicting interests that applies to all employees of the Company extends also to situations involving their relatives.

•

The Chief Executive Officer of the Company has the ultimate authority and responsibility to determine what remedial steps should be taken in situations involving an actual or potential conflict of interest.

Waivers

Any waiver of any provision of the Code for the Company’s executive officers or directors may be made only by its board of directors. The waiver must be promptly disclosed to the Company’s stockholders, along with the reasons for the waiver, as required by law or Amex regulations.

Reporting and Responsibilities

Any employee having information, knowledge or suspicion of any actual or contemplated activity which is or appears to be in violation of this Code shall promptly report it to the Company’s Chief Executive Officer or Chief Financial Officer. If any such transaction involves an officer of the Company, the matter shall be reported directly to the Chairman of the Board. However, if you are uncomfortable speaking with any of these individuals, you may report the incident on the Company’s 24-hour toll free Ethics Hotline at (866)593-0490. This hotline allows you to make a report anonymously.

The Company’s Chief Executive Officer and Chief Financial Officer have overall responsibility for matters involving the Code. Their responsibilities include providing for prompt and consistent enforcement of the Code, clear and objective standards for compliance with the Code and a fair process for determining whether violations of the Code have occurred.

Employees who make reports of suspected violations of this Code will be protected from retaliation, such as discipline or involuntary termination of employment, as a result of their reports. With the cooperation of the employee, management will promptly investigate every reported allegation of illegal or unethical behavior, except that the employee will not participate where he or she has made an anonymous report.

Penalties for Violations

Violation of the Code will result in appropriate, case specific, discipline which may include demotion or discharge. Penalties may also include civil and/or criminal prosecution.

EX-21.1 8 dex211.htm SUBSIDIARIES OF THE COMPANY Subsidiaries of the Company

EXHIBIT 21.1

SUBSIDIARIES OF THE COMPANY

PainCare, Inc.

PainCare Management Services, Inc.

Caperian, Inc.

PainCare Surgery Centers, Inc.

PainCare Surgery Centers I, Inc.

PainCare Surgery Centers II, Inc.

PainCare Surgery Centers III, Inc.

Advanced Orthopaedics of South Florida II, Inc.

Rothbart Pain Management Clinic

Pain and Rehabilitation Network, Inc.

Medical Rehabilitation Specialists II, Inc.

PainCare Acquisition Company V, Inc.

PainCare Acquisition Company VI, Inc.

PainCare Acquisition Company VIII, Inc. d/b/a Bone and Joint Surgical Clinic

Health Care Center of Tampa, Inc.

PainCare Acquisition Company IX, Inc.

PainCare Acquisition Company X, Inc.

PainCare Acquisition Company XI, Inc.

Georgia Surgical Centers, Inc.

PainCare Acquisition Company XII, Inc.

PainCare Acquisition Company XIII, Inc.

Benjamin Zolper, M.D., Inc.

PainCare Acquisition Company XV, Inc.

PainCare Acquisition Company XVII, Inc.

PainCare Acquisition Company XVIII, Inc.

PainCare Acquisition Company XIX, Inc.

PainCare Acquisition Company XX, Inc.

PainCare Acquisition Company XXI, Inc.

PainCare Acquisition Company XXII, Inc.

PainCare Acquisition Company XXIII, Inc.

PainCare Acquisition Company XXIV, Inc.

PainCare Acquisition Company XXV, Inc.

PainCare Acquisition Company XXVI, Inc.

PainCare Acquisition Company XXVII, Inc.

PainCare Acquisition Company XXVIII, Inc.

PainCare Acquisition Company XXIX, Inc.

PainCare Acquisition Company XXX, Inc.

PainCare Reorganization Corp I Inc.

PainCare Reorganization Corp II Inc.

PainCare

Reorganization Corp III Inc.

PainCare

Reorganization Corp IV Inc.

PainCare

Reorganization Corp V Inc.

PainCare

Reorganization Corp VI Inc.

PainCare Neuromonitoring I, Inc.

PainCare Intraoperative Services, Inc.

EX-23.(A) 9 dex23a.htm CONSENT OF BPKH Consent of BPKH

Exhibit 23.(A)

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of PainCare Holdings, Inc.

Beemer, Pricher, Kuehnhackl & Heidbrink, P.A.

Winter Park, Florida

May 12, 2006

EX-23.(B) 10 dex23b.htm CONSENT OF TSCHOPP, WHITCOMB & ORR, P.A Consent of Tschopp, Whitcomb & Orr, P.A

Exhibit 23.(B)

Independent Auditors’ Report

The Board of Directors

PainCare Holdings, Inc.

As discussed in note 2 of the consolidated financial statements, the Company has restated its 2004 and 2003 consolidated financial statements.

/s/ Tschopp, Whitcomb & Orr, P.A.

March 4, 2005, except for note 2 as to which the date is April 17, 2006

Maitland, Florida

EX-31.1 11 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Randy Lubinsky, certify that:

1.	I have reviewed this Annual Report on Form 10-K of PainCare Holdings, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 1, 2006

/s/ Randy Lubinsky

Randy Lubinsky, Chief Executive Officer

EX-31.2 12 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Mark Szporka, certify that:

1.	I have reviewed this Annual Report on Form 10-K of PainCare Holdings, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 1, 2006

/s/ Mark Szporka

Mark Szporka, Chief Financial & Accounting Officer

EX-32.1 13 dex321.htm SECTION 906 CEO AND CFO CERTIFICATION Section 906 CEO and CFO Certification

EXHIBIT 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL AND

ACCOUNTING OFFICER OF PAINCARE HOLDINGS, INC.

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10K of PainCare Holdings, Inc. (the “Company”) for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Randy Lubinsky, as Chief Executive Officer of the Company, and Mark Szporka, as Chief Financial & Accounting Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/s/ Randy Lubinsky

Randy Lubinsky, Chief Executive Officer

Date: June 1, 2006

/s/ Mark Szporka

Mark Szporka, Chief Financial & Accounting Officer

Date: June 1, 2006

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