Paincare (PRXZ) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number 1-14160

PainCare Holdings, Inc.

(Exact name of small business issuer as specified in its charter)

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

1030 N. Orange Avenue, Suite 105, Orlando, Florida 32801

(Address of principal executive offices)

(407) 367-0944

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the issuer’s common stock as of November 14, 2005 is 56,650,977 shares.

PAINCARE HOLDINGS, INC.

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004 (Audited)	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004 (Unaudited)	4
	Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2005 (Unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	34
PART II	OTHER INFORMATION	34
Item 1.	Legal Proceedings	34
Item 2.	Changes in Securities	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
	Signatures	36

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PainCare Holdings, Inc.

Consolidated Balance Sheets

As of September 30, 2005 and December 31, 2004

	September 30, 2005 (Unaudited)		December 31, 2004 (Audited)
Assets
Current assets:
Cash	$	18,086,682	$	19,100,840
Accounts receivable, net		22,909,586		14,077,643
Due from shareholders		2,954,580		1,794,957
Deposits & prepaid expenses		3,455,423		1,117,317
Acquisition consideration paid in escrow		14,525,761		—
Total current assets		61,932,032		36,090,757
Property and equipment, net		10,935,321		7,119,065
Goodwill, net		85,069,645		55,237,910
Other assets		6,522,189		4,628,770
Total assets	$	164,459,187	$	103,076,502
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	2,247,741	$	562,314
Acquisition consideration payable		916,667		17,900,833
Income tax payable		3,851,709		2,199,100
Interest payable		68,895		131,368
Current portion of notes payable		9,812,713		765,177
Current portion of convertible debentures		—		3,885,000
Current portion of capital lease obligations		1,437,600		930,117
Total current liabilities		18,335,325		26,373,909
Notes payable, less current portion		28,750,000		295,583
Convertible debentures, less current portion		10,456,000		17,186,000
Capital lease obligations, less current portion		2,562,850		2,190,627
Deferred income tax liability		715,752		1,500,200
Total liabilities		60,819,927		47,546,319
Minority interests		1,732,729		—
Stockholders’ equity:
Common stock, $.0001 par value, authorized 200,000,000 shares; issued and outstanding 55,143,884 and 41,512,833 shares		5,514		4,151
Preferred stock, $.0001 par value, authorized 10,000,000 shares; issued and outstanding -0- shares		—		—
Additional paid in capital		85,243,879		47,995,110
Retained earnings		16,610,811		7,499,546
Other comprehensive income		46,327		31,376
Total stockholders’ equity		101,906,531		55,530,183
Total liabilities and stockholders’ equity	$	164,459,187	$	103,076,502

The accompanying notes are an integral part of the consolidated financial statements.

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PainCare Holdings, Inc.

Consolidated Statements of Operations (Unaudited)

For the Three and Nine Months Ended

September 30, 2005 and 2004

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
Total revenues:
Pain management	$	14,904,949		$	6,060,655		$	35,460,297		$	14,311,376
Surgeries		1,389,222			1,333,926			4,444,255			3,856,246
Ancillary services		4,569,489			3,067,121			11,083,701			8,270,878
Total revenues		20,863,660			10,461,702			50,988,253			26,438,500
Cost of sales		3,279,321			1,303,902			8,295,102			4,363,899
Gross profit		17,584,339			9,157,800			42,693,151			22,074,601
General and administrative expenses		9,906,921			5,952,089			24,218,347			13,514,874
Amortization expense		91,318			127,894			333,661			264,476
Depreciation expense		418,665			229,665			924,542			596,050
Operating income		7,167,435			2,848,152			17,216,601			7,699,201
Interest expense		(1,376,216	)		(523,351	)		(2,355,325	)		(1,236,367	)
Other income		91,938			48,398			235,321			101,051
Income before income taxes		5,883,157			2,373,199			15,096,597			6,563,885
Provision for income taxes		2,129,200			831,320			5,608,200			2,298,060
Income before minority interest		3,753,957			1,541,879			9,488,397			4,265,825
Minority interest		280,060			—			377,132			—
Net income	$	3,473,897		$	1,541,879		$	9,111,265		$	4,265,825
Basic earnings per common share	$	0.06		$	0.05		$	0.18		$	0.15
Basic weighted average common shares outstanding		53,495,697			31,692,969			49,859,872			29,276,572
Diluted earnings per common share	$	0.06		$	0.04		$	0.15		$	0.11
Diluted weighted average common shares outstanding		65,020,702			39,265,988			62,860,091			38,721,269

The accompanying notes are an integral part of the consolidated financial statements.

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PainCare Holdings, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Three Months Ended September 30, 2005

	Common Stock Shares	Common Stock Amount		Additional Paid in Capital		Retained Earnings		Other Comprehensive Income		Total Stockholders’ Equity
Balances at June 30, 2005	52,163,181	$	5,216	$	74,485,837	$	13,136,914	$	34,124	$	87,662,091
Common stock issued for earnouts	529,141		53	$	2,445,914		—		—		2,445,967
Common stock issued for exercise of stock options	220,000		22	$	62,778		—		—		62,800
Common stock issued for exercise of warrants	25,000		3	$	37,497		—		—		37,500
Common stock issued for convertible debenture interest payments	52,596		5	$	196,045		—		—		196,050
Common stock issued for acquisitions	2,153,966		215	$	8,015,808		—		—		8,016,023
Other comprehensive income	—		—		—		—		12,203		12,203
Net income	—		—		—		3,473,897		—		3,473,897
Balances at September 30, 2005	55,143,884	$	5,514	$	85,243,879	$	16,610,811	$	46,327	$	101,906,531

The accompanying notes are an integral part of the consolidated financial statements.

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PainCare Holdings, Inc.

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2005 and 2004

	2005			2004
Cash flows from operating activities:
Net income	$	9,111,265		$	4,265,825
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,258,203			860,526
Common stock issued for interest payments		735,968			—
Amortization of deferred financing expenses		(475,717	)		—
Restricted stock issued for compensation		11,892			—
Minority Interests		145,632			—
Other comprehensive income		14,951			11,148
Change in operating assets and liabilities, net of assets acquired:
Accounts receivable		(4,202,102	)		(5,133,242	)
Deposits and prepaid expenses		(2,062,263	)		35,716
Other assets		(2,227,080	)		(590,980	)
Deferred income tax liability		304,812			858,000
Accounts payable and accrued expenses		909,023			(55,565	)
Income tax payable		563,349			1,370,060
Interest payable		(62,473	)		55,975
Net cash provided by operating activities		4,025,460			1,677,463
Cash flow from investing activities:
Purchase of property and equipment		(1,146,845	)		(149,918	)
Cash paid for earnout payments		(6,406,800	)		(1,583,332	)
Cash paid for acquisition		(24,845,848	)		(7,836,900	)
Cash from acquisitions		398,291			439,616
Cash used for purchase of contract rights		—			(757,500	)
Net cash used in investing activities		(32,001,202	)		(9,888,034	)
Cash flows from financing activities:
Net proceeds from issuance of common stock, net capital offering costs		524,662			414,183
Net proceeds from issuance of convertible debentures		—			12,299,925
Payments of capital lease obligations		(1,026,431	)		(553,322	)
Payment of convertible debentures		—			(1,408,466	)
Payment of acquisition consideration payable		(135,500	)		(3,000,000	)
Due from shareholders		(1,159,623	)		(1,470,614	)
Net advances on notes receivable		—			96,356
Net advances (payments) on notes payable		28,758,476			(1,059,475	)
Net cash provided by financing activities		26,961,584			5,318,587
Net decrease in cash		(1,014,158	)		(2,891,984	)
Cash at beginning of period		19,100,840			7,923,767
Cash at end of period	$	18,086,682		$	5,031,783
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	$	1,822,962		$	1,180,392
Cash paid during the year for income taxes		4,673,855			—
Equipment financed with capital lease obligations		1,504,833			116,199
Non-cash transactions:
Common stock issued for acquisitions		18,921,194			6,725,000
Common stock issued for earnouts		7,052,633			1,124,999
Common stock issued for contract rights		—			758,000
Common stock issued for convertible debentures		10,003,783			1,533,690

The accompanying notes are an integral part of the consolidated financial statements.

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PainCare Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Organization and Basis of Presentation

(1)Organization and Summary of Significant Accounting Policies

Organization

History of the Company

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. had approximately 128 shareholders of record prior to the Merger with HelpMate. The combined Company now has approximately 10,200 shareholders of record.

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.

Principles of Interim Statements.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 16, 2005.

Acquisitions

On April 13, 2005 the Company acquired the non-medical assets of Colorado Pain Specialists, PC (“CPS”), an advanced interventional pain management practice operating six clinics in the Denver, Colorado area. The initial portion of the purchase price consisted of $2,125,000 plus 653,698 PainCare common shares subject to certain post-closing adjustments, if any. In addition, the Company will pay CPS an additional $4,250,000 in three equal annual payments (50% in cash and 50% in PainCare common stock priced at market) subject to the satisfaction of certain earnings goals and the payment of the management fee to the Company. The Company funded the cash portion of the initial purchase price from the proceeds of the recently completed public offering. Neither CPS nor its members have any prior relationship with the Company or its affiliates.

On May 12, 2005, the Company acquired the controlling interest of PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center (“LWSC”), a fully accredited ambulatory surgical center located in Palm Beach County, Florida. The Company acquired 100% of the interest in LWSC owned by the general partner, PSHS Partnership Ventures, Inc., and approximately 50% of the interest in LWSC owned by the three Limited Partners, one of whom includes Dr. Merrill Reuter, Chairman of PainCare and President of Advanced Orthopaedics of South Florida II, Inc., a practice, which the Company has owned since 2001. PainCare Surgery Center I, Inc., a wholly owned subsidiary of the Company, will act as the sole general partner of LWSC and owns 67.5% of all partnership interests in the partnership. In consideration for its general partner interest and the controlling stake in LWSC, the Company paid the sellers a total of $8,159,058 in a combination of cash and common stock.

On August 1, 2005, the Company acquired the controlling interest of PSHS Beta Partners, Ltd. d/b/a Gables Surgical Center (“GSC”), a fully accredited ambulatory surgical center located in Miami, Florida. The Company acquired 100% of the interest in GSC owned by the general partner, PSHS Partnership Ventures, Inc., and approximately 25% of the interest in GSC owned by four Limited Partners. PainCare Surgery Centers II, Inc., a wholly owned subsidiary of the Company, will act as the sole general partner of GSC and owns 73% of all partnership interests in the partnership. In consideration for its general partner interest and the controlling stake in GSC, the Company paid the sellers a total of $8,221,370 of which $3,322,344 was cash consideration less $133,925 in long-term debt that was satisfied at closing. An additional 868,624 shares of common stock worth $3,266,024 and two promissory notes bearing zero percent interest totaling $1,633,012 payable on August 3, 2006, were also issued.

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On August 9, 2005 the Company acquired the non-medical assets of Piedmont Center for Spinal Disorders, P.C. (“PCSD”), an orthopedic spine surgery practice located in Danville, Virginia. The initial portion of the purchase price consisted of $1,000,000 plus 263,400 PainCare common shares subject to certain post-closing adjustments, if any. In addition, the Company will pay the shareholders of PCSD an additional $2,000,000 in three equal annual payments (50% in cash and 50% in PainCare common stock priced at market) subject to the satisfaction of certain earnings goals and the payment of the management fee to the Company. Neither PCSD nor its shareholders have any prior relationship with the Company or its affiliates.

On September 26, 2005, the Company entered into an asset purchase agreement to acquire Center for Pain Management ASC, LLC (“CPMASC”), which owns and operates four ambulatory surgery centers in Maryland. The acquisition is subject to the receipt of required regulatory approval. The initial portion of the purchase price consisted of $3,750,000 plus 1,021,942 PainCare common shares, which is being held in escrow pending the receipt of the required regulatory approval. In addition, the Company will pay CPMASC an additional $7,500,000 in one annual payment (50% in cash and 50% in PainCare common stock priced at market). The Company acquired Center for Pain Management, LLC, a pain management practice with four locations in Maryland, from the sellers of CPM in December 2004.

On October 3, 2005, the Company acquired the non-medical assets of Floyd O. Ring, Jr., M.D., P.C. (“RING”), an interventional pain management physician practice located in Denver, Colorado. The initial portion of the purchase price consisted of $1,250,000 plus 349,162 common shares. In addition, the Company will pay the shareholders of RING an additional $2,500,000 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 October 14, 2005, the Company acquired the non-medical assets of Christopher J. Centeno, M.D., P.C. and Therapeutic Management, Inc., collectively doing business as The Centeno Clinic (“CENTENO”), a pain management physician practice located in Denver, Colorado. The initial portion of the purchase price consisted of $3,750,000 plus 1,132,931 common shares. In addition, the Company will pay the shareholders of CENTENO an additional $7,500,000 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.

Earn Out Payments

On July 1, 2004, the Company completed the acquisition of the outstanding capital stock of Ben Zolper, M.D., LLC, a pain management physician practice in Bangor, Maine. The Company paid $291,667 in cash and issued 69,115 shares in July 2005, representing the first of three potential earn out payments.

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 carries a term of 48 months and has an interest rate equal to LIBOR + 7.25% or prime + 4.25%, (10.92% at September 30, 2005). On September 15, 2005 the Company closed on a $5 million extension to the original $25 million senior secured credit facility with HBK Investments L.P. No warrants or other equity securities were issued to any party in connection with this transaction. The outstanding balance under this credit facility was $30,000,000 at September 30, 2005.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

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 our consolidated financial statements and related notes included elsewhere in this report. 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 50 physician practices which vary from state to state depending upon regulations governing the corporate practice of medicine and the type of service we provide. Our growth strategy is to acquire or 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 19 practices since December 1, 2000, and because our growth strategy involves

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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 July 2002. Before the merger, PainCare operated three 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 property 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 physicians practice. In these states, we manage physicians’ practices pursuant to a management agreement.

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

We currently have one owned practice primarily providing surgery services, four owned practices primarily providing pain management services, ten managed practices primarily providing pain management services, two managed practices primarily providing surgery services, two managed practices providing ancillary services, and 31 limited management services and equipment contracts.

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. The Financial Accounting Standards Board Emerging Issues Task Force 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.

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 filed as part of our annual report on Form 10-KSB for the fiscal year ended December 31, 2004. 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.

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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 assume the net realizable amount for a particular practice based on historical collections of the particular practice. 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.

We recognize revenues and profits from real estate service contracts under the percentage of completion method of accounting. The amounts of revenues and profits recognized each year are based on the ratio of labor time completed in the period to the total estimated labor time required to fulfill the contract obligations. There are no allocated general and administrative costs to the contracts.

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.

Results of Operations

Set forth below is certain of our selected consolidated financial and operating information for the three and nine month periods ended September 30, 2005 and the comparable periods in 2004, respectively. The selected consolidated financial information is derived from our consolidated financial statements for such periods. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Results of Operations and Financial Condition and our Consolidated Financial Statements and Notes thereto.

	Three Months Ended September 30,
	(in thousands, except per share amounts)
	2005		2004
Total revenues	$	20,864	$	10,462
Gross profit		17,584		9,158
Net income		3,474		1,542
Earnings per common share, basic	$	0.06	$	0.05
Earnings per common share, diluted	$	0.06	$	0.04
Weighted average common shares outstanding:
Basic		53,495,697		31,692,969
Diluted		65,020,702		39,265,988
	Nine Months Ended September 30,
	(in thousands, except per share amounts)
	2005		2004
Total revenues	$	50,988	$	26,439
Gross profit		42,693		22,075
Net income		9,111		4,266
Earnings per common share, basic	$	0.18	$	0.15
Earnings per common share, diluted	$	0.15	$	0.11
Weighted average common shares outstanding:
Basic		49,859,872		29,276,572
Diluted		62,860,091		38,721,269

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	At September 30, 2005
	(in thousands)
Working capital	$	43,597
Total current assets		61,932
Total assets		164,459
Stockholders’ equity		101,907

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

Revenues increased to $20,863,660 for the three months ended September 30, 2005 from $10,461,702 for the comparable 2004 period, representing an increase of 99%. Operating income increased to $7,167,435 for the three months ended September 30, 2005 from $2,848,152 for the comparable 2004 period, representing an increase of 152%. This increase is attributed to the three practices and two ambulatory surgical centers acquired since September 30, 2004 and the five practices acquired during the first nine months of 2004.

Gross profit increased to $17,584,339 for the three months ended September 30, 2005 from $9,157,800 for the comparable 2004 period, representing an increase of 92%. This increase is attributed to the three practices and two ambulatory surgical centers acquired since September 30, 2004 and the five practices acquired during the first nine months of 2004.

Operating expenses increased to $10,416,904 for the three months ended September 30, 2005 from $6,309,648 in the comparable 2004 period, representing an increase of 65%. This increase is also attributed to operating expenses from the three practices and two ambulatory surgical centers acquired since September 30, 2004 and the five practices acquired during the first nine months of 2004.

Interest expense increased to $1,376,216 for the three months ended September 30, 2005 from $523,351 in the comparable 2004 period, representing an increase of 163%. This increase is the result of interest associated with a $30,000,000 credit facility obtained in 2005.

The provision for income taxes increased to $2,129,200 for the three months ended September 30, 2005 from $831,320 for the comparable 2004 period, representing an increase of 156%. This increase is due to an increase in profitability.

As a result of the above changes, net income was $3,473,897 for the three months ended September 30, 2005 compared with net income of $1,541,879 for the comparable 2004 period, representing an increase of 125%.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

Total revenues increased to $50,988,253 for the nine months ended September 30, 2005 from $26,438,500 for the comparable 2004 period, representing an increase of 93%. Operating income increased to $17,216,601 for the nine months ended September 30, 2005 from $7,699,201 for the comparable 2004 period, representing an increase of 124%. This increase was primarily the result of $9.1 million in revenue and $4.7 million in operating income from “New-Practices” acquired since September 30, 2004. There was a 27% increase in revenues and a 28% increase in operating income from practices acquired/managed prior to September 30, 2004 (“Same-Practices”). Net revenue and operating income for Same-Practices on a year over year basis is reflected in the chart below.

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	For the Nine Months Ended September 30,
	2005		2004		% Increase
Same-Practice
Revenues	$	15,294,810	$	12,070,001	27	%
Operating income		7,059,537		5,498,414	28	%
New-Practice
Revenues	$	9,137,079		—	—
Operating income		4,734,230		—	—

Gross profit increased to $42,693,151 for the nine months ended September 30, 2005 from $22,074,601 for the comparable 2004 period, representing an increase of 93%. This increase is attributed to the three practices and two ambulatory surgical centers acquired since September 30, 2004 and the five practices acquired during the first nine months of 2004.

Operating expenses increased to $25,476,550 for the nine months ended September 30, 2005 from $14,375,400 in the comparable 2004 period, representing an increase of 77%. The increase is primarily due to an additional $8.9 million in operating expenses related to the three practices and two ambulatory surgical centers acquired since September 30, 2004 and the five practices acquired during the first nine months of 2004. Approximately $394,000 is related to consulting fees for Sarbanes-Oxley compliance and approximately $354,000 is due to an increase in payroll expense for additions to corporate staff.

Interest expense increased to $2,355,325 for the nine months ended September 30, 2005 from $1,236,367 in the comparable 2004 period, representing an increase of 91%. This increase is a result of interest associated with a $30,000,000 credit facility, which commenced in May 2005, and interest expense associated with various equipment financing and working capital lines of credit at the practices.

The provision for income taxes increased to $5,608,200 for the nine months ended September 30, 2005 from $2,298,060 in the comparable 2004 period, representing an increase of 144%. This increase is due to an increase in profitability.

As a result of the above changes, net income was $9,111,265 for the nine months ended September 30, 2005 compared with net income of $4,265,825 for the comparable 2004 period, representing an increase of 114%.

LIQUIDITY AND CAPITAL RESOURCES ON SEPTEMBER 30, 2005 AND 2004

Cash amounted to $18,086,682 at September 30, 2005, compared to $5,031,783 as of September 30, 2004. The net cash provided by operations was $4,025,460 for the nine months ended September 30, 2005, compared to cash provided by operations of $1,677,463 for the comparable period in 2004. This net increase in cash from operations is primarily due to cash provided by growth in our existing practices acquired prior to September 30, 2004 and new practices acquired since September 30, 2004.

Cash used in investing activities was $32,001,202 for the nine months ended September 30, 2005 compared with a use of $9,888,034 in the comparable 2004 period. This increase is due to the three practices and two ambulatory surgical centers acquired since September 30, 2004, and earnout payments paid to practices owned/managed prior to September 30, 2004.

Cash provided by financing activities was $26,961,584 for the nine months ended September 30, 2005 compared with $5,318,587 provided by financing activities in the comparable 2004 period. This increase is due primarily to funds advanced under our credit facility in 2005.

Management believes the current cash position will be sufficient to provide us with capital to fund working capital needs for the next twelve months. We have significant indebtedness, as described under “Convertible Debt” and “New Debt.” We are obligated to make principal payments of $21,464,012 due in calendar year 2006, and $4,375,000 due in calendar year 2007. We may not have adequate funds from operations to pay the debt when it comes due and may have to either refinance this debt or raise additional capital to satisfy this debt. It will be necessary, in order to expand our business, consummate acquisitions and refinance indebtedness, to 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 which such capital may be available but may not be commercially feasible or advantageous.

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OTHER DATA

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 ambulatory surgery centers, and 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 treatment and diagnostic imagery. Our cost of revenue is primarily physicians’ salaries and medical supplies.

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

	For the Nine Months Ended September 30, 2005
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Totals
Revenues	$	35,460,297	$	4,444,255	$	11,083,701	$	—		$	50,988,253
Operating Income		16,527,859		1,565,525		5,101,398		(5,978,180	)		17,216,602
	For the Nine Months Ended September 30, 2004
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Totals
Revenues	$	14,311,376	$	3,856,246	$	8,270,878	$	—		$	26,438,501
Operating Income		6,276,182		1,562,577		4,130,746		(4,270,304	)		7,699,202

Pain management revenue, expense and income are attributable to four owned and ten 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 one owned and two managed physician practices that offer surgical physician services, including minimally invasive spine surgery. Ancillary service revenue, expense and income are attributable to nine owned ambulatory surgery centers, and two managed practices that primarily offer orthopedic rehabilitation services. We have 31 practices under limited management agreements, including orthopedic rehabilitation, electrodiagnostic medicine and real estate services.

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EPS Reconciliation

The shares used in the computation of the Company’s basic and diluted earnings per common share are reconciled as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2005		2004		2005		2004
Basic earnings per common share:
Net income available to common shareholders	$	3,473,897	$	1,541,879	$	9,111,265	$	4,265,825
Basic weighted average common shares outstanding		53,495,697		31,692,969		49,859,872		29,276,572
Basic earnings per common share	$	0.06	$	0.05	$	0.18	$	0.15
Diluted earnings per common share:
Net income available to common shareholders	$	3,473,897	$	1,541,879	$	9,111,265	$	4,265,825
Plus impact of assumed conversions
Interest expense on 7.5% convertible note due 2006, net of tax		—		—		312,341		—
Interest expense on 7.25% convertible note due 2007, net of tax		—		—		68,019		—
Interest expense on 7.5% convertible note due 2007, net of tax		121,551		—		70,805		—
Net income available to common shareholders plus assumed conversions	$	3,595,448	$	1,541,879	$	9,562,430	$	4,265,825
Basic weighted average common shares outstanding		53,495,697		31,692,969		49,859,872		29,276,572
Plus incremental shares from assumed conversions
7.5% convertible note due 2006		4,713,242		3,428,337		4,713,242		3,428,337
7.25% convertible note due 2007		—		—		1,015,201		1,631,806
7.5% convertible note due 2007		789,474		—		929,771		—
Employee stock option plan for vested, in the money options		4,634,343		3,623,338		4,943,324		3,798,112
Warrants issued, outstanding, and in the money		1,387,946		521,345		1,398,681		586,442
Contingent shares for acquisitions		—		—		—		—
Initial shares for acquisitions, weighted		—		—		—		—
Diluted weighted average common shares outstanding		65,020,702		39,265,989		62,860,091		38,721,269
Diluted earnings per common share	$	0.06	$	0.04	$	0.15	$	0.11

There were antidilutive shares during the periods presented in 2004.

Weighted average common share 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.

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PRO FORMA FINANCIALS

Following are the summarized unaudited pro forma results of operations for the nine months ended September 30, 2005, assuming the acquisitions of Colorado Pain Specialists, Lake Worth Surgical Center, Piedmont Center for Spinal Disorders, P.C. and Gables Surgical Center had taken place at the beginning of the year. The unaudited pro forma results are not necessarily indicative of future earnings that would have been reported had the acquisitions been completed when assumed.

Pro Forma Consolidated Statement of Operations

Nine Months Ended September 30, 2005

(Unaudited)

	PainCare Historical			Colorado Pain Specialists (4)			Lake Worth Surgical Ctr (5)			Piedmont Ctr Spinal Disorders (6)			Gables Surgical Ctr (7)			Pro forma Adjustments			Pro forma
Revenues	$	50,988,253		$	722,974		$	1,880,625		$	817,534		$	2,502,554		$	—		$	56,911,940
Cost of sales		8,295,102			326,637			357,636			168,640			322,451			(250,164	)(1)		9,220,302
Gross profit		42,693,151			396,337			1,522,989			648,894			2,180,103			250,164			47,691,638
Operating expenses:
General & adminstrative		24,218,347			398,396			618,067			333,018			731,731			(330,840	)(2)		25,968,719
Depreciation & amortization		1,258,203			—			82,278			2,284			83,937			—			1,426,702
Operating income		17,216,601			(2,059	)		822,644			313,592			1,364,435			581,004			20,296,217
Interest expense		(2,355,325	)		(2,040	)		(9,668	)		(4,529	)		(13,525	)		—			(2,385,087	)
Other income		235,321			—			—			—			—			—			235,321
Income before taxes		15,096,597			(4,099	)		812,976			309,063			1,350,910			581,004			18,146,451
Provision for income taxes		5,608,200			—			—			—			—			1,160,502	(3)		6,768,702
Income before minority interests’ share		9,488,397			(4,099	)		812,976			309,063			1,350,910			(579,498	)		11,377,749
Less: Minority interests’ share		377,132			—			163,815			—			364,745			—			905,692
Net income	$	9,111,265		$	(4,099	)	$	649,161		$	309,063		$	986,165		$	(579,498	)	$	10,472,057
Basic earnings per share																			$	0.21
Basic weighted average shares outstanding																				50,991,896
Diluted earnings per share																			$	0.16
Diluted weighted average shares outstanding																				63,992,115

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 tax rate of 38%.

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 May 12, 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.

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RECENT EVENTS

On October 3, 2005, the Company acquired the non-medical assets of Floyd O. Ring, Jr., M.D., P.C. “(RING),” an interventional pain management physician practice located in Denver, Colorado. The initial portion of the purchase price consisted of $1,250,000 plus 349,162 common shares. In addition, the Company will pay the shareholders of RING an additional $2,500,000 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 October 14, 2005, the Company acquired the non-medical assets of Christopher J. Centeno, M.D., P.C. and Therapeutic Management, Inc., collectively doing business as The Centeno Clinic “(CENTENO),” a pain management physician practice located in Denver, Colorado. The initial portion of the purchase price consisted of $3,750,000 plus 1,132,931 common shares. In addition, the Company will pay to the shareholders of CENTENO an additional $7,500,000 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.

FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF SECURITIES

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-Q. 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.

We received a comment letter from the United States Securities and Exchange Commission with respect to our Annual Report on Form 10-KSB for the year ended December 31, 2004, as filed with the SEC on March 16, 2005. We have been in communication with the SEC in an effort to resolve the matters set forth in the SEC comment letter. We are unable at this time to determine what impact, if any, the matters set forth in the SEC letter may have on our financial condition and/or financial statements.

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 19 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:

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

• possible decreases in capital resources or dilution to existing stockholders;

• difficulties and expenses incurred in connection with an acquisition;

• the difficulties of operating an acquired business;

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

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

• 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.

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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.

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We can give you 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.

We have recently been profitable but no assurance can be given that such profitability will continue.

For the years ended December 31, 2004 and 2003 we realized net income of $5,730,153 and $1,212,906 respectively. We expect to increase our spending significantly as we continue to expand our service offerings. As a result, we will need to generate significant revenues in order to continue to grow our business and remain 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 September 30, 2005, we had an intangible asset, net goodwill, of approximately $91.6 million, which constituted 56% of our total assets. The net goodwill reflects the amount we pay for our acquired practices in excess of their book value. Our net goodwill will increase in the future as a result of our acquisitions as we pay contingent purchase price for the acquisitions according to the terms of the respective purchase agreements. In addition, we expect to incur 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 owned, 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, $10,456,000 as of September 30, 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

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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., Peter Rothbart, 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). We also have a consulting agreement with Peter Rothbart, M.D. Should the services of Dr. Reuter, Dr. Rothbart, 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 an annual bonus equal to a total of 11% of our earnings before interest, taxes, depreciation and amortization.

Our employment agreements with our Chief Executive Officer and Chief Financial Officer, which expire on July 31, 2008, entitle each officer to an annual bonus equal to 4% of our earnings before interest, taxes, depreciation, and amortization. Our employment agreement with our President, which expires on January 31, 2009, entitles our President to an annual bonus equal to 3% of our earnings before interest, taxes, depreciation, and amortization. Historically our CEO, CFO and President have elected not to receive the entire annual bonus to which they were entitled. In the event our CEO, CFO and President do not waive their right to receive all or part

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of their respective bonuses in the future, it may materially impact our available cash and financial condition generally.

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, will require changes in some of our corporate governance and securities disclosure and compliance practices, and will require 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.

Our internal controls over financial reporting may not be adequate and our independent auditors may not be able to certify as to their adequacy, which could have a significant and adverse effect on our business and reputation.

We are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC thereunder, which we refer to as Section 404. Section 404 requires a reporting company such as ours to, among other things, annually review and disclose its internal controls over financial reporting, and evaluate and disclose changes in its internal controls over financial reporting quarterly. We are currently performing the system and process evaluation and testing required (and any necessary remediation) in an effort to comply with management certification and auditor attestation requirements of Section 404. If, during the course of our ongoing evaluation, we identify areas of our internal controls requiring improvement, the resulting plans to design enhanced processes and controls to address said issues would likely result in additional expenses and diversion of management’s time. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations and may not be able to ensure that the process is effective or that the internal controls are or will be effective in a timely manner. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent auditors may not be able to certify as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. As a result, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

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

Approximately 58% of our revenues are directly dependent on the acceptance of the services provided by our owned practices, 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

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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 materially adverse affect on us.

Professional liability claims could adversely impact our business.

Our owned and 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

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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.

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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 during the first nine months of this year was generated by our operations in five states. In particular, Florida accounted for approximately 42% of our revenue. 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.

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 W-2 employees of the respective

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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 is 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.

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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 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 of DHHS (“OIG”) 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.

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 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.

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

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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.

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Although we believe that our arrangements with the limited management practices do not run afoul of 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 the event the OIG were to conclude that these arrangements violate the Anti-Kickback Statute, this would have a material adverse effect on us.

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.

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, which would have a material adverse effect on us.

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;

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Security Standards, or Security Rule. The respective compliance dates for these rules for most entities were and are 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 will be 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.

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.

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 exercise their warrants, 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, you 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

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decreases your 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 or the warrants that were issued with such securities are exercised, 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 and the exercise price of the warrants issued with such securities 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 of 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.

The market price of our common stock has been volatile.

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 $0.12 to a high of $5.25 (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 in 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.

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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.

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FORWARD-LOOKING STATEMENTS

This report contains “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:

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

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

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

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

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

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

• 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 report under the section “Risk Factors.” The forward-looking statements contained in this report represent our judgment as of the date of this report, and you should not unduly rely on such statements.

Unless otherwise required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this 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.

ITEM 3. 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 September 30, 2005, we had $30,000,000 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 three months ended September 30, 2005 would correspondingly decrease our earnings and operating cash flows by approximately $81,900.

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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 September 30, 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.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act) as of June 30, 2005. In designing and evaluating the disclosure controls and procedures, the Executives recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is necessarily required to apply judgment in evaluating the cost-benefit relationship of possible controls and objectives. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures effectively and timely provide them with material information relating to our company and its consolidated subsidiaries required to be disclosed in the reports we file under the Exchange Act.

Changes in Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities

Between June 30, 2005 and September 30, 2005 a total of 220,000 common stock shares were issued upon the exercise of vested stock options.

Between June 30, 2005 and September 30, 2005 a total of 25,000 common stock shares were issued upon the exercise of vested warrants.

Between June 30, 2005 and September 30, 2005 a total of 52,596 common stock shares were issued for the payment of convertible debenture interest due to Midsummer Investments, Ltd. and Islandia, L.P.

Between June 30, 2005 and September 30, 2005 a total of 868,624 common stock shares were issued for the acquisition of Gables Surgical Center.

Between June 30, 2005 and September 30, 2005 a total of 263,400 common stock shares were issued for the acquisition of Piedmont Center for Spinal Disorders, P.C.

Between June 30, 2005 and September 30, 2005 a total of 1,021,942 common stock shares were issued for the acquisition of Center for Pain Management ASC. These shares are currently being held in escrow pending regulatory approval.

Between June 30, 2005 and September 30, 2005 a total of 69,115 common stock shares were issued to Benjamin Zolper, M.D. representing the first of three earn-out installments related to the acquisition of Ben Zolper, M.D., LLC.

Between June 30, 2005 and September 30, 2005 a total of 460,026 common stock shares were issued to Kenneth Alo, M.D. and Robert Wright, M.D. representing the first of three earn-out installments related to the acquisition of Denver Pain Management, Inc.

All of the foregoing securities were issued pursuant to the exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

No.	Description
31.1	Certification of Chief Executive Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934.
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.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PainCare Holdings, Inc.
Date: November 14, 2005	/s/ Randy A. Lubinsky
	Randy A. Lubinsky
	Chief Executive Officer
Date: November 14, 2005	/s/ Mark Szporka
	Mark Szporka
	Chief Financial & Accounting Officer

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