Exhibit 10.1

 

MERGER AGREEMENT AND PLAN OF REORGANIZATION

 

BY AND AMONG

 

PAINCARE HOLDINGS, INC.,

 

PAINCARE ACQUISITION COMPANY XIII, INC.,

 

RICK TAYLOR, D.O., P.A.

 

AND

 

RICK TAYLOR, D.O.

 

EXECUTION DATE: JUNE 7, 2004.

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1.

   DEFINITIONS.    2

2.

   TRANSACTION.    2      2.1   Transaction.    2      2.2   Effect of the
Merger.    2      2.3   Filing of Certificates.    2      2.4   Articles of
Incorporation.    2      2.5   Bylaws.    2      2.6   Directors and Officers.
   2      2.7   Tax Consequences.    3      2.8   Additional Actions.    3     
2.9   No Dissenters’ Rights.    3      2.10   Surrender of Certificates.    3  
       (a)   Company’s Shares.    3          (b)   Dividends.    3      2.11  
Medical Assets.    3      2.12   Conversion of Shares.    4      2.13  
Shareholder Consent and Release.    4      2.14   Registration.    4      2.15  
Shareholder’s Obligation to Furnish Information.    5      2.16   Suspension of
Sales Pending Amendment to Prospectus.    5      2.17   Registration Expenses.
   6

3.

  

TRANSACTION CONSIDERATION.

   6      3.1   Merger Consideration.    6      3.2   Distributions of Cash.   
7      3.3   Closing Date Adjustments    7          (a)   Transaction Related
Adjustments.    7          (b)   Closing Date Balance Sheet.    7      3.4  
Earnout Payment.    8          (a)   General.    8          (b)   Installment
Payment Discount.    8

 

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         (c)   Installment Payment Premium.    8          (d)   Manner of
Payment.    9          (e)   Earnout Cap.    9          (f)   Definitions for
Purposes of Section 3.    10

4.

   REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER.    11      4.1  
Organization, Qualification, and Corporate Power.    11      4.2  
Capitalization.    11      4.3   Authorization.    11      4.4  
Noncontravention.    12      4.5   Broker’s Fees.    12      4.6   Title to
Assets.    12      4.7   No Subsidiaries.    12      4.8   Financial Statements.
   13      4.9   Events Subsequent to Most Recent Year End.    13          (a)  
Sale or Lease of Assets.    13          (b)   Contracts.    13          (c)  
Change in Contracts.    13          (d)   Security Interests.    13          (e)
  Investments.    13          (f)   Debts.    13          (g)   Liabilities
Unaffected.    13          (h)   Claims Unaffected.    14          (i)  
Articles and Bylaws.    14          (j)   Changes in Equity.    14          (k)
  Intentionally Omitted.    14          (l)   Property Damage.    14         
(m)   Transactions with Affiliates.    14          (n)   Collective Bargaining
Agreements.    14          (o)   Compensation Changes.    14          (p)  
Employee Benefit Plans.    14

 

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    (q)   Officers; Directors; Employees.    14     (r)   Charitable or Capital
Contributions.    14     (s)   Ordinary Course of Business.    15     (t)  
Accounting Practices.    15     (u)   Accounts Receivable.    15     (v)   In
General.    15

4.10

  Undisclosed Liabilities.    15

4.11

  Tax Matters.    15     (a)   Tax Returns.    15     (b)   Withholding.    16  
  (c)   No Disputes of Claims.    16     (d)   No Waivers.    16     (e)   No
Special Circumstances.    16     (f)   Subchapter “S”.    16     (g)   Audits of
Tax Returns.    16     (h)   Period of Assessment.    17     (i)   Tax
Agreements.    17     (j)   Inclusions in Taxable Periods.    17     (k)  
Consents.    17     (l)   Personal Holding Company    17     (m)   Consolidated
Tax Returns.    17

4.12

  Real Property.    17     (a)   Binding.    17     (b)   Continued Validity.   
17     (c)   No Defaults.    17     (d)   Repudiation.    18     (e)   No
Disputes.    18     (f)   Encumbrances.    18     (g)   Approvals.    18     (h)
  Utilities.    18

 

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4.13

  Intellectual Property.    18

4.14

  Condition of Tangible Assets.    18

4.15

  Contracts.    18     (a)   Personal Property Leases.    18     (b)   Services.
   18     (c)   Partnership; Joint Venture.    19     (d)   Indebtedness.    19
    (e)   Confidentiality; Non-Competition.    19     (f)   Shareholders’
Agreements.    19     (g)   Plans.    19     (h)   Employment or Consulting
Agreements.    19     (i)   Advances; Loans.    19     (j)   Adverse Effects.   
19     (k)   Other Agreements.    19

4.16

  Powers of Attorney.    20

4.17

  Insurance; Malpractice.    20

4.18

  Litigation.    20

4.19

  Health Care Compliance.    21

4.20

  Fraud and Abuse.    21

4.21

  Legal Compliance.    22

4.22

  Rates and Reimbursement Policies.    22

4.23

  Medical Staff.    22

4.24

  Employees.    23

4.25

  Employee Benefits.    23     (a)   Plans.    23     (b)   Compliance.    23  
  (c)   Reports and Descriptions.    23     (d)   Contributions.    23     (e)  
Qualified Plan.    23     (f)   Market Value.    23

 

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    (g)   Copies.    23     (h)   Maintenance of Plans.    24         (i)  
Reportable Events.    24         (ii)   Prohibited Transactions.    24

4.26

  Physicians and Other Providers.    24     (a)   Licenses.    24     (b)  
Controlled Substances.    24     (c)   Actions.    24         (i)   Malpractice
Actions.    24         (ii)   Disciplinary Proceedings.    24         (iii)  
Criminal Proceedings.    24         (iv)   Investigation.    25         (v)  
Mental Illnesses.    25         (vi)   Substance Abuse.    25         (vii)  
Professional Ethics.    25         (viii)   Application for Licensure.    25

4.27

  Guaranties.    25

4.28

  Environment, Health, and Safety.    25     (a)   Compliance.    25     (b)  
Permits and Licenses.    25     (c)   Notices.    25     (d)   Hazardous
Substances.    25

4.29

  Certain Business Relationships with the Company and its Affiliates.    26

4.30

  Third-party Payors.    26

4.31

  Bank Accounts.    26

4.32

  Tax Status.    26

4.33

  Binding Obligation.    26

4.34

  No Corporate Practice or Fee Splitting.    27

4.35

  Intentions.    27

4.36

  Securities Representation.    27

 

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(a)

 

No Registration of PainCare Shares; Investment Intent.

   27        

(b)

 

Resale Restrictions.

   27        

(c)

 

Ability to Bear Economic Risk.

   27        

(d)

 

Accredited Investor.

   28        

(e)

 

No Registration.

   28    

4.37

 

HIPAA

   28    

4.38

 

Improper and Other Payments

   28    

4.39

 

Accounts Receivable

   28    

4.40

 

Medical Waste

   28    

4.41

 

No Untrue or Inaccurate Representation or Warranty

   29

5.

 

REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING COMPANIES.

   29    

5.1

 

Organization of PainCare and Subsidiary.

   29    

5.2

 

Authorization of Transaction.

   29    

5.3

 

No Conflict or Violation.

   30    

5.4

 

Consents and Approvals.

   30    

5.5

 

Disclosure Documents.

   30    

5.6

 

Capitalization.

   30    

5.7

 

Litigation.

   30    

5.8

 

No Undisclosed Liabilities.

   31    

5.9

 

No Brokers.

   31    

5.10

 

Compliance with Laws.

   31    

5.11

 

Material Misstatements or Omissions

   31

6.

 

CLOSING; TERMINATION.

   31

7.

 

CLOSING DELIVERIES.

   32    

7.1

 

Deliveries of the Company and the Shareholder.

   32        

(a)

 

Consents and Approvals.

   32        

(b)

 

Termination of Agreements.

   32        

(c)

 

Company Stock.

   32        

(d)

 

Corporate Authorization.

   32

 

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(e)

 

Secretary’s Certificate.

  32        

(f)

 

Medicare Provider Number.

  32        

(g)

 

Managed Care Agreements.

  32        

(h)

 

Other documents.

  32    

7.2

 

Deliveries of PainCare.

  32        

(a)

 

Transaction Consideration.

  32        

(b)

 

Resolutions.

  32        

(c)

 

Secretary’s Certificate.

  33        

(d)

 

Other Documents.

  33

8.

 

CONDITIONS TO THE OBLIGATIONS OF THE PARTIES

  33    

8.1

 

Conditions for the Benefit of PainCare and the Subsidiary.

  33    

8.2

 

Conditions for the Benefit of the Shareholder.

  33

9.

 

COVENANTS.

  33    

9.1

 

Operations.

  33    

9.2

 

Deliveries.

  33    

9.3

 

Distributions of Sub-Chapter S Income by the Company.

  33    

9.4

 

Post-Closing General Covenant.

  34    

9.5

 

Tax Returns.

  34    

9.6

 

Litigation Support.

  34    

9.7

 

Consents.

  34    

9.8

 

Operational Covenants.

  35    

9.9

 

Capital Adjustments.

  36

10.

 

SURVIVAL AND INDEMNIFICATION.

  36    

10.1

 

Survival of Representations and Warranties.

  36    

10.2

 

Indemnification Provisions for the Benefit of PainCare and Subsidiary.

  36    

10.3

 

Indemnification Provisions for the Benefit of the Shareholder.

  37    

10.4

 

Matters Involving Third Parties.

  37        

(a)

 

Notification.

  37        

(b)

 

Defense by Indemnifying Party.

  37

 

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(c)

  

Satisfactory Defense.

   38        

(d)

  

Conditions.

   38    

10.5

 

Right to Set-Off.

   38    

10.6

 

Materiality.

   39    

10.7

 

Limitation.

   39    

10.8

 

Survival of Representations and Warranties of Shareholder.

   39    

10.9

 

No Other Representations or Warranties.

   39

11.

 

RESTRICTIVE COVENANTS; CONFIDENTIALITY.

   40    

11.1

 

Restrictive Covenants.

   40        

(a)

  

Restricted Period.

   40        

(b)

  

Consideration.

   41        

(c)

  

Third-Party Beneficiaries.

   41    

11.2

 

Intentionally Omitted.

   42    

11.3

 

No Running of Covenant During Breach.

   42    

11.4

 

Blue Pencil Doctrine.

   42    

11.5

 

Confidentiality, Press Releases, and Public Announcements.

   42    

11.6

 

Conduct of Business.

   43    

11.7

 

No Third-Party Beneficiaries.

   45

12.

 

MISCELLANEOUS

   45    

12.1

 

Entire Agreement.

   45    

12.2

 

Succession and Assignment.

   45    

12.3

 

Counterparts.

   45    

12.4

 

Headings.

   45    

12.5

 

Notices.

   45    

12.6

 

Governing Law; Jurisdiction; Attorney’s Fees.

   46    

12.7

 

Amendments and Waivers.

   46    

12.8

 

Severability.

   46    

12.9

 

Expenses.

   46    

12.10

 

Further Assurances.

   46    

12.11

 

Construction.

   47

 

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12.12

  

Survival.

   47

12.13

  

Incorporation of Exhibits and Schedules.

   47

12.14

  

Submission to Jurisdiction.

   47

 

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MERGER AGREEMENT AND PLAN OF REORGANIZATION

 

THIS MERGER AGREEMENT AND PLAN OF REORGANIZATION (the “Agreement”) is made and
entered into on the 7th day of June, 2004 (the “Execution Date”) by and among
PAINCARE HOLDINGS, INC., a Florida corporation (“PainCare”), PAINCARE
ACQUISITION COMPANY XIII, INC., a Florida corporation (“Subsidiary”), in which
PainCare and the Subsidiary are sometimes referred to herein as the “Acquiring
Companies”, and RICK TAYLOR, D.O., P.A., a Texas professional association (the
“Company”), and RICK TAYLOR, D.O., an individual (“Shareholder”).

 

RECITALS

 

A. The Company owns and operates a medical practice (hereinafter sometimes
called the “Business”) at 2900 South Loop 256, Palestine, Texas 75801
(hereinafter sometimes called the “Center”) and Shareholder is a licensed
medical provider in the State of Texas and owns all of the issued and
outstanding shares of stock in the Company (the “Company Shares”);

 

B. PainCare is in the business of acquiring the non-medical assets of medical
practices and entering into management services agreements with practices
entities associated with the acquired assets;

 

C. PainCare desires to enter into this Agreement in order for the Subsidiary,
which is a wholly-owned subsidiary of PainCare, to acquire the non-medical
assets of the Company;

 

D. In connection with this transaction, Shareholder will convert the Company
from a Texas professional association to a Texas business corporation, will
immediately cease the practice of medicine in the name of the Company and will
change the Company’s name to Rick Taylor Conversion, Inc. (hereinafter the
“Conversion”). Prior to or contemporaneous with such Conversion, Shareholder
will form a new Texas professional association, PainCare Clinics, P.A.
(hereinafter the “New PA”), to operate his medical practice and in connection
with same will transfer all the Company’s medical assets to the New PA.

 

E. In connection with this acquisition, PainCare desires to have Subsidiary
enter into a management services agreement with the New PA, in which the
management services agreement is the significant inducement for the Subsidiary
to acquire the non-medical assets of the Company;

 

F. All of the Parties hereto desire to enter into this Agreement to effectuate
the Merger, as hereinafter defined, of the Company with and into Subsidiary
pursuant to the terms and conditions of this Agreement; and

 

G. It is the intention of the Parties for the Merger contemplated herein to
qualify as a tax-free reorganization pursuant to Sections 368(a)(1)(A) and
368(a)(2)(D) of the Code.

 

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NOW, THEREFORE, in consideration of the premises and the actual promises herein
made, and in consideration of the representations, warranties, and covenants
herein contained, the receipt and adequacy of which are hereby conclusively
acknowledged, the Parties, intending to become legally bound, hereby agree as
follows:

 

TERMS AND CONDITIONS

 

1. DEFINITIONS. All capitalized words that are not capitalized for purposes of
grammar and which are not defined in the text of this Agreement are defined
terms with their definitions set forth on Exhibit 1.

 

2. TRANSACTION.

 

2.1 Transaction. Immediately prior to the Merger, the Company shall file
articles of conversion to convert from a professional association to a business
corporation and as of such time will immediately cease the practice of medicine.
Upon the terms and subject to the conditions hereof and in accordance with the
provisions of the Texas Business Corporation Act (the “Texas Act”) and the
Florida Business Corporation Act (the “Florida Act”), the Company shall be
merged with and into Subsidiary (the “Merger”) and the separate existence of the
Company shall thereupon cease, and Subsidiary, as the surviving corporation (the
“Surviving Corporation”), shall continue to exist under and be governed by the
Florida Act (the “Transaction”).

 

2.2 Effect of the Merger. At and after the Statutory Merger Time, as defined in
Section 2.3 below, the effect of the Merger shall, in all legal respects, be as
provided in the Texas Act and the Florida Act. From and after the Statutory
Merger Time, the Surviving Corporation shall continue to be a Florida
corporation.

 

2.3 Filing of Certificates of Merger. The Merger shall be legally effected by
the filing at the time of the Closing or as soon as practicable thereafter, of
the Articles of Merger (the “Articles of Merger”), substantially in the form of
Exhibit 2.3 attached hereto, with the Secretary of the State of Florida and the
Secretary of the State of Texas in accordance with the provisions of the Florida
Act and the Texas Act, respectively (hereinafter the “Statutory Merger Time”).
The Parties shall take any and all other lawful actions and do any and all other
lawful things necessary to cause the Merger to become effective.

 

2.4 Articles of Incorporation. As of the Statutory Merger Time, the articles of
incorporation of Subsidiary, as in effect immediately prior to the Statutory
Merger Time, shall be the articles of incorporation of the Surviving Corporation
until thereafter amended in accordance with applicable law.

 

2.5 Bylaws. As of the Statutory Merger Time, the bylaws of Subsidiary, as in
effect immediately prior to the Statutory Merger Time, shall be the bylaws of
the Surviving Corporation until thereafter amended in accordance with its terms
and applicable law.

 

2.6 Directors and Officers. As of the Statutory Merger Time, the directors and
officers of Subsidiary immediately prior to the Statutory Merger Time shall be
the directors and officers of the Surviving Corporation. Each director and
officer of the Surviving Corporation shall hold office in accordance with the
articles of incorporation and bylaws of the Surviving Corporation. The Company
shall cause to be delivered to Subsidiary the written resignations of all of the
directors and officers of the Company, which resignations shall be unconditional
and effective as of the Closing Date (as defined in Section 6 below).

 

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2.7 Tax Consequences. It is intended by the Parties hereto that the Merger shall
constitute a tax-free reorganization within the meaning of Sections 368(a)(1)(A)
and 368(a)(2)(D) of the Code.

 

2.8 Additional Actions. If, at any time after the Closing, any further acts are
necessary: (a) to vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation, title to and possession of any property or right of the
Company acquired or to be acquired by reason of, or as a result of, the Merger;
or (b) otherwise to carry out the purposes of this Agreement, then the
Shareholder shall be deemed to have granted to the Surviving Corporation an
irrevocable power of attorney to execute and deliver all such deeds, assignments
and assurances in law and to do all other acts necessary or proper to vest,
perfect or confirm title to and possession of such property or rights in the
Surviving Corporation and otherwise to carry out the purposes of this Agreement;
and the officers and directors of the Surviving Corporation are fully authorized
in the name of the Shareholder and the Company to take any and all such actions.

 

2.9 No Dissenters’ Rights. As a result of the unanimous approval of the
transactions contemplated herein by the Shareholder; neither the Shareholder,
nor any other party, is entitled to dissenters’ rights under the laws of the
State of Texas or the State of Florida.

 

2.10 Surrender of Certificates.

 

(a) Company’s Shares. At the Closing, the Shareholder shall be required to
surrender to Subsidiary the original stock certificates evidencing one thousand
(1,000) shares of stock issued and outstanding, which immediately prior to the
Closing Date represented all of the Company Shares (the “Certificate”) (together
with all stock powers duly endorsed to Subsidiary). Until so surrendered, each
Certificate which immediately prior to the Closing Date represented the Company
Shares (other than Company Shares held in the Company treasury) shall upon and
after the Closing Date by virtue of the Merger be deemed for all purposes to
represent and evidence only the right to receive the Merger Consideration, as
hereinafter defined, as provided in this Agreement. As of the Closing Date, the
stock transfer books of the Company shall be closed and no transfer of the
Company Shares shall be made at any time thereafter.

 

(b) Dividends. No dividends or other distributions declared or made with respect
to the PainCare Shares with a record date after the Closing will be paid to the
holder of any unsurrendered Certificate with respect to the PainCare Shares
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
Certificate representing whole PainCare Shares issued in exchange therefor,
without interest, at the time of such surrender, the amount of dividends or
other distributions with a record date after the Closing payable with respect to
such whole PainCare Shares.

 

2.11 Medical Assets. Those assets (the “Medical Assets”) of the Company which
require a medical license to own or utilize, such as medical records and any
pharmaceutical supplies, shall not become the possession of Subsidiary pursuant
to the Merger. The Company shall convey all such Medical Assets, which have
nominal value, to the New PA as of, or prior to, the Statutory Merger Time for
nominal consideration.

 

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2.12 Conversion of Shares. Each share of capital stock of Subsidiary issued and
outstanding immediately prior to the Closing shall continue to represent one (1)
validly issued, fully paid and non-assessable share of capital stock of the
Surviving Corporation after the Merger. By virtue of the Merger and without any
action on the part of the Shareholder the Company Shares shall be converted into
the Merger Consideration. The PainCare Shares to be received by the Shareholder
as part of the Merger Consideration shall be subject to restrictions of the
sale, transfer or distribution thereof as set forth in Section 4.36.

 

2.13 Shareholder Consent and Release. The Shareholder hereby consents to the
Transaction and approves the execution and delivery of this Agreement and the
transactions contemplated hereby. Effective on the Closing Date, the Shareholder
hereby releases the Company from any and all claims against the Company relating
to the period prior to the Closing Date which he may, could or will have, as a
result of the Shareholder having served as a stockholder, director, officer,
employee, agent, or in any other capacity of the Company; provided, however,
such release shall not operate to release the Company (or the Surviving
Corporation as successor to the Company) from (i) Shareholder’s rights (whether
arising under the Company’s By-Laws or by statute or other applicable law) to
indemnification, or (ii) the obligation to make the distributions of pre-Closing
Date income as permitted under this Agreement, or (iii) claims, if any, arising
from Shareholder serving as a guarantor or joint-obligor with respect to those
certain obligations of the Company as identified in Section 2.13 of the
Disclosure Schedule.

 

2.14 Registration.

 

(a) If within the three (3) year period commencing on the Closing Date, PainCare
proposes for any reason to register the PainCare Shares under the Securities Act
[other than a registration in connection with the registration of the securities
owned by Midsummer Capital and the Laurus Master Fund currently in process or
with respect to an exchange offer (Form S-4) or filed in connection with an
employee stock option or other benefit plan (Form S-8, or any substitute form
that may be adopted by the Commission)], PainCare shall promptly give written
notice to the Shareholder of its intention to so register the PainCare Shares
and, upon written request by the Shareholder, given within twenty (20) days
after delivery of any such notice by PainCare, to include in such registration
PainCare Shares held by the Shareholder (which request shall specify the number
of PainCare Shares proposed to be included in such registration), PainCare shall
attempt to cause all such PainCare Shares to be included in such registration on
the same terms and conditions as the securities otherwise being included in such
registration; provided however, that if the managing underwriters advise
PainCare that the inclusion of the PainCare Shares proposed to be included in
such registration would interfere with the successful marketing (including
pricing) of the PainCare Shares proposed to be registered by PainCare, then if
such registration is in part an underwritten primary or secondary registration
on behalf of PainCare, PainCare shall include in such registration the PainCare
Shares requested to be included in such registration, pro rata from among the
holders of any and all PainCare shares to be registered pursuant to such
registration according to the number of shares proposed by each holder to be
included. In the event PainCare determines not to pursue, or to withdraw, a
registration as to which it has given notice pursuant to this section, the
Shareholder shall have no further rights or obligations hereunder with respect
to such proposed registration. Notwithstanding any other provision of this
Section to the contrary, PainCare shall not be

 

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required to include any of the PainCare Shares in a registration statement
relating to an underwritten offering of PainCare’s securities unless the
Shareholder accepts the terms of the underwriting as agreed upon between
PainCare and the underwriters selected by it, including, without limitation, any
Underwriter’s Cutback and/or Lockup, and the Shareholder agrees to promptly
execute and/or deliver such documents in connection with such registration as
PainCare or the managing underwriter may reasonably request.

 

(b) The Shareholder may exercise his rights under Section 2.14(a) above on an
unlimited number of occasions. PainCare shall pay all Registration Expenses (as
defined below) of any registration effected under this Section, except that in
the event of withdrawal by the Shareholder, the Shareholder shall pay (or
reimburse PainCare for) the amount of registration, filing or listing fees
relating to his PainCare Shares included in the registration and shall pay the
reasonable fees of PainCare’s counsel associated with such withdrawal, unless
such withdrawal is due to the Shareholder obtaining material adverse information
that was not known by him at the time he requested inclusion of his PainCare
Shares in the registration.

 

(c) The Shareholder may not participate in any registration under this Section
which is underwritten unless he agrees to sell such PainCare Shares on the basis
provided in any underwriting agreement (with terms not inconsistent herewith and
customary in underwriting agreements for secondary distributions) approved by
PainCare, provided that the Shareholder shall not be required to make any
representations or warranties to PainCare or the underwriters (other than
representations and warranties regarding such Shareholder and such Shareholder’s
intended method of distribution).

 

2.15 Shareholder’s Obligation to Furnish Information. PainCare may require
Shareholder to furnish PainCare such information regarding the distribution of
such securities as PainCare may from time to time reasonably request. If the
failure by the Shareholder to furnish such information as expeditiously as
possible would prevent (i) the registration statement relating to such
registration from being declared effective by the Securities Exchange
Commission, or (ii) members of the National Association of Securities Dealers,
Inc. from participating in the distribution of the PainCare Shares proposed to
be registered, PainCare may exclude the Shareholder’s PainCare Shares from such
registration.

 

2.16 Suspension of Sales Pending Amendment to Prospectus.

 

(a) The Shareholder agrees that, upon receipt of any written notice from
PainCare of the happening of any event that requires PainCare not to proceed
with the registration, or if PainCare has decided not to proceed with the
registration for any reason, the Shareholder shall forego the disposition of any
PainCare Shares covered by the registration statement or prospectus until he is
advised in writing by PainCare that the use of the applicable prospectus may be
resumed and, if so directed by PainCare, the Shareholder shall deliver to
PainCare (at PainCare’s expense, except as hereinafter provided) all copies,
other than permanent file copies, then in Shareholder’s possession of any
prospectus covering such PainCare Shares.

 

(b) The Shareholder agrees that he shall, as expeditiously as possible, notify
PainCare at any time when a prospectus relating to a registration statement
covering such

 

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Shareholder’s PainCare Shares is required to be delivered under the Securities
Act, of the happening of any event actually known to him which requires changes
to be made in the registration statement or any related prospectus so that such
registration statement or prospectus shall not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading as a result of any
information provided by the Shareholder for inclusion in such prospectus
included in such registration statement and, at the request of PainCare, as
expeditiously as possible prepare and furnish to it such information as may be
necessary so that, after incorporation into a supplement or amendment of such
prospectus as thereafter delivered to the purchasers of such PainCare Shares,
the information provided by such Shareholder shall not include an untrue
statement of a material fact or a misstatement of a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading and, in such event the
expenses of delivery to PainCare of copies of any prospectus in the
Shareholder’s possession shall be at the expense of the Shareholder.

 

2.17 Registration Expenses.

 

(a) All expenses incident to PainCare’s performance of or compliance with its
obligations under this Section 2, including without limitation all (i)
registration and filing fees, (ii) fees and expenses of compliance with
securities laws, (iii) printing expenses, (iv) messenger and delivery expenses,
(v) internal expenses, (vi) reasonable fees and disbursements of its counsel and
its independent certified public accountants (including “comfort” letters),
(vii) securities act liability insurance, (viii) reasonable fees and expenses of
any special experts retained by PainCare in connection with the registration
hereunder, and (ix) reasonable fees and expenses of other persons retained by
PainCare (all such expenses being referred to herein as “Registration Expenses”)
shall be borne by PainCare.

 

(b) Notwithstanding the foregoing, the following costs and expenses shall be
excluded from the term “Registration Expenses”: (i) all underwriting discounts
and commissions, (ii) all applicable transfer taxes, (iii) the fees and
disbursements of any counsel retained by the Shareholder, and (iv) except as
provided in Section 2.17(a), all other costs, fees, and expenses incurred by the
Shareholder in connection with the exercise of his registration rights
hereunder.

 

2.18 Rule 144. PainCare, from and after the Closing, shall take such reasonable
actions and make all such filings as may be reasonably necessary to ensure that
Rule 144 under the Securities Act will be available for sales of any PainCare
Shares held by Shareholder pursuant to this Agreement after the first
anniversary date of the issuance of such Shares. Upon request by Shareholder,
PainCare shall furnish to Shareholder a written statement setting forth its
compliance with the current public information reporting requirements of Rule
144. This covenant shall expire upon an effective registration statement which
includes such PainCare Shares held by Shareholder.

 

3. TRANSACTION CONSIDERATION.

 

3.1 Merger Consideration. The aggregate merger consideration (the “Merger
Consideration”) shall consist of (i) the Closing Date Consideration (the
“Closing Date Consideration”) as hereafter defined, and (ii) the Earnout Payment
as determined under Section 3.4 below.

 

6

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Subject to adjustment as provided in Section 3.3 below, the Closing Date
Consideration that PainCare shall deliver to the Shareholder upon the
satisfaction of the Closing conditions shall equal Three Million Seven Hundred
Fifty Thousand and 00/100 Dollars ($3,750,000), comprised of: (i) One Million
Eight Hundred Seventy Five Thousand and 00/100 Dollars ($1,875,000) (the “Cash
Due At Closing”) to be delivered via wire transfer to a bank account designated
by the Shareholder, plus (ii) Seven Hundred Sixty One Thousand Five Hundred
Forty Five Shares (761,545) PainCare Shares, valued at approximately Two Dollars
and 46.21/100 ($2.4621) per share and having an aggregate value of One Million
Eight Hundred Seventy Five Thousand and 00/100 Dollars ($1,875,000). At least
one (1) day prior to the Closing Date, the Shareholder shall notify PainCare in
writing of the bank account to which the Cash Due At Closing shall be wired and
to what location the PainCare Shares are to be sent.

 

3.2 Distributions of Cash. It is understood and agreed that the Company shall
have the right to distribute all of its cash to the Shareholder at any time on
or prior to the Closing Date saving the Required Cash as provided in Section
3.3(b) below.

 

3.3 Closing Date Adjustments. The Closing Date Consideration shall be subject to
adjustment as follows:

 

(a) Transaction Related Adjustments. The Cash Due At Closing shall be reduced by
the amount of any cash payments made by the Company or the Acquiring Companies
with respect to any expenses paid on behalf of the Shareholder (rather than the
Company) expect as otherwise specifically allowed pursuant to this Agreement.

 

(b) Closing Date Balance Sheet. Within forty-five (45) days after the Closing
Date, PainCare or its Affiliate will prepare and deliver to Shareholder a
balance sheet of the Company as of the close of business on the Closing Date
prepared in accordance with GAAP (the “Closing Date Balance Sheet”). Within
thirty (30) days after PainCare’s delivery of the Closing Date Balance Sheet to
Shareholder, Shareholder shall, in a written notice to PainCare, either accept
or describe in reasonable detail any proposed adjustments to the Closing Date
Balance Sheet and the reasons therefore, and shall include pertinent
calculations. If Shareholder fails to deliver notice of acceptance or objection
to the Closing Date Balance Sheet within such thirty (30) day period, the
Shareholder shall be deemed to have accepted the Closing Date Balance Sheet.
Except in the case of a dispute with respect to the Closing Date Balance Sheet,
within thirty (30) days after delivery of the Closing Date Balance Sheet (the
“Adjustment Payment Date”), the Shareholder shall pay the Net Equity Adjustment
(as defined below) to PainCare. In the event that PainCare and Shareholder are
not able to agree on the Closing Date Balance Sheet within thirty (30) days from
and after the receipt by PainCare of any objections raised by Shareholder, then
either Party shall each have the right to require that such disputed
determinations be submitted to an independent certified public accountant or
accounting firm that PainCare and Shareholder shall jointly select, for
computation or verification in accordance with the provisions of this Agreement,
and the Net Equity Adjustment, if any, shall be paid by the Shareholder to
PainCare within ten (10) business days after receipt of the accountant’s
computation or verification. The foregoing provisions for accounting firm review
shall be final and binding upon the Parties and there shall be no right of
appeal from such decision. Such accounting firm’s fees and expenses for such
disputed determination shall be borne by the Party whose determination has been
modified by such accounting firm’s report or by all Parties in

 

7

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proportion to the relative amount each Party’s determination has been modified.
Any payments due under this Section 3.3 shall bear interest at eight percent
(8%) per annum from the Adjustment Payment Date.

 

If the final Closing Date Balance Sheet reflects Cash of the Company that is
less than Twenty Thousand Dollars ($20,000.00) (the “Required Cash”), or Net
Shareholder’s Equity (as defined below) of the Company that is less than One
Hundred Twenty Five Thousand and 00/100 Dollars ($125,000.00)(“Agreed Net
Equity”), then the Cash Due at Closing shall be reduced and the Shareholder
shall be required to immediately return to PainCare dollar for dollar (the “Net
Equity Adjustment”) by (i) an Amount equal to the Required Cash less Cash
reflected on the Closing Date Balance Sheet, and (ii) the difference between (x)
the Agreed Net Equity; and (y) the Net Shareholder’s Equity set forth in the
Closing Date Balance Sheet. “Net Shareholder’s Equity” shall mean the book value
of the Company’s tangible non-medical assets plus its accounts receivable (less
the Required Cash) net of all liabilities of the Company.

 

3.4 Earnout Payment.

 

(a) General. Subject to the condition that the Surviving Corporation achieves
Formula Period Profits (as defined in Subsection (f) below) of at least One
Million Five Hundred Thousand and 00/100 Dollars ($1,500,000) (the “Earnings
Threshold”) in each of the three (3) successive twelve (12) month calendar
periods beginning on the first (1st) day of the first month immediately
following the Closing Date unless the Closing occurs on the first day of a month
in which case the first 12 month period shall begin on the Closing Date, (each
such twelve (12) month calendar period shall be referred to herein as a “Formula
Period”), then PainCare shall pay to the Shareholder a total amount of
additional consideration of Three Million Seven Hundred Fifty Thousand and
00/100 Dollars ($3,750,000) for the Formula Periods, payable in three equal
annual installments of One Million Two Hundred Fifty Thousand and 00/100 Dollars
($1,250,000) (the “Intended Installment Payment”) in the form of consideration
and subject to adjustment as provided in Section 3.4(d) below.

 

(b) Installment Payment Discount. Notwithstanding Section 3.4(a) above, if the
Surviving Corporation fails to achieve the Earnings Threshold in a Formula
Period, the amount of the Intended Installment Payment for such Formula Period
shall be recalculated to equal the product of the Intended Installment Payment,
multiplied by the Installment Payment Discount (as defined below) (the “Adjusted
Installment Payment”). The “Installment Payment Discount” shall equal (i) the
Formula Period Profits (as defined in Subsection (f) below) for such Formula
Period divided by the Earnings Threshold; multiplied by (ii) ninety percent
(90%). By way of example of this Section 3.4(b), if the Formula Period Profits
of the Surviving Corporation is $1,200,000 for the first Formula Period, then
the Adjusted Installment Payment with respect to such Formula Period would be
$900,000 (i.e. $1,250,000 x [(1,200,000 ÷ 1,500,000) x 0.90].

 

(c) Installment Payment Premium. Notwithstanding Section 3.4(b), if (i) the
Shareholder receives the Adjusted Installment Payment from PainCare in a Formula
Period rather than the Intended Installment Payment as a result of the Formula
Period Profits equaling less than the Earnings Threshold for such Formula
Period, and (ii) the Surviving Corporation’s Formula Period Profits exceed the
Earnings Threshold in the Formula Period immediately subsequent to the Formula
Period for which the Installment Payment Discount corresponded,

 

8

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then PainCare shall pay to the Shareholder the Installment Payment Premium (as
defined below). The “Installment Payment Premium” shall equal the product of (A)
the Formula Period Profits for the Formula Period in which the Installment
Payment Premium is calculated less the Earnings Threshold, multiplied by (B)
Seventy-five percent (75%). By way of example of this Section 3.4(c), if the
Formula Period Profits of the Surviving Corporation is less than $1,500,000 for
the first Formula Period and the Formula Period Profits of the Surviving
Corporation is $1,700,000 for the second Formula Period, then the Installment
Payment Premium with respect to such second Formula Period would be $150,000
(i.e. [$1,700,000 - $1,500,000] x 0.75). The Installment Payment Premium shall
be paid to the Shareholder in the same percentages, form and time as the
Installment Payments (as defined in Subsection (d) below) are due for the
Formula Period for which the Installment Payment Premium is calculated.

 

(d) Manner of Payment. Within sixty (60) days after the end of each Formula
Period, PainCare or its Affiliate shall prepare and deliver to Shareholder a
financial statement presenting the Formula Period Profits for the Surviving
Corporation for the applicable Formula Period (the “Formula Period Profits
Statement”). Within thirty (30) days after delivery of the Formula Period
Profits Statement, Shareholder shall in a written notice to PainCare either
accept or describe in reasonable detail any proposed adjustments to the Formula
Period Profits Statement and the reasons therefore, and shall include pertinent
calculations. If Shareholder fails to deliver notice of acceptance or objection
to the Formula Period Profits Statement within such thirty (30) day period, the
Shareholder shall be deemed to have accepted the Formula Period Profits
Statement. If Shareholder accepts or fails to object to the Formula Period
Profits Statement within the thirty (30) day period set forth above, then within
ninety (90) days after the end of the Formula Period, PainCare shall pay to the
Shareholder the Intended Installment Payment or the Adjusted Installment Payment
(each an “Installment Payment”, and collectively, the “Installment Payments”)
along with any Installment Payment Premium owed in accordance with Subsection
(c) above as follows: (i) fifty percent (50%) of the Installment Payment shall
be made in cash via wire transfer to a bank account designated by the
Shareholder; and (ii) fifty percent (50%) of the Installment Payment shall be
made in PainCare Shares priced at Fair Market Value (as defined below) per one
share of PainCare common stock for all Formula Periods. In the event PainCare
and Shareholder are not able to agree on the Formula Period Profits Statement
within thirty (30) days from and after the receipt by PainCare of any objections
raised by Shareholder, PainCare and Shareholder shall each have the right to
require that such disputed determinations be submitted to an independent
certified public accountant or accounting firm that PainCare and Shareholder
shall jointly select, for computation or verification in accordance with the
provisions of this Agreement, and the Installment Payment shall be paid by
PainCare to the Shareholder within fifteen (15) days after receipt of the
accountant’s computation or verification. The foregoing provisions for
accounting firm review shall be final and binding upon the Parties and there
shall be no right of appeal from such decision.

 

(e) Earnout Cap. Notwithstanding anything to the contrary in this Section 3, in
no event whatsoever shall the aggregate amount of the Installment Payments paid
to the Shareholder from PainCare in cash, in PainCare Shares or any other form
of consideration exceed Three Million Seven Hundred Fifty Thousand and 00/100
Dollars ($3,750,000).

 

9

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(f) Definitions for Purposes of Section 3. For purposes of Section 3 of this
Agreement:

 

(i) “Fair Market Value” shall mean the value of the PainCare Shares determined
as follows:

 

(1) if the principal market for the PainCare Shares is a national securities
exchange, then the “Fair Market Value” of the PainCare Shares shall equal the
thirty (30) day trailing average of the closing ask prices of the PainCare
Shares as reported by such exchange or on a composite tape reflecting
transactions on such exchange; or

 

(2) if the principal market for the PainCare Shares is not a national securities
exchange, but the price of the PainCare Shares is quoted on the National
Association of Securities Dealers Automated Quotation System (“NASDAQ”) Stock
Market, and (A) actual closing price information is available with respect to
the PainCare Shares, then the “Fair Market Value” of the PainCare Shares shall
equal the thirty (30) day trailing average of the closing ask prices of such
stock on the NASDAQ Stock Market; or (B) actual closing price information is not
available with respect to the PainCare Shares, then the “Fair Market Value” of
the PainCare Shares shall equal the thirty (30) day trailing average of the bid
prices per share of such stock on the NASDAQ Stock Market; or

 

(3) if the principal market for the PainCare Shares is neither a national
securities exchange and such stock is not quoted on NASDAQ, then the “Fair
Market Value” of the PainCare Shares shall equal the thirty (30) day trailing
average of the closing ask prices of the PainCare Shares as reported by the OTC
Bulletin Board Service or by National Quotation Bureau, Incorporated, or a
comparable service selected by PainCare; or

 

(4) if subsections (f)(i)(1)-(3) above are inapplicable or if no trades have
been made or no quotes are available for such day with respect to the PainCare
Shares, then the “Fair Market Value” of the PainCare Shares shall be determined
by an independent third party appraiser selected jointly by PainCare and
Shareholder. Within ten (10) days after the effective date of the appraiser’s
appointment, the appraiser shall deliver an appraisal of the Fair Market Value
of the PainCare Shares, which shall be binding and conclusive on the Parties.
The cost of any appraisal hereunder shall be shared equally by the Parties, and
each Party shall be responsible and financially liable for its or his own
attorneys’ fees; and

 

(5) with the understanding that notwithstanding the Fair Market Value ascribed
to the PainCare Shares pursuant to subsections 3.4(f)(1), (2), (3) or (4) above
in no event shall the Fair Market Value of the PainCare Shares ever be less than
Two Dollars and 50/100 ($2.50) per share.

 

(ii) “Formula Period Profits” shall mean the Surviving Corporation’s earnings
before deductions for interest, taxes, depreciation and amortization (“EBITDA”)
as calculated utilizing GAAP by PainCare’s independent certified public
accountants for the applicable Formula Period, and as calculated by PainCare for
quarterly and less than quarterly data for such Formula Period. Notwithstanding
the foregoing, the calculation of the Formula Period Profits shall not include
any costs or expenses related to: (i) the corporate overhead of PainCare or its
Affiliates or other administrative or similar charges that PainCare or its
Affiliates might impose upon the Surviving Corporation, except those charges for
services provided directly to and for the benefit, or as required, of the
Surviving Corporation; and (ii) any non-recurring

 

10

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charges, losses, profits, gains, or non-cash adjustments not related to the
ongoing operations of the Surviving Corporation’s business, including but not
limited to discontinued operations, extraordinary items, acquisition costs and
goodwill charges incurred in connection with the transactions contemplated
hereby (excluding the write-off of any goodwill with respect to the Surviving
Corporation in accordance with FASB 142), or unusual or infrequent items as such
terms are defined pursuant to generally accepted accounting principles, or (iii)
any charge related to grants or exercises of options of employees of the
Surviving Corporation.

 

4. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER. The Shareholder represents
and warrants to the Acquiring Companies that the statements contained in this
Section 4 are correct and complete as of the date of this Agreement, except as
set forth in the disclosure schedule accompanying this Agreement (the
“Disclosure Schedule”). The Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered paragraphs contained in this Section 4 to the
Agreement.

 

4.1 Organization, Qualification, and Corporate Power. As of the Closing Date,
the Company will be a corporation duly organized, validly existing, and in good
standing under the laws of the State of Texas. The Company has full power and
authority and all licenses, permits and authorizations necessary to carry on the
businesses in which it is currently engaged and to own and use the properties
owned and used by it. Section 4.1 of the Disclosure Schedule lists all of the
officers and members of the Board of Directors of the Company, as of the date
immediately preceding the Closing Date. The Company has made available to the
Acquiring Companies correct and complete copies of the minute book, articles of
incorporation and bylaws of the Company, as amended to date. Copies of the
minute book (containing the records of meetings of the stockholders, the board
of directors and any committees of the board of directors), the stock
certificate books and stock record books of the Company are correct and complete
in all material respects and will have been delivered to PainCare prior to or at
the Statutory Merger Time. The Company is not in default under or in violation
of any provision of its articles of incorporation or bylaws.

 

4.2 Capitalization. The entire authorized capital stock of the Company consists
of One Hundred Thousand (100,000) shares of common stock (the “Shares”), of
which One Thousand (1,000) Shares are issued and outstanding. All of the issued
and outstanding Company Shares have been duly authorized, are validly issued,
fully paid, and nonassessable and are held of record by the Shareholder. The
Shareholder has good title to the Company Shares free and clear of any and all
liens, claims, security interests or other encumbrances of any Person. There are
no outstanding or authorized options, warrants, purchase rights, subscription
rights, redemption rights, conversion rights, exchange rights, or other
contracts or commitments that could require the Company to issue, sell, or
otherwise cause to become outstanding any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Company. There are no
stockholders’ agreements, voting trusts, proxies, or other agreements or
understandings with respect to the voting of the capital stock of the Company.

 

4.3 Authorization. The Company has full power and authority (including full
corporate power and authority) and Dr. Rick Taylor on behalf of each Shareholder
has all necessary authority to execute, bind each Shareholder and deliver this
Agreement and to perform

 

11

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its obligations hereunder. The execution, delivery and performance of this
Agreement by the Company has been duly authorized and approved by its board of
directors and shareholders and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement and the transactions
contemplated hereby. The Company has given the Shareholder any and all notice
required to be given to the Shareholder under applicable law. This Agreement
constitutes the valid and legally binding obligation of the Company and the
Shareholder, enforceable in accordance with its terms and conditions.

 

4.4 Noncontravention. Except as set forth in Section 4.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement by the
Company or the Shareholder, nor the consummation of the transactions
contemplated hereby will: (a) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, or other restriction of any
government, governmental agency or any other third party whatsoever, or court to
which the Company or the Shareholder are subject, or any provision of the
articles of incorporation or bylaws of the Company; or (b) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any material agreement, contract, lease, license,
instrument or other arrangement to which the Company or the Shareholder are a
party or by which either the Company or the Shareholder is bound or to which any
of the Company’s assets are subject (or result in the imposition of any Security
Interest upon any of its assets). Except as set forth in Section 4.4 of the
Disclosure Schedule, the Shareholder and the Company need not give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency or any other third party whatsoever in
order for the Parties to consummate the transactions contemplated by this
Agreement.

 

4.5 Broker’s Fees. The Shareholder has not entered into any broker or finder’s
agreement for which he, the Company or PainCare is required to pay any Liability
or has any obligation to pay any fees, expenses, or commissions to any
consultant, broker, finder, or agent in connection with the transactions
contemplated by this Agreement.

 

4.6 Title to Assets. Section 4.6 of the Disclosure Schedule contains a complete,
true and correct list of all of the assets of the Company. Except for the
security interest in the assets of the Company held by First State Bank or
except as to assets disposed of in the ordinary course of business subsequent to
the date hereof or disposed of as otherwise contemplated by this Agreement, the
Company has good and marketable title to, or a valid leasehold interest in, the
properties and assets used by it, or shown on the April 30, 2004 Balance Sheet
(the “Latest Balance Sheet”) or acquired after the date thereof, free and clear
of all Security Interests. Except for the Medical Assets which are to be
transferred to New PA, the assets set forth in Section 4.6, in conjunction with
any assets which the Company leases, constitute all of the assets used by the
Company in connection with its business as presently conducted and all assets
necessary or appropriate for the continued operation of the Company’s business.

 

4.7 No Subsidiaries. The Company has no subsidiaries and does not control,
directly or indirectly, or have any direct or indirect equity participation in
any corporation, partnership, limited liability company, trust or other business
association.

 

12

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4.8 Financial Statements. The Company has prepared financial statements
consisting of (i) a balance sheet and statement of income and expenses as of and
for the year ended December 31, 2003 (the “Year-End Financial Statements”); and
(ii) a balance sheet and a statement of income and expenses as of and for the
four month period ending April 30, 2003 and 2004 (the “Interim Financial
Statements”) all of which are included in Section 4.8 of the Disclosure
Schedule. The Year-End Financial Statements and the Interim Financial Statements
(collectively, the “Financial Statements”) have been prepared in accordance with
the cash method of accounting. The Financial Statements present fairly the
financial condition of the Company as of such dates and the results of the
operations of the Company for such periods, are correct and complete in all
material respects, and are consistent with the books and records of the Company
(which books and records are correct and complete in all material respects).

 

4.9 Events Subsequent to Most Recent Year End. Since December 31, 2003 (the
“Most Recent Year End”), there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of the Company. Without limiting the generality of the foregoing,
since the Most Recent Year End:

 

(a) Sale or Lease of Assets. The Company has not sold, leased, transferred, or
assigned any of its material assets, tangible or intangible, other than for fair
market value in the ordinary course of its business;

 

(b) Contracts. Other than this Agreement, the Company has not entered into any
agreement, contract, lease, or license (or series of related agreements,
contracts, leases, and licenses) outside the ordinary course of business;

 

(c) Change in Contracts. No third party (or the Company) has accelerated,
terminated, adversely modified, or canceled any material agreement, contract,
lease, or license (or series of related agreements, contracts, leases, and
licenses) to which the Company is a party or by which it is bound and neither
the Shareholder nor the Company has any intent to do any of the foregoing or has
received a verbal or written indication of any third party’s intent to do any of
the foregoing;

 

(d) Security Interests. The Company has not had imposed any Security Interest
upon any of its assets, tangible or intangible;

 

(e) Investments. The Company has not made any capital investment in, any loan
to, or any acquisition of the securities or assets of, any other Person (or
series of related capital investments, loans, and acquisitions);

 

(f) Debts. The Company has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money or
capitalized lease obligation;

 

(g) Liabilities Unaffected. The Company has not delayed or postponed the payment
of accounts payable and other Liabilities or accelerated the collection of
accounts, notes or other receivables;

 

13

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(h) Claims Unaffected. The Company has not canceled, compromised, waived, or
released any right or claim (or series of related rights and claims) outside the
ordinary course of its business;

 

(i) Articles and Bylaws. Except in connection with the Conversion, there has
been no change made or authorized in the articles of incorporation or bylaws of
the Company;

 

(j) Changes in Equity. Except in connection with the Conversion, the Company has
not issued, sold, or otherwise disposed of any of its capital stock, or granted
any options, warrants, or other rights to purchase or obtain (including upon
conversion, exchange, or exercise) any of its capital stock;

 

(k) Intentionally Omitted.

 

(l) Property Damage. The Company has not experienced any material damage,
destruction, or loss (whether or not covered by insurance) to its property or
assets;

 

(m) Transactions with Affiliates. The Company has not made any loan to, or
entered into any other transaction with, any of its directors, officers and
employees outside the ordinary course of business provided that any such
transaction entered into within the sixty (60) day period immediately preceding
the Closing Date is listed in Section 4.9(m) of the Disclosure Schedule;

 

(n) Collective Bargaining Agreements. The Company has not entered into any
collective bargaining agreement, written or oral, or modified the terms of any
existing such contract or agreement;

 

(o) Compensation Changes. The Company has not granted any increase in the
compensation of any of its directors, officers, and employees outside of the
ordinary course of business provided that any such compensation increase
provided to such individuals within the sixty (60) day period immediately
preceding the Closing Date is listed in Section 4.9(o) of the Disclosure
Schedule;

 

(p) Employee Benefit Plans. The Company has not adopted, amended, modified, or
terminated any bonus, profit-sharing, incentive, severance, or other plan,
contract, or commitment for the benefit of any of its directors, officers, and
employees (or taken any such action with respect to any other Employee Benefit
Plan);

 

(q) Officers; Directors; Employees. The Company has not made any change in the
employment terms for any of its directors, officers and employees, other than
increases in compensation in the ordinary course of business or other than to
terminate such agreements as required herein;

 

(r) Charitable or Capital Contributions. The Company has not made or pledged to
make any charitable or other capital contribution;

 

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(s) Ordinary Course of Business. To the Knowledge of the Shareholder, there has
not been any other occurrence, event, incident, action, failure to act, or
transaction outside the ordinary course of business involving the Company other
than as contemplated by this Agreement;

 

(t) Accounting Practices. There has not been any change in any method of
accounting or accounting principle, estimate or practice of the Company;

 

(u) Accounts Receivable. The Company has not accelerated the collection of any
Accounts Receivable or any other amounts owed to it; and

 

(v) In General. Neither the Company nor the Shareholder has committed to do any
of the foregoing.

 

4.10 Undisclosed Liabilities. The Company has no Liability and to the Knowledge
of the Shareholder there is no reasonable basis for any present or future
action, suit, proceeding, hearing, investigation, complaint, claim, or demand
against the Company giving rise to any Liability, except for: (a) Liabilities
disclosed in the Disclosures Schedule; (b) contractual obligations incurred in
the ordinary course of business; (c) Liabilities reflected on the Latest Balance
Sheet; (d) Liabilities which have arisen after the date of the Latest Balance
Sheet in the ordinary course of business (none of which results from, arises out
of, relates to, is in the nature of, or was caused by any breach of contract,
breach of warranty, tort, infringement, or violation of law), and (e)
Liabilities for professional fees relating to the transactions contemplated by
this Agreement which shall be the sole obligation of the Shareholder. As of the
Closing, other than the current trade accounts payable, leasehold obligations,
accrued payroll and benefit obligations, accrued property taxes, the note
payments on that certain promissory note issued in favor of First State Bank
with respect to Equipment Loan #160794760 with pay-off as of 5/24/04 of
#298,858.34 for DRX9000 medical equipment (the “Equipment Note”), the Company
shall not have any unpaid liabilities, other than those listed in the Section
4.10 Disclosure Schedule, including, but not limited to, any bank debt, capital
leases or any general or professional liability claims, or be obliged in any
other way to provide funds in respect of, or to guarantee or assume, any debt,
obligation or dividend of any person, except endorsements in the ordinary course
of business in connection with the deposit, in banks or other financial
institutions, of items for collection.

 

4.11 Tax Matters.

 

(a) Tax Returns. Except as set forth in Disclosure Schedule 4.11, the Company
has filed all Tax Returns it was required to file. All such Tax Returns were
correct and complete in all material respects and were filed on a timely basis.
All Taxes owed by the Company (whether or not shown on any Tax Return) have been
paid. The Company currently is not the beneficiary of any extension of time
within which to file any Tax Return. No claim is currently pending by an
authority in a jurisdiction where the Company is or may be subject to taxation
by that jurisdiction. There are no Security Interests on any of the assets of
the Company that arose in connection with any failure (or alleged failure) to
pay any Tax.

 

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(b) Withholding. The Company has withheld, and remitted when due, all Taxes
required to have been withheld or paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder, or other third
party.

 

(c) No Disputes of Claims. No Shareholder or director or officer (or employee
responsible for Tax matters) of the Company expects any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Company either: (a)
claimed or raised by any authority; or (b) as to which any Shareholder,
directors and officers (and employees responsible for Tax matters) of the
Company has Knowledge based upon personal contact with any agent of such
authority. Section 4.11 of the Disclosure Schedule lists all federal, state,
local, and foreign income Tax Returns filed with respect to the Company for
taxable periods ended on or after December 31, 2000, indicates those Tax Returns
that have been audited, and indicates those Tax Returns that currently are the
subject of audit. The Shareholder has made available to PainCare correct and
complete copies of all federal income Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by the Company since
December 31, 2000.

 

(d) No Waivers. The Company has not waived any statute of limitations in respect
of Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency.

 

(e) No Special Circumstances. The Company has not made any payments, is not
obligated to make any payments, nor is a party to any agreement that under
certain circumstances could obligate it to make any payments that will not be
deductible under Code Section 280G. The Company has not been a United States
real property holding corporation within the meaning of Code Section 897(c)(2)
during the applicable period specified in Code Section 897(c)(1)(A)(ii). The
Company has disclosed on its federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of federal income
Tax within the meaning of Code Section 6662.

 

(f) Subchapter “S”. The Company has elected, by the unanimous consent of its
shareholders and in compliance with all applicable legal requirements, to be
taxed under Subchapter “S” of the Code and corresponding provisions under any
applicable state and local laws, and such elections are currently in full force
and effect for the Company. No action has been taken by the Company or the
Shareholder that may result in the revocation of any such elections. The Company
has no “Subchapter C earnings and profits,” as defined in Code Section 1362(d).
The Company has no “net unrealized built-in gain,” as such term is defined in
Code Sections 1374(d)(1) and 1374(d)(8). The Company has no Liability, absolute
or contingent, for the payment of any income Taxes under the Code or under
Subchapter “S” of the Code.

 

(g) Audits of Tax Returns. No Tax Return of the Company is currently under audit
or examination by any taxing authority, and the Company has not received a
written notice stating the intention of any taxing authority to conduct such an
audit or examination. Each deficiency resulting from any audit or examination
relating to Taxes by any taxing authority has been paid, except for deficiencies
being contested in good faith. The revenue agents’ reports related to any prior
audits and examinations are attached as part of Section 4.11 of the Disclosure
Schedule.

 

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(h) Period of Assessment. There is no agreement or other document extending, or
having the effect of extending, the period of assessment or collection of any
Taxes.

 

(i) Tax Agreements. The Company is not a party to or bound by any tax sharing
agreement, tax indemnity obligation or similar agreement with respect to Taxes,
including any advance pricing agreement, closing agreement or other agreement
relating to Taxes with any taxing authority.

 

(j) Inclusions in Taxable Periods. The Company will be required to include in a
taxable period ending after the Closing Date taxable income attributable to
income that accrued in a prior taxable period but was not recognized in any
prior taxable period as a result of the installment method of accounting, the
completed contract method of accounting, the long-term contract method of
accounting, the cash method of accounting or Code Section 481 with respect to a
change in method of accounting occurring before the Closing Date or comparable
provisions of state, local or foreign tax law. PainCare agrees to pay all such
tax as they become due.

 

(k) Consents. The Company has not filed a consent pursuant to or agreed to the
application of Code Section 341(f).

 

(l) Personal Holding Company. The Company has not, during the five (5) year
period ending on the Closing Date, been a personal holding company within the
meaning of Code Section 541.

 

(m) Consolidated Tax Returns. The Company has never filed or been included in
any combined or consolidated Tax Return with any other person or been a member
of an Affiliated Group filing a consolidated federal income Tax Return.

 

4.12 Real Property. The Company does not own any real property. Section 4.12 of
the Disclosure Schedule lists and describes briefly all real property leased or
subleased by the Company. The Shareholder has made available to PainCare and
Subsidiary correct and complete copies of the leases and subleases listed in
Section 4.12 of the Disclosure Schedule (as amended to date). With respect to
each lease and sublease listed in Section 4.12 of the Disclosure Schedule:

 

(a) Binding. The lease or sublease is legal, valid, binding, enforceable, and in
full force and effect;

 

(b) Continued Validity. The lease or sublease will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby;

 

(c) No Defaults. The Company is not in breach or default in any material respect
under the lease or sublease and to the Knowledge of the Shareholder, no third
party is in breach or default under the lease or sublease, and to the Knowledge
of the Shareholder, no event has occurred which, with notice or lapse of time,
would constitute a breach or default or permit termination, modification or
acceleration thereunder;

 

17

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(d) Repudiation. Neither the Company nor any other party to the lease has
repudiated any provision of the lease or sublease;

 

(e) No Disputes. There are no disputes, oral agreements, or forbearance programs
in effect as to the lease or sublease;

 

(f) Encumbrances. The Company has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the leasehold or
subleasehold;

 

(g) Approvals. To the Knowledge of the Shareholder, all facilities leased or
subleased thereunder have received all approvals of governmental authorities
(including licenses and permits) required in connection with the operation
thereof and to the Knowledge of the Shareholder, have been operated and
maintained in accordance with applicable laws, rules, and regulations; and

 

(h) Utilities. All facilities leased or subleased thereunder are supplied with
utilities and other services reasonably necessary for the operation of said
facilities.

 

4.13 Intellectual Property. The Company owns or has the right to use pursuant to
a valid license, sublicense, agreement, or permission all Intellectual Property
necessary or desirable for the operation of the businesses of the Company as
presently conducted. No claim or demand of any Person has been made, nor is
there any proceeding that is pending, or to the Shareholder’s Knowledge,
threatened, which challenges the rights of the Company with respect to any
Intellectual Property or asserts that the Company is infringing or otherwise in
conflict with or is required to pay any royalty or license fee with respect to
any Intellectual Property.

 

4.14 Condition of Tangible Assets. Each tangible asset of the Company has been
maintained in accordance with normal industry practice, is in good operating
condition and repair (subject to normal wear and tear), and is suitable,
designed and intended for the purposes for which it presently is used by the
Company and, to the Knowledge of Shareholder, is not outdated in comparison with
the assets used for similar purposes by similar businesses.

 

4.15 Contracts. Section 4.15 of the Disclosure Schedule lists the following
contracts and other agreements, written or oral, to which the Company was a
party immediately preceding the Closing:

 

(a) Personal Property Leases. Any agreement (or group of related agreements) for
the lease of personal property to or from any Person providing for lease
payments in excess of Five Thousand Dollars ($5,000.00) per year;

 

(b) Services. Any agreement (or group of related agreements) for the furnishing
or receipt of services, the performance of which will extend over a period of
more than one (1) year;

 

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(c) Partnership; Joint Venture. Any agreement constituting a partnership or
joint venture;

 

(d) Indebtedness. Any agreement (or group of related agreements) under which it
has created, incurred, assumed, or guaranteed any indebtedness for borrowed
money, or any capitalized lease obligation;

 

(e) Confidentiality; Non-Competition. Any agreement concerning confidentiality
or non-competition;

 

(f) Shareholders’ Agreements. Any agreement by and between the Shareholder and
the Company;

 

(g) Plans. Any profit sharing, stock option, stock purchase, stock appreciation,
deferred compensation, severance, or other plan or arrangement for the benefit
of its current or former directors, officers, and employees;

 

(h) Employment or Consulting Agreements. Any agreement for the employment of any
individual on a full-time or part-time or the engagement of any individual as a
consultant or independent contractor, or otherwise compensating an individual
for services rendered or to be rendered to the Company;

 

(i) Advances; Loans. Any agreement under which the Company has advanced or
loaned any amount to any of its directors, officers and employees outside the
ordinary course of business;

 

(j) Adverse Effects. Any other agreement under which the consequences of a
default or termination could have a material adverse effect on the business,
financial condition, operations, results of operations or future prospects of
the Company; and

 

(k) Other Agreements. Any other agreement (or group of related agreements) the
performance or rendering of which involves consideration in excess of Five
Thousand and No/100 Dollars ($5,000.00).

 

The Shareholder has made available to PainCare and Subsidiary a correct and
complete copy of each written agreement listed in Section 4.15 of the Disclosure
Schedule (as amended to date) and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 4.15 of the Disclosure
Schedule. With respect to each such agreement: (i) the agreement is legal,
valid, binding, enforceable, and in full force and effect; (ii) there shall be
no breach or other violation resulting from the consummation of the transactions
contemplated hereby; (iii) the Company is not in default or breach in any
material respect and to the Knowledge of the Shareholder, no other party is in
breach or default, and to the Knowledge of Shareholder, no event has occurred
which with notice or lapse of time would constitute a breach or default, or
permit termination, modification, or acceleration, under the agreement; and (iv)
neither the Company nor any other party has repudiated any provision of the
agreement. None of the agreements listed in Section 4.15 of the Disclosure
Schedule requires the consent or approval of any Person, or any compensation or
payment to be made to any such Person by reason of the transactions contemplated
by this Agreement, or the merger of the Company with and into the Subsidiary.

 

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4.16 Powers of Attorney. Except as set forth in Section 4.16 of the Disclosure
Schedule, there are no outstanding powers of attorney executed on behalf of the
Company.

 

4.17 Insurance; Malpractice. Section 4.17 of the Disclosure Schedule contains a
list and brief description of all policies or binders of fire, liability,
product liability, workers compensation, health and other forms of insurance
policies or binders currently in force insuring against risks to which the
Company is currently a party, a named insured or otherwise the beneficiary of
coverage. Section 4.17 of the Disclosure Schedule contains a description of all
current malpractice liability insurance policies of Shareholder, the Company,
and the Company’s professional employees. Except as set forth on Section 4.17 of
the Disclosure Schedule: (a) neither the Company nor Shareholder has, during the
five (5) years immediately preceding the Closing Date, filed a written
application for any insurance coverage relating to the Company’s business or
property which has been denied by an insurance agency or carrier; and (b) the
Company, the Company’s professional employees, and Shareholder have been
continuously insured for professional malpractice claims during the same period.
Section 4.17 of the Disclosure Schedule also sets forth a list of all claims for
any insured loss in excess of Five Thousand and 00/100 Dollars ($5,000) per
occurrence filed by the Company, the Company’s professional employees, or
Shareholder during the five (5) years immediately preceding the Closing Date,
including workers compensation, general liability, environmental liability and
professional malpractice liability claims. With respect to each insurance policy
listed in Section 4.17 of the Disclosure Schedule: (i) the policy is legal,
valid, binding, enforceable, and in full force and effect; (ii) other than
policies to be reissued in the name of the New PA, the policy will continue to
be legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (iii)
neither the Company, Shareholder, nor to the Knowledge of Shareholder, any other
party to the policy is in breach or default (including with respect to the
payment of premiums or the giving of notices), and to the Knowledge of
Shareholder, no event has occurred which, with notice or the lapse of time,
would constitute such a breach or default, or permit termination, modification,
or acceleration, under the policy; (iv) the Company has not repudiated any
provision thereof and no other party to the policy has repudiated any provision
thereof; (v) there is no claim pending under any of such policies as to which
coverage has been questioned, denied or disputed by the underwriter(s) of such
policies or any notice that a defense will be afforded with reservation of
rights; (vi) the Company has not received: (A) any notice that any issuer of any
such policy has filed for protection under applicable bankruptcy laws or is
otherwise in the process of liquidating or has been liquidated; or (B) any other
indication that such policies are no longer in full force and effect or that the
issuer of any such policy is no longer willing or able to perform its
obligations thereunder; and (vii) neither Shareholder nor the Company has
received any written notice from or on behalf of any insurance carrier issuing
such policies, that there will hereafter be a cancellation or non-renewal of
existing policies.

 

4.18 Litigation. Except as noted in Section 4.18 of the Disclosure Schedule,
there is no litigation, arbitration, governmental claim, investigation or
proceeding, pending or, to Shareholder’s Knowledge, threatened, against the
Company or Shareholder at law or in equity, before any court, arbitration
tribunal or governmental agency. Shareholder has no knowledge of

 

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any facts on which claims may hereafter be reasonably made against the Company
that will have a Material Adverse Effect on the Company. All known medical
malpractice claims, general liability incidents and incident reports relating to
the Business have been submitted to Company’s insurer. All claims made or, to
Shareholder’s Knowledge, threatened against the Company or Shareholder in excess
of the deductible are covered under Shareholder’s or Company’s current insurance
policies. Section 4.18 of the Disclosure Schedule provides a complete list of
all general liability incidents, incident reports and malpractice claims in
excess of $5,000 relating to the Business or the Center that have been filed for
the five (5) year period prior to the date hereof.

 

4.19 Health Care Compliance. The Company is participating or otherwise
authorized to receive reimbursement from Medicare and Medicaid and is a party to
other third-party payor agreements set forth in Section 4.19 of the Disclosure
Schedule. All necessary certifications and contracts required for participation
in such programs are in full force and effect and have not been amended or
otherwise modified, rescinded, revoked or assigned, and to the Knowledge of
Shareholder, no condition exists or event has occurred which in itself or with
the giving of notice or the lapse of time or both would result in the
suspension, revocation, impairment, forfeiture or non-renewal of any such
third-party payor program. The Company is in compliance in all material respects
with the requirements of all such third-party payors applicable thereto. None of
the Company, its physician employees (to the Knowledge of Shareholder), the
Shareholder, or immediate family members of the Shareholder have any financial
relationship (whether investment interest, compensation interest, or otherwise)
with any entity to which any of the foregoing refer patients, except for such
financial relationships that qualify for exceptions to state and federal laws
restricting physician referrals to entities in which they have a financial
interest.

 

4.20 Fraud and Abuse. The Company, Shareholder, and all persons and entities (to
the Knowledge of Shareholder) providing professional services for the Company
have not engaged in any activities which are prohibited under 42 U.S.C. §
1320a-7b, or the regulations promulgated thereunder pursuant to such statutes,
or related state or local statutes or regulations, or which are prohibited by
rules of professional conduct, including the following: (a) knowingly and
willfully making or causing to be made a false statement or representation of a
material fact in any application for any benefit or payment; (b) knowingly and
willfully making or causing to be made any false statement or representation of
a material fact for use in determining rights to any benefit or payment; (c)
failing to disclose knowledge by a claimant of the occurrence of any event
affecting the initial or continued right to any benefit or payment on its own
behalf or on behalf of another, with intent to fraudulently secure such benefit
or payment; and (d) knowingly and willfully soliciting or receiving any
remuneration (including any kickback, bribe, or rebate), directly or indirectly,
overtly or covertly, in cash or in kind or offering to pay or receive such
remuneration: (A) in return for referring an individual to a person for the
furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part by Medicare or Medicaid; or (B) in
return for purchasing, leasing, or ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service or item for which
payment may be made in whole or in part by Medicare or Medicaid. The Company has
at all times complied with the requirements of Texas Statutes which prohibit
physicians who have an ownership, investment or beneficial interest in certain
health care facilities from referring patients to such facilities for the
provisions of designated and other health services, and has at all times
complied with the Texas Statutes. Furthermore, the Company has filed all reports
required to be filed by the State of Texas and federal law regarding
compensation arrangements and financial relationships between a physician and an
entity to which the physician refers patients.

 

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4.21 Legal Compliance. The Company has complied in all material respects with
all applicable Laws (including rules, regulations, codes, injunctions,
judgments, orders, decrees, and rulings of federal, state, local, and foreign
governments (and all agencies thereof)), and no action, suit, proceeding,
hearing, complaint, claim, demand, notice or investigation has been filed or
commenced, or to the Knowledge of the Shareholder, threatened against the
Company alleging any failure so to comply. The Company and all physicians and
other health care professionals engaged or employed by the Company (or
associated with the Company as a result of being engaged or employed by New PA)
have all permits and licenses required by applicable Law, have made all required
regulatory filings and are not in violation of any such permit or license. The
Company is lawfully operated in accordance in all material respects with the
requirements of all applicable Laws and has in full force and effect all
authorizations and permits necessary to operate a medical practice saving those
that have been assigned or transferred to the New PA in accordance with this
Agreement. There are no outstanding notices of deficiencies relating to the
Company issued by any governmental authority or third-party payor requiring
conformity or compliance with any applicable law or condition for participation
with such governmental authority or third-party payor. The Company has not
received notice and the Shareholder has no knowledge or reason to believe that,
such necessary authorizations may be revoked or not renewed in the ordinary
course of business.

 

4.22 Rates and Reimbursement Policies. The jurisdiction in which the Company is
located does not currently impose any restrictions or limitations on rates which
may be charged to private pay patients receiving services provided by the
Company except for restrictions promulgated by Texas law and regulation on
charging of excessive fees and limitations on charges for and profits from the
sale of medications, goods and devices and free samples. The Company does not
have any rate appeal currently pending before any governmental authority or any
administrator of any third-party payor program. The Shareholder is not aware of
any applicable Law which affects rates or reimbursement procedures which has
been enacted, promulgated or issued within the eighteen (18) months preceding
the date of this Agreement or any such legal requirement proposed or currently
pending in the State of Texas which could have a Material Adverse Effect on the
Company, its business or operations, or may result in the imposition of
additional Medicaid, Medicare, charity, free care, welfare, or other discounted
or government assisted patients at the Company or require the Company to obtain
any necessary authorization which the Company does not currently possess. The
Shareholder is not aware of any impending proposed reduction in reimbursement
from third party or other payors and is not aware of any threatened termination
of payor contracts.

 

4.23 Medical Staff. Except as set forth on Section 4.23 of the Disclosure
Schedule, the Shareholder has no Knowledge of a physician who is providing
services on behalf of the Company or New PA, as applicable, who plans, or has
threatened to terminate his or her employment or other relationship with the
Company or the New PA, as applicable. The Shareholder is not aware that any of
the physicians providing services on behalf of the Company or New PA, as
applicable, currently has plans to retire from the practice of medicine in the
next three (3) years.

 

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4.24 Employees. Except as set forth on Section 4.24 of the Disclosure Schedule:
(a) there is no unfair labor practice charge or complaint pending or threatened
relating to the business of the Company; and (b) payment in full to all of the
employees of the Company of all wages, salaries, commissions, bonuses, benefits,
and other compensation lawfully due and owing to such employees or otherwise
arising under any policy, practice, agreement, plan, program, statute, or other
law as of the Closing Date has been made.

 

4.25 Employee Benefits.

 

(a) Plans. Section 4.25 of the Disclosure Schedule lists each Employee Benefit
or health and welfare plan that the Company maintains or to which the Company
contributes.

 

(b) Compliance. Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all material
respects with its terms and with the applicable requirements of ERISA, the Code
and other applicable laws.

 

(c) Reports and Descriptions. All required reports and descriptions (including
Form 5500 Annual Reports, Summary Annual Reports, PBGC-1’s, and Summary Plan
Descriptions) have been filed or distributed appropriately with respect to each
such Employee Benefit Plan. The requirements of Part 6 of Subtitle B of Title I
of ERISA and of Code Section 4980B have been met with respect to each such
Employee Benefit Plan which is an Employee Welfare Benefit Plan.

 

(d) Contributions. All contributions (including all employer contributions and
employee salary reduction contributions) which are due have been paid to each
such Employee Benefit Plan which is an Employee Pension Benefit Plan and all
contributions for any pay period ending on or before the Closing Date which are
not yet due have been paid to each such Employee Pension Benefit Plan or accrued
in accordance with the past custom and practice of the Company. All premiums or
other payments due for all periods ending on or before the Closing Date have
been paid with respect to each such Employee Benefit Plan which is an Employee
Welfare Benefit Plan.

 

(e) Qualified Plan. Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan and is intended to meet the requirements of a “qualified plan”
under Code Section 401(a) meets such requirements and has received, within the
last two (2) years, a favorable determination letter from the IRS.

 

(f) Market Value. The market value of assets under each such Employee Benefit
Plan which is an Employee Pension Benefit Plan (other than any Multiemployer
Plan) equals or exceeds the present value of all vested and nonvested
Liabilities thereunder determined in accordance with PBGC methods, factors, and
assumptions applicable to an Employee Pension Benefit Plan terminating on the
date for determination.

 

(g) Copies. The Shareholder has delivered to PainCare and Subsidiary correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the IRS, the most recent Form 5500
Annual Report, and all related trust agreements, insurance contracts, and other
funding agreements which implement each such Employee Benefit Plan.

 

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(h) Maintenance of Plans. With respect to each Employee Benefit Plan that the
Company maintains, ever has maintained, or to which it contributes, ever has
contributed, or ever has been required to contribute:

 

(i) Reportable Events. No such Employee Benefit Plan which is an Employee
Pension Benefit Plan has been completely or partially terminated or been the
subject of a Reportable Event as to which notices would be required to be filed
with the PBGC. No proceeding by the PBGC to terminate any such Employee Pension
Benefit Plan has been instituted or threatened; and

 

(ii) Prohibited Transactions. There have been no Prohibited Transactions with
respect to any such Employee Benefit Plan. No Fiduciary has any Liability for
breach of fiduciary duty or any other failure to act or comply in connection
with the administration or investment of the assets of any such Employee Benefit
Plan. No action, suit, proceeding, hearing, or investigation with respect to the
administration or the investment of the assets of any such Employee Benefit Plan
(other than any Multiemployer Plan), other than routine claims for benefits, is
pending or threatened. The Shareholder and the Company have no Knowledge of any
basis for any such action, suit, proceeding, hearing, or investigation.

 

4.26 Physicians and Other Providers. During the five (5) years preceding the
Closing Date, each physician, and other health care provider who is or was
employed by, or who renders or has rendered services on behalf of, the Company
or New PA:

 

(a) Licenses. Has been duly licensed and registered, and in good standing by the
State of Texas to engage in the practice of medicine, and said license and
registration have not been suspended, revoked or restricted in any manner;

 

(b) Controlled Substances. Has current controlled substances registrations
issued by the State of Texas and the U.S. Drug Enforcement Administration, which
registrations have not been surrendered, suspended, revoked or restricted in any
manner;

 

(c) Actions. Except as set forth on Section 4.26 of the Disclosure Schedule, has
not been a party or subject to:

 

(i) Malpractice Actions. Any malpractice suit, claim (whether or not filed in
court), settlement, settlement allocation, judgment, verdict or decree;

 

(ii) Disciplinary Proceedings. Any disciplinary, peer review or professional
review investigation, proceeding or action instituted by any licensure board,
hospital, medical school, physical therapy school, health care facility or
entity, professional society or association, third party payor, peer review or
professional review committee or body, or governmental agency;

 

(iii) Criminal Proceedings. Any criminal complaint, indictment or criminal
proceedings;

 

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(iv) Investigation. Any investigation or proceedings, whether administrative,
civil or criminal, relating to an allegation of filing false health care claims,
violating anti-kickback or fee-splitting laws, or engaging in other billing
improprieties;

 

(v) Mental Illnesses. Any organic or mental illness or condition that impairs or
may impair such physician’s ability to practice;

 

(vi) Substance Abuse. Any dependency on, habitual use or episodic abuse of
alcohol or controlled substances, or any participation in any alcohol or
controlled substance detoxification, treatment, recovery, rehabilitation,
counseling, screening or monitoring program;

 

(vii) Professional Ethics. Any allegation, or any investigation or proceeding
based on any allegation of violating professional ethics or standards, or
engaging in illegal, immoral or other misconduct (of any nature or degree),
relating to his or her practice; or

 

(viii) Application for Licensure. Any denial or withdrawal of an application in
any state for licensure as a physician or physical therapist, for medical staff
privileges at any hospital or other health care entity, for board certification
or recertification, for participation in any third party payment program, for
state or federal controlled substances registration, or for malpractice
insurance.

 

4.27 Guaranties. Saving the guaranties listed in Section 4.27 of the Disclosure
Schedule, the Company is not a guarantor or otherwise liable for any Liability
or obligation (including indebtedness) of any other Person.

 

4.28 Environment, Health, and Safety.

 

(a) Compliance. The Company has materially complied and is in material
compliance with all Environmental, Health, and Safety Requirements.

 

(b) Permits and Licenses. Without limiting the generality of the foregoing, to
the Knowledge of the Shareholder, the Company has obtained and complied in all
material respects with, and is in compliance in all material respects with, all
permits, licenses and other authorizations that are required pursuant to
Environmental, Health, and Safety Requirements for the occupation of its
facilities and the operation of its business; a list of all such permits,
licenses and other authorizations is set forth on Section 4.28 of the Disclosure
Schedule.

 

(c) Notices. The Company has not received any notice, report or other
information regarding any actual or alleged violation of Environmental, Health,
and Safety Requirements, or any Liabilities or potential Liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise), including any
investigatory, remedial or corrective obligations, relating to any of them or
its facilities arising under Environmental, Health, and Safety Requirements.

 

(d) Hazardous Substances. The Company has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled, or released any
substance, including without limitation any hazardous substance, or owned or
operated any property or

 

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facility (and to the Knowledge of the Shareholder, no such property or facility
is contaminated by any such substance) in a manner that has given or would give
rise to liabilities, including any Liability for response costs, corrective
action costs, personal injury, property damage, natural resources damages or
attorney fees, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, the Solid Waste Disposal
Act, as amended or any other Environmental, Health, and Safety Requirements.

 

(e) The Company has not received any communication, whether from a governmental
authority, citizens’ group, employee or otherwise, that alleges that the
Business or the Company is not in full compliance with Environmental Laws, or
that the Company is otherwise subject to liability under Environmental Laws, and
to the Shareholder’s Knowledge, there are no circumstances that may prevent or
interfere with such full compliance in the future. There is no Environmental
Claim (as defined below) pending or, to the Shareholder’s Knowledge, threatened
against the Company or the Business.

 

(f) The Shareholder has no Knowledge of any actions, activities, circumstances,
conditions, events or incidents, including, but not limited to, the release,
emission, discharge, presence or disposal of any Hazardous Substances that could
form the basis of any Environmental Claim against the Company or the Business.

 

4.29 Certain Business Relationships with the Company and its Affiliates. Except
as contemplated hereby with respect to the Company and the New PA, neither the
Shareholder nor any of his Affiliates have been involved in any business
arrangement or relationship with the Company within the past twelve (12) months,
and none of the Shareholder and his Affiliates owns any asset, tangible or
intangible, which is material to the business of the Company.

 

4.30 Third-party Payors. Section 4.30 of the Disclosure Schedule sets forth an
accurate, correct and complete list of the Company’s third-party payors. Neither
the Company nor the Shareholder has received any notice nor has any Knowledge
that any third-party payor intends to terminate or materially reduce its
business with, or reimbursement to, the Company. The Shareholder has no reason
to believe that any third-party payor will cease to do business with the Company
after, or as a result of, the consummation of any transactions contemplated
hereby. The Shareholder does not know of any fact, condition or event which
would adversely affect its relationship with any third-party payor.

 

4.31 Bank Accounts. Section 4.31 of the Disclosure Schedule sets forth all of
the bank and security accounts and all safe deposit boxes maintained by the
Company and all lines of credit owned or used by the Company, and the names of
all persons with authority to withdraw funds from, or execute drafts or checks
on, each such account.

 

4.32 Tax Status. The Shareholder is not a “nonresident alien individual” or
“foreign corporation” for purposes of Code Section 897(a)(1).

 

4.33 Binding Obligation. This Agreement constitutes the valid and legally
binding obligation of the Shareholder, enforceable in accordance with its terms
and conditions.

 

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4.34 No Corporate Practice or Fee Splitting. The Shareholder does not have any
Knowledge that the actions, transactions or relationships arising from, and
contemplated by, the Transaction violate any law, rule or regulation relating to
the corporate practice of medicine or fee splitting. The Shareholder accordingly
agrees that he will not and will not cause any other Party, in an attempt to
void or nullify this Agreement or any document related to the Transaction or any
relationship involving PainCare or Subsidiary to sue, claim, aver, allege or
assert that any such document or any such relationship violates any law, rule or
regulation relating to the corporate practice of medicine or fee splitting.

 

4.35 Intentions. The Shareholder intends to continue managing the business
operations of the New PA pursuant to his Employment Agreement for the next five
(5) years and does not know of any fact or condition that adversely affects, or
in the future may adversely effect, his ability or intention to manage the
business of the New PA for the next five (5) years.

 

4.36 Securities Representation.

 

(a) No Registration of PainCare Shares; Investment Intent. The Shareholder
acknowledges that the PainCare Shares to be delivered pursuant to this Agreement
have not been and will not be registered under the Securities Act (except as
provided for in this Agreement) and may not be resold without compliance with
the Securities Act. The PainCare Shares to be acquired by the Shareholder
pursuant to this Agreement are being acquired solely for his own account, for
investment purposes only and with no present intention of distributing, selling
or otherwise disposing of them in connection with a distribution other than in
compliance with the Securities Act.

 

(b) Resale Restrictions. The Shareholder covenants, warrants and represents that
none of the PainCare Shares issued to Shareholder will be offered, sold,
assigned, pledged, hypothecated, transferred or otherwise disposed of except
after full compliance with all of the applicable provisions of the Securities
Act and the rules of regulations of the Commission and applicable state
securities laws and this Agreement.

 

(c) Ability to Bear Economic Risk. The Shareholder covenants, warrants and
represents that he is able to bear the economic risk of an investment in
PainCare Shares acquired pursuant to this Agreement and can afford to sustain a
total loss of such investment and has such Knowledge and experience in financial
and business matters that he is capable of evaluating the merits and risks of
the proposed investment and therefore has the capacity to protect his own
interests in connection with the acquisition of the PainCare Shares. The
Shareholder, and the Shareholder’s purchaser representative, if any, have
received copies of PainCare’s most recent 10-K, 10-Q and 8-K filings and have
had an adequate opportunity to ask questions and receive answers from the
officers of PainCare concerning any and all matters relating to the background
and experience of the officers and directors of PainCare, the plans for the
operations of the business of PainCare, and any plans for additional
acquisitions and the like. The Shareholder, and the Shareholder’s purchaser
representative, if any, have asked any and all questions in the nature described
in the preceding sentence and all questions have been answered to such
individual’s satisfaction.

 

27

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(d) Accredited Investor. The Shareholder covenants, represents and warrants that
he is an: (a) individual with a net worth (either individually or jointly with
his respective spouse) in excess of One Million and No/100 Dollars
($1,000,000.00); or (b) individual who had an income in excess of Two Hundred
Thousand and No/100 Dollars ($200,000.00) in each of 2002 and 2003, or had a
joint income with his spouse in excess of Three Hundred Thousand and No/100
Dollars ($300,000.00) in each of 2002 and 2003, and has a reasonable expectation
of reaching the same income level in 2004.

 

(e) No Registration. The Shareholder understands, agrees and acknowledges that
the PainCare Shares have not been registered under the Texas Securities Act or
the Securities Act in reliance upon exemption provisions contained therein which
PainCare believes are available.

 

4.37 HIPAA. Schedule 4.37 lists and describes all plans and other efforts of
Shareholder with respect to the practice locations to comply with the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”), including the
final regulations promulgated thereunder, whether such plans and efforts have
been put in place or are in process. Schedule 4.37 includes but is not limited
in any manner whatsoever to any privacy compliance plan of Sellers in place or
in development, and any plans, analyses or budgets relating to information
systems including but not limited to necessary purchases, upgrades or
modifications to effect HIPAA compliance.

 

4.38 Improper and Other Payments. (a) Neither the Company, nor to the Knowledge
of Shareholder, any director, officer, employee, agent or representative of the
Company or any person acting on behalf of any of them, has made, paid or
received any unlawful bribes, kickbacks or other similar payments to or from any
person or authority, (b) no contributions have been made, directly or
indirectly, by the Company to a domestic or foreign political party or
candidate; and (c) the internal accounting controls of the Company are believed
by the Company’s management to be adequate to detect any of the foregoing under
current circumstances.

 

4.39 Accounts Receivable. Schedule 4.39 sets forth a list, accurate, correct and
complete in all respects, of all outstanding accounts and notes receivable of
the Company as of the last day of the month immediately preceding the Closing
Date. All outstanding accounts and notes receivable reflected on Schedule 4.39
are due and are valid claims against account debtors for services rendered in
accordance with the usual business practices and historical collection
experience of the Company and to the best of Shareholder’s knowledge, are
subject to no counterclaims, and have been outstanding for the periods indicated
in the aging analysis at Schedule 4.39. The Shareholder know of no reason why
such accounts receivable would not be collectible by the Company according to
approximately the same ratios as accounts receivable have been historically
collectible by the Company. All outstanding accounts and notes receivable
included on Schedule 4.39 arose in the ordinary course of business. The Company
has not incurred any liabilities to customers for discounts, returns,
promotional allowances or otherwise, except as provided in the Financial
Statements

 

4.40 Medical Waste. With respect to the generation, transportation, treatment,
storage, and disposal, or other handling of Medical Waste, the Company, with
respect to the business, has complied in all material respects with all Medical
Waste Laws (as hereinafter defined).

 

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“Medical Waste” includes, but is not limited to, (a) pathological waste, (b)
blood, (c) sharps, (d) wastes from surgery or autopsy, (e) dialysis waste,
including contaminated disposable equipment and supplies, (f) cultures and
stocks of infectious agents and associated biological agents, (g) contaminated
animals, (h) isolation wastes, (i) contaminated equipment, (j) laboratory waste,
and (k) various other biological waste and discarded materials contaminated with
or exposed to blood, excretion, or secretions from human beings or animals.
“Medical Waste” also includes any substance, pollutant, material, or contaminant
listed or regulated under the Medical Waste Tracking Act of 1988, 42 U.S.C.
§§6992, et seq. (“MWTA”).

 

“Medical Waste Law” means the following, including regulations promulgated and
orders issued thereunder, all as may be amended from time to time: the MWTA; the
U.S. Public Vessel Medical Waste Anti-Dumping Act of 1988, 33 USCA §§2501 et
seq.; the Marine Protection, Research, and Sanctuaries Act of 1972, 33 USCA
§§1401 et seq.; the Occupational Safety and Health Act, 29 USCA §§651 et seq.;
the United States Department of Health and Human Services, National Institute
for Occupational Self-Safety and Health Infectious Waste Disposal Guidelines,
Publication No. 88-119; and any other federal, state, regional, county,
municipal, or other local laws, regulations, and ordinances insofar as they
purport to regulate Medical Waste, or impose requirements relating to Medical
Waste.

 

4.41 No Untrue or Inaccurate Representation or Warranty. No representation or
warranty by Shareholder contains or will contain any untrue material statement
of fact, or omits or will omit to state a material fact necessary to make the
statements and information contained in this Section 4 not misleading.

 

5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING COMPANIES. The Acquiring
Companies represent and warrant to the Shareholder that the statements contained
in this Section 5 are correct and complete as of the date of this Agreement and
as of the Closing Date.

 

5.1 Organization of PainCare and Subsidiary. PainCare is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Florida. Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida. PainCare is the direct
parent of the Subsidiary, with PainCare directly owning all of the issued and
outstanding shares of stock of the Subsidiary.

 

5.2 Authorization of Transaction. PainCare and Subsidiary have full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform their obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of PainCare and Subsidiary,
enforceable in accordance with its terms and conditions. The execution,
delivery, and performance of this Agreement has been approved and authorized by
the Board of Directors of PainCare and Subsidiary and no other corporate
proceedings on the part of PainCare and Subsidiary are necessary to authorize
this Agreement and the transactions contemplated hereby.

 

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5.3 No Conflict or Violation. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
result in (a) a violation of or a conflict with any provision of the Certificate
or Articles of Incorporation or bylaws of the PainCare or Subsidiary, (b) a
breach of, or a default under, any term or provision of any contract, agreement,
indebtedness, lease, commitment, license, franchise, permit, authorization or
concession to which the PainCare or Subsidiary is a party, which breach or
default could reasonably be expected to have a material adverse effect on the
business or financial condition of the PainCare or Subsidiary or its ability to
consummate the transactions contemplated hereby or (c) a violation by the
PainCare or Subsidiary of any statute, rule, regulation, ordinance, code, order,
judgment, writ, injunction, decree or award, which violation could reasonably be
expected to have a material adverse effect on the business or financial
condition of the PainCare or Subsidiary, or their ability to consummate the
transactions contemplated hereby.

 

5.4 Consents and Approvals. Except as set forth on Disclosure Schedule 5.4, no
notice to, declaration, filing or registration with, or authorization, consent
or approval of, or permit from, any domestic or foreign governmental or
regulatory body or authority, or any other person or entity, is required to be
made or obtained by the PainCare or Subsidiary in connection with the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby.

 

5.5 Disclosure Documents. PainCare has delivered or Shareholder has had the
opportunity to obtain and review PainCare’s Form 10-KSB for the year ending
December 31, 2003, Form 10-QSB for the quarter ending March 31, 2004 and current
Forms 8-K (the “PainCare Disclosure Documents”). The PainCare Disclosure
Documents are true and correct in all material respects and do not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which such statements were made, not misleading. To the Knowledge of PainCare
nothing has occurred after the date of the documents contained in the Disclosure
Documents that would individually or in the aggregate have a material adverse
effect on PainCare or the Subsidiary.

 

5.6 Capitalization. The authorized capital stock of PainCare consists of
75,000,000 shares of Common Stock, $.0001 par value per share, which as of May
31, 2004, approximately 29,400,000 shares are issued and outstanding and
10,000,000 shares of “blank check” preferred none of which have been issued or
are outstanding. All of the PainCare Shares are, and all shares of PainCare
Shares to be issued pursuant to this Agreement will be duly authorized, validly
issued, fully paid and non-assessable. Disclosure Schedule 5.6(a) hereto sets
forth a listing of all options, warrants and outstanding PainCare securities
which are convertible (with or without the payment of consideration) into shares
of the Common Stock of PainCare, including all contingently issuable shares of
such Common Stock issuable pursuant to agreements outstanding as of May 31,
2004. Disclosure Schedule 5.6(b) also sets forth the terms of any financing
proposed to be raised by PainCare in connection with the transactions
contemplated by this Agreement.

 

5.7 Litigation. Except as set forth in Disclosure Schedule 5.7, there is no
charge, complaint, action, order, writ, injunction, judgment or decree
outstanding or claim, suit, litigation, proceeding, labor dispute, arbitrable
action or investigation (collectively, “Actions”) pending or, to the knowledge
of the PainCare, threatened against, relating to or affecting (i) PainCare or
its assets or the operation of the business of the PainCare as currently
operated and

 

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as proposed to be operated, (ii) any Employee Plan of PainCare or any trust or
other funding instrument, fiduciary or administrator thereof or (iii) the
transactions contemplated by this Agreement, before or by any federal, state,
municipal or other governmental department, commission, court, board, bureau,
agency or instrumentality, domestic or foreign, any of which is reasonably
expected to result in a loss not covered by insurance in excess of $100,000 or
reasonably expected to have a material adverse effect on PainCare. To the
knowledge of PainCare, PainCare is not in default with respect to any judgment,
order, writ, injunction or decree of any court or governmental agency, and there
are no unsatisfied judgments against PainCare or the business of PainCare.
Except as set forth in Disclosure Schedule 5.7, each Action pending or, to the
Knowledge of PainCare, threatened (whether or not disclosed in Disclosure
Schedule 5.7), is covered by insurance of reputable and solvent insurance
companies.

 

5.8 No Undisclosed Liabilities. Except as set forth in Disclosure Schedule 5.8,
to the Knowledge of PainCare, PainCare has no liabilities or obligations
(absolute, accrued, contingent or otherwise) except (i) liabilities that are
reflected and reserved against on PainCare’s audited balance sheet dated
December 31, 2003 (the “PainCare Balance Sheet Date”) that have not been paid or
discharged since the date thereof and (ii) liabilities incurred by PainCare
since the PainCare Balance Sheet Date in the ordinary course of business
consistent with past practice (none of which relates to any breach of contract,
breach of warranty, tort, infringement or violation of law or arose out of any
complaint, action, suit or proceeding except those which individually or in the
aggregate could not have a material adverse effect on PainCare).

 

5.9 No Brokers. There is no obligation on the part of PainCare to pay any
finder’s fee, brokerage commission or similar payment in connection with the
transactions contemplated hereby.

 

5.10 Compliance With Laws. To the Knowledge of PainCare and the Subsidiary,
PainCare and Subsidiary have complied with all applicable Laws except where the
failure to so comply would not individually or in the aggregate have a material
adverse effect on PainCare and the Subsidiary taken as a whole.

 

5.11 Material Misstatements Or Omissions. No representations or warranties by
PainCare or Subsidiary in this Agreement, nor any document, exhibit, statement,
certificate or schedule furnished or to be furnished to the Shareholder pursuant
hereto, or in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of a material fact, or omits or will omit to
state any material fact necessary to make the statements or facts contained
therein not misleading.

 

6. CLOSING; TERMINATION. The closing of the Transaction (the “Closing”) shall be
effective between the Parties as of the date upon which all other conditions to
the Parties obligations have been met or waived, or such other date or time as
the Parties may mutually agree (the “Closing Date”).

 

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7. CLOSING DELIVERIES.

 

7.1 Deliveries of the Company and the Shareholder. At or prior to the Closing
Date, the Company and the Shareholder shall deliver to the Acquiring Companies
the following:

 

(a) Consents and Approvals. Copies of all authorizations, consents, and
approvals of governments, governmental agencies and third parties referred to in
Section 4.4(a) of the Disclosure Schedule;

 

(b) Termination of Agreements. Copies of documents effectuating the assignment,
to the extent assignable, of any and all written employment and independent
contractor agreements, compensation agreements, buy-sell agreements and other
similar agreements entered into by the Company and which are in effect
immediately preceding the Closing;

 

(c) Company Stock. The Certificates and stock powers, duly endorsed,
transferring the Company Stock to Subsidiary and the officer and director
resignations required in Section 4.6;

 

(d) Corporate Authorization. A certified copy of resolution(s) of the
Shareholder and board of directors of the Company which authorizes the
Transaction in accordance with: (a) applicable law; (b) the Company’s articles
of incorporation and bylaws; and (c) all other requirements for proper corporate
authorization;

 

(e) Secretary’s Certificate. A certificate of the secretary of the Company and
the New PA certifying that the resolutions, articles of incorporation and bylaws
of the Company and the New PA, attached as exhibits to such certificate, are
true, correct, and complete; and

 

(f) Medicare Provider Number. A certification from Shareholder that following
Closing Shareholder will fully cooperate in the preparation and execution of the
application for New PA’s Medicare provider number with such application to be
filed within fifteen (15) days of the Closing Date.

 

(g) Managed Care Agreements. To the extent assignable, assignment(s) of all
Managed Care Agreements to which the Company is a party to the New PA.

 

(h) Other documents. Such other instruments or documents as may be necessary or
appropriate to carry out the Transactions.

 

7.2 Deliveries of PainCare. At or prior to the Closing Date, PainCare shall
deliver to the Shareholder the following:

 

(a) Transaction Consideration. The Closing Date Consideration;

 

(b) Resolutions. A certified copy of the resolution of the board of directors of
PainCare, and the sole shareholder and members of the board of directors of
Subsidiary, authorizing the Transaction in accordance with: (a) applicable law;
(b) the articles of incorporation and bylaws of PainCare and Subsidiary; and (c)
all other requirements for proper corporate authorization;

 

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(c) Secretary’s Certificate. A certificate of the secretary of PainCare and
Subsidiary certifying that the articles of incorporation and bylaws of PainCare
and Subsidiary attached as exhibits to such certificate are true, correct, and
complete; and

 

(d) Other documents. Such other instruments or documents as may be necessary or
appropriate to carry out the Transactions.

 

8. CONDITIONS TO THE OBLIGATIONS OF THE PARTIES. The obligations of the Parties
to Close are subject to the satisfaction of the following respective conditions
by the Closing Date unless waived by the Party for whose benefit the condition
applies.

 

8.1 Conditions for the Benefit of PainCare and the Subsidiary. (a) The
representations and warranties of the Shareholder and the Company in this
Agreement or in any schedule hereto shall be true and correct when made and
shall be true and correct in all material respects on the Closing Date as though
then made, except as expressly provided for herein, and (b) both the Shareholder
and the Company shall have performed and complied with all agreements, covenants
and conditions and shall have made all deliveries required by this Agreement to
be performed, delivered and complied with by them prior to the Closing Date; and
(c) to the extent assignable, the Company shall have assigned to the New PA any
and all Medical Assets and payor contracts of the Company, and (e) the filing of
the Articles of Merger with and the acceptance of such Articles by the Secretary
of State of the State of Texas and Florida.

 

8.2 Conditions for the Benefit of the Shareholder. (a) The representations and
warranties of PainCare and Subsidiary in this Agreement and all information
contained in any schedule hereto shall be true and correct when made and shall
be true and correct in all material respects on the Closing Date as though then
made, except as expressly provided for herein, (b) both PainCare and Subsidiary
shall have performed and complied with all agreements, covenants and conditions
and shall have made all deliveries required by this Agreement to be performed,
delivered and complied with by them prior to the Closing Date, and (c) the
filing of the Articles of Merger with and the acceptance of such Articles by the
Secretary of State of the State of Florida and Texas.

 

9. COVENANTS. The Parties covenant and agree as follows:

 

9.1 Operations. As of the Statutory Merger Time, the New PA and the Subsidiary
will execute and deliver to each other the Management Services Agreement and
Shareholder and the New PA will execute and deliver the Employment Agreement.

 

9.2 Deliveries. PainCare will promptly deliver and make available to Shareholder
copies of any filings made by it under the Securities Act or the Securities
Exchange Act, including the exhibits thereto and any correspondence with the
Securities Exchange Commission or its staff.

 

9.3 Distributions of Sub-Chapter S Income by the Company. Not later than the
Statutory Merger Time, one hundred percent (100%) of the taxable income (as
determined by using the cash method of accounting) allocated to Shareholder for
the period beginning on January 1, 2004 and ending on the Closing Date shall
have been distributed to the Shareholder

 

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subject to the requirement that Shareholder shall insure that as of the Closing
Date that the Company will have a minimum cash balance of Twenty Thousand
Dollars ($20,000.00). The Shareholder shall not be entitled to any additional
distributions or payments with respect to taxable income of the Company for the
period ending after the Closing Date, other than as specifically set forth in
this Agreement.

 

9.4 Post-Closing General Covenant. In the event that at any time after the
Closing any further action is necessary to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party may reasonably request, all at the sole cost and expense of the requesting
Party; provided, however, that the costs and expenses associated with the taking
of any action necessary to execute or deliver to PainCare any stock powers and
such other instruments of transfer as may be necessary to transfer ownership of
the Company’s Shares by the Shareholder shall be borne by the Shareholder.

 

9.5 Tax Returns. Shareholder shall be responsible for preparing and filing all
income or franchise Tax Returns of the Company relating to periods of time prior
to the Closing Date. PainCare and the Subsidiary will provide Shareholder access
to all books and records of the Company necessary to the preparation of such Tax
Returns and the Subsidiary, as the successor to the Company will execute such
Tax Returns. The Shareholder will take no positions on the Tax Returns of the
Company that relate to the tax period prior to the Closing Date that could
adversely affect the Company or PainCare after the Closing. The Shareholder will
provide PainCare with an opportunity to review and comment on such Tax Returns
(including any amended returns). PainCare will be responsible for preparing and
filing all income and franchise Tax Returns of the Company relating to periods
after the Closing. The income of the Company will be apportioned to the period
up to the Closing Date and the period from and after the Closing Date in
accordance with the provisions of Code Section 1362(e)(6)(D) by closing the
books of the Company as of the close of business on the last calendar day
immediately preceding the Closing Date, with recognition that the Company files
on that basis of a cash rather than accrual method.

 

9.6 Litigation Support. In the event and for so long as any Party actively is
contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand in connection with: (a) any
transaction contemplated under this Agreement; or (b) any fact, situation,
circumstances, status, condition, activity, practice, occurrence, event,
incident, action, failure to act, or transaction on or prior to the Closing Date
involving the Company, each of the Parties will cooperate with the contesting or
defending Party and its or his counsel in the contest or defense, at the sole
cost and expense of the contesting or defending Party except to the extent that
the contesting or defending party is entitled to indemnification therefor under
this Agreement.

 

9.7 Consents. The Shareholder hereby covenants and agrees that he will use his
best efforts to obtain all authorizations, consents, and approvals set forth in
Section 4.4(b) of the Disclosure Schedule. If such consent, approval or
agreement is not obtained, or if an attempted assignment thereof would affect
the rights of the parties thereunder so that such parties would not in fact
receive all such rights, the Parties will cooperate in any arrangement designed
to provide for the Parties to receive the benefits under any such contract,
including enforcement for the benefit of PainCare and Subsidiary of any and all
rights of the Shareholder against a third party thereto arising out of the
breach or cancellation by such third party or otherwise.

 

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9.8 Operational Covenants. Without the prior written consent of Shareholder,
which will not be unreasonably withheld, PainCare and its Affiliates shall not,
prior to the conclusion of the third Formula Period:

 

(a) reorganize the Surviving Corporation, whether by integrating or
consolidating the business of the Surviving Corporation with other operating
units of PainCare or its subsidiaries or affiliates or any other Person, except
in the case that at the time of such integration or consolidation such
transaction could not reasonably be expected to have a material adverse effect
on the Formula Period Profits;

 

(b) effect any reassignment, reprioritization, reallocation, restructuring, or
reduction of the Surviving Corporation’s human or other resources, their
research and development initiatives, or their marketing programs, except in a
manner that at the time of such event could not reasonably be expected to have a
material adverse effect on the Formula Period Profits or that are reasonably
necessary in light of the Surviving Corporation’s results of operation;

 

(c) amend the articles of incorporation or bylaws of the Surviving Corporation
in any manner that at the time of such amendment could reasonably be expected to
have a material adverse effect on the Formula Period Profits;

 

(d) cause the Surviving Corporation to become a party to, amend or terminate any
agreement which at the time such agreement is entered into, amended or
terminated could reasonably be expected to have a material adverse effect on the
Formula Period Profits or that are reasonably necessary in light of the
Surviving Corporation’s results of operation;

 

(e) cause the Surviving Corporation to undertake actions outside the ordinary
course of its business or that are reasonably necessary in light of the
Surviving Corporation’s results of operation;

 

(f) sell a material portion of the Surviving Corporation or its assets, merge
the Surviving Corporation with any other entity, sell a controlling interest in
the Surviving Corporation, or make any fundamental change in the business of the
Surviving Corporation except as may be reasonably necessary in light of the
Surviving Corporation’s results of operation; or

 

(g) cause the Surviving Corporation to undertake any action which at the time of
such undertaking could reasonably be expected to have a material adverse effect
on the Formula Period Profits except as may be reasonably necessary in light of
the Surviving Corporation’s results of operation.

 

The parties hereby acknowledge and agree that the foregoing covenants in this
Section 9.8 shall become null and void and of no further force or effect if the
Formula Period Profits of the Surviving Corporation for any two (2) consecutive
calendar quarters are less than

 

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$600,000 combined, or if the Formula Period Profits of the Surviving Corporation
in one (1) calendar quarter is less than $250,000, unless in each case, such
deficit results from the failure of the New PA to recover payment from Medicaid,
Medicine, or Blue Cross as a result of transitioning the Company’s business to
the New PA.

 

9.9 Capital Adjustments. In the event of a stock dividend, recapitalization, or
merger in which PainCare is the surviving corporation, split-up, combination or
exchange of shares or the like which results in a change in the number or kind
of shares of common stock which is outstanding immediately prior to such event,
the rights of the Shareholder to receive PainCare Shares in respect of this
Agreement and the price thereof, shall be appropriately adjusted in the same
manner as the number and kind of shares a shareholder of PainCare who owned the
same number and kind of shares immediately prior to such event. Such adjustments
shall be made in good faith by the Board of Directors of PainCare, whose
determination shall be conclusive and binding on all parties, subject to
manifest error.

 

In case of any consolidation or merger of PainCare with or into another party or
parties or the conveyance of all or substantially all of the assets of PainCare
to another party or parties or a share exchange transaction involving more than
50% of the issued and outstanding common stock of PainCare, the PainCare Shares
and right to receive PainCare Shares shall thereafter be convertible into the
number of shares of stock, options or other securities or property to which a
shareholder of the PainCare who owned the same number and kind of shares prior
to such event would have been entitled upon such consolidation, merger,
conveyance, conversion or exchange; and, in any such case, appropriate
adjustment shall be made in the application of the provisions herein set forth
with respect to the rights and interest thereafter of the Shareholder’s right to
receive PainCare Shares, to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as reasonably possible, in relation to any
shares of stock or other property thereafter deliverable upon the Shareholder’s
entitlement to same.

 

10. SURVIVAL AND INDEMNIFICATION.

 

10.1 Survival of Representations and Warranties. All of the representations,
warranties, covenants, and agreements including but not limited to the
restrictive covenants and the indemnification provisions contained in this
Agreement are material and have been relied upon by the Parties hereto and,
except as set forth in Section 10.8 shall survive the Closing for their
applicable statute of limitations. The representations and warranties contained
herein shall not be affected by any investigation, verification or examination
by any Party or by anyone on behalf of such Party.

 

10.2 Indemnification Provisions for the Benefit of PainCare and Subsidiary. In
the event of: (a) a misrepresentation (or in the event any third party alleges
facts that, if true, would mean a misrepresentation) of any of the Shareholder’s
representations and/or warranties contained in this Agreement; (b) a breach (or
in the event any third party alleges facts that, if true, would mean a breach)
of any of the Shareholder’s covenants contained in this Agreement; (c) any
Liability (including, in this case only, consequential and incidental damages)
incurred by the PainCare, the Company, the Surviving Corporation or the New P.A.
with respect to any breach by the Shareholder or Company occurring prior or
subsequent to the Closing with respect to that certain Non-competition Agreement
by and between Palestine Principal

 

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Healthcare Limited Partnership and Rick Taylor, D.O. and Rick Taylor, D.O., P.A.
dated March 22, 2002 with the understanding that this indemnity shall not apply
to any Liability associated with the expansion of any product or service
offering provided by the Surviving Corporation or New P.A. subsequent to Closing
which is caused or directed by PainCare beyond the product and service offering
provided by the Company prior to the Closing unless and until such agreement
expires or is terminated; (d) any matter described in the Disclosure Schedules
which the Shareholder agrees to assume and/or indemnify PainCare and/or the
Surviving Corporation; and (e) any Liability of the Company of any nature
whatsoever accrued or existing as of the Closing Date or related to actions of
the Company which occurred prior to the Closing Date, other than (i) Liabilities
reflected on the Financial Statements, (ii) Liabilities which have arisen after
the Latest Balance Sheet in the ordinary course of business, or (iii)
Liabilities reflected on the Disclosure Schedules which the Subsidiary
explicitly agrees as documented in Section 10.2 of the Disclosure Schedule to
assume or take the assets of the Company subject to, as the case may be, then
the Shareholder agrees to indemnify PainCare and Subsidiary from and against any
Adverse Consequences PainCare and Subsidiary may suffer through and after the
date of the claim for indemnification resulting from, arising out of, relating
to, in the nature of, or caused by the misrepresentation or breach (or alleged
breach) or non-disclosed Liability under this Section 10.2. No provision of this
Agreement, including but not in any way limited to, any “Knowledge” qualifiers
or materiality standards in the representations and warranties of the
Shareholder, shall have any effect on the Shareholder’s obligation to provide
indemnity of any Liability arising prior to the Closing Date which was required
but omitted from the Disclosure Schedule.

 

10.3 Indemnification Provisions for the Benefit of the Shareholder. In the event
of a misrepresentation or breach (or in the event any third party alleges facts
that, if true, would mean a misrepresentation or breach) of any of PainCare’s or
Subsidiary’s representations, warranties, and/or covenants contained in this
Agreement, then PainCare and Subsidiary agree to, jointly and severally,
indemnify the Shareholder from and against any Adverse Consequences the
Shareholder may suffer through and after the date of the claim for
indemnification resulting from, arising out of, relating to, in the nature of,
or caused by the misrepresentation or breach.

 

10.4 Matters Involving Third Parties.

 

(a) Notification. If any third party shall notify any Party (the “Indemnified
Party”) with respect to any matter (a “Third Party Claim”) which may give rise
to a claim for indemnification against the other Party (the “Indemnifying
Party”) pursuant to this Section 10, then the Indemnified Party shall promptly
notify the Indemnifying Party thereof in writing; provided, however, that no
delay on the part of the Indemnified Party in notifying the Indemnifying Party
shall relieve the Indemnifying Party from any obligation hereunder unless the
Indemnifying Party thereby is prejudiced and then only to the extent that the
Indemnifying Party is actually prejudiced.

 

(b) Defense by Indemnifying Party. The Indemnifying Party shall have the right
to defend the Indemnified Party against the Third Party Claim with counsel of
its choice reasonably satisfactory to the Indemnified Party so long as: (i) the
Indemnifying Party notifies the Indemnified Party in writing within ten (10)
business days after the Indemnified Party has given notice of the Third Party
Claim that the Indemnifying Party will indemnify the Indemnified Party from and
against any Adverse Consequences the Indemnified Party may suffer

 

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resulting from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim; (ii) the Indemnifying Party provides the Indemnified Party
with evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against the Third
Party Claim and fulfill the Indemnifying Party’s indemnification obligations
hereunder; (iii) the Third Party Claim involves only money damages and does not
seek an injunction or other equitable relief; (iv) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not, in the good faith
judgment of the Indemnified Party, likely to establish a precedential custom or
practice adverse to the continuing business interests of the Indemnified Party;
and (e) the Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.

 

(c) Satisfactory Defense. So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 10.4(b) above: (i)
the Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim; (ii) the
Indemnified Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be withheld or delayed unreasonably)
and any such settlement must include a complete release of the Indemnifying
Party; and (iii) the Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party Claim
without the prior written consent of the Indemnified Party (not to be withheld
or delayed unreasonably) and any such settlement must include a complete release
of the Indemnified Party.

 

(d) Conditions. In the event any of the conditions in Section 10.4(b) above is
or becomes unsatisfied, however: (i) the Indemnified Party may defend against
the Third Party Claim; provided that the Indemnified Party will not consent to
the entry of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior written consent of the Indemnifying Party (not to
be delayed or withheld unreasonably), and any such settlement must include a
complete release of the Indemnifying Party; (ii) if the Indemnified Party is
entitled to Indemnification under this Section 10, the Indemnifying Party will
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including reasonable attorneys’ fees
and expenses); and (iii) if the Indemnified Party is entitled to indemnification
from the Indemnifying Party under this Section10, the Indemnifying Party will
remain responsible for any Adverse Consequences the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim to the fullest extent provided in this Section 10.

 

10.5 Right to Set-Off. Any Adverse Consequences which PainCare or Subsidiary
suffers, sustains or becomes subject to and with respect to which PainCare or
Subsidiary is entitled to indemnification from Shareholder pursuant to this
Section 10, shall first be satisfied by such combination of cash and/or PainCare
Shares as the Shareholder shall determine, in his sole discretion, so as to
continue the qualification of the Merger as a tax-free reorganization pursuant
to Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code, with the value of any
PainCare Shares used to satisfy the indemnification to be based upon the Fair
Market Value of the PainCare Shares (as defined in Section 3.3(f)) at the time
the amount of Adverse Consequences is finally determined. PainCare and the
Subsidiary shall also have the right to offset any indemnification obligations
of Shareholder against any Installment or post-closing payment due from PainCare
or Subsidiary to the Shareholder under this Agreement or any other agreement.

 

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10.6 Materiality. In determining the amount of Adverse Consequences resulting
from any misrepresentation, breach, or default, any materiality standard
contained in the applicable representation, warranty, or covenant shall be
disregarded; provided that such materiality standard shall be considered in
determining whether or not a misrepresentation, breach, or default occurred.

 

10.7 Limitation. The indemnification provisions set forth in this Section 10
shall be limited to all claims in excess of Fifty Thousand and 00/100 Dollars
($50,000) (the “Threshold”). Once a claim exceeds the Threshold, if a Party is
entitled to indemnification under this Section 10, such party shall recover all
appropriate funds (including the Threshold). Further, the indemnitors shall not
be liable for any liabilities resulting from claims that are covered by any
insurance policy or other indemnity or contribution agreement unless, and only
to the extent that, the full limit of such insurance policy, indemnity or
contribution agreement has been exceeded. The Party entitled to indemnification
shall have a duty to mitigate its damages. Notwithstanding the foregoing, a
Party’s obligation to indemnify under this Article 10 shall be limited to an
amount equal to $3,500,000 plus the amount of any Installment Payments paid or
due pursuant to Section 3.4 of this Agreement; provided however that such cap
shall not be applicable to with respect to any indemnification matter which
arise from or out of fraudulent conduct or intention wrongful acts or omissions
of a Party or with respect to Sections 4.1, 4.3, 4.6, 4.11 and/or 4.36 or with
respect to Sections 5.1, 5.2, and/or 5.6.

 

10.8 Survival of Representations and Warranties of Shareholder. Notwithstanding
anything in this Agreement to the contrary, the representations and warranties
of the Parties set forth in this Agreement and the indemnity obligations of the
Parties under Section 10 of this Agreement shall survive only for a period of
three and one-half (3.5) years after the Closing or the applicable statute of
limitations (whichever is shorter) (the “Expiration Date”). The Parties and
their Affiliates shall not be entitled to make, and hereby waive the right to
assert, any claim for indemnification or otherwise relating to the foregoing
matters unless the same seek indemnification for such claim by written notice to
the Indemnifying Party dated and delivered in accordance with the notice
provisions set forth in Section 12.5 below on or before the Expiration Date.

 

10.9 No Other Representations or Warranties. Shareholder has not made any
representations or warranties, express or implied, with respect to the Company,
the New PA or the transactions contemplated by this Agreement except as
specifically provided in Section 4, the Disclosure Schedules or elsewhere in
this Agreement or in any other agreement executed in connection with this
transaction. Likewise, PainCare and the Subsidiary have not made any
representations or warranties, express or implied, with respect to PainCare, the
Subsidiary or the transactions contemplated by this Agreement except as
specifically provided in Section 5, the Disclosure Schedules or elsewhere in
this Agreement or in any other agreement executed in connection with this
transaction.

 

10.8 Exclusive Remedy. The terms and provisions of this Section 10 shall be the
sole and exclusive right and remedy of PainCare, Subsidiary, and their
Affiliates, successors and

 

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assigns with respect to any matter arising out of this Agreement and the
transactions contemplated hereby, including without limitation, the
representations, warranties, covenants and agreements of the Shareholder set
forth in this Agreement, and such Persons hereby waive all other rights or
remedies that may exist, whether at law, equity, or otherwise; provided however,
that the foregoing shall not be construed to limit the equitable remedies of
specific performance or injunctive relief of such Persons in respect of any
breach by the Shareholder of any covenant or other agreement of Shareholder set
forth in this Agreement.

 

11. RESTRICTIVE COVENANTS; CONFIDENTIALITY.

 

11.1 Restrictive Covenants.

 

(a) Restricted Period. Shareholder hereby agrees that during the time period
commencing as of the Closing Date and continuing for a period of two (2) years
after his termination “For Cause” by the New P.A. pursuant to his Employment
Agreement with the New P.A. of even date herewith (the “Restricted Period”),
neither Shareholder nor any of his Affiliates, shall, other than on behalf of
the New PA, PainCare or Subsidiary, directly or indirectly, for himself, or on
behalf of any other corporation, person, firm, partnership, association, or any
other entity whatsoever (whether as an individual, agent, servant, employee,
employer, officer, director, shareholder, investor, principal, consultant or in
any other capacity whatsoever) take any action or undertake any matter set forth
in 11.1(a)(i)-(ii) below; provided, however, that the Restricted Period shall
terminate upon the earlier to occur of (i) any bankruptcy, liquidation or
assignment for the benefit of creditors applicable to either PainCare or
Subsidiary, or (ii) upon a default by PainCare or Subsidiary in any material
covenant or term of this Agreement to be performed after the Closing or any
material covenant or term of the Management Services Agreement if Shareholder
shall have given written notice of such default to PainCare and such default
shall not have been cured within 30 business days after the giving of such
notice.

 

(i) be employed by, act as an agent, consultant or contractor of, engage in,
continue in or carry on any business which competes with the business of the New
P.A. or the Surviving Corporation (the business of such parties is pain
management medicine, orthopedic medicine, physical rehabilitation or ancillary
medical activities related thereto), including owning or controlling any
financial interest in any corporation, partnership, firm or other form of
business organization which is so engaged;

 

(ii) be employed by, consult with, advise or assist in any way, whether or not
for consideration, any corporation, partnership, firm or other business
organization which is now or becomes a competitor of the New P.A. or the
Surviving Corporation in any aspect with respect to the business of the New P.A.
or the Surviving Corporation, including, but not limited to, advertising or
otherwise endorsing the products of any such competitor; soliciting patients and
customers or otherwise serving as an intermediary for any such competitor;
loaning money or rendering any other form of financial assistance to or engaging
in any form of business transaction on other than on an arm’s length basis with
any such competitor;

 

(iii) offer employment to an employee of the New P.A. or the Surviving
Corporation, or PainCare or any of its subsidiaries, without the prior written
consent of PainCare;

 

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or

 

(iv) engage in any practice the purpose of which is to evade the provisions of
this covenant not to compete or to commit any act which adversely affects the
New P.A. or the Surviving Corporation, or PainCare or its subsidiaries or their
businesses;

 

provided, however, that the foregoing shall not prohibit the ownership of
securities of corporations which are listed on a national securities exchange or
traded in the national over-the-counter market in an amount which shall not
exceed 5% of the outstanding shares of any such corporation. The parties agree
that the geographic scope of this covenant not to compete shall be a one hundred
(100) mile radius extending outward from the Clinic’s location as it may exist
from time to time (the “Territory”). The parties agree that PainCare may sell,
assign or otherwise transfer this covenant not to compete, in whole or in part,
to any person, corporation, firm or entity that purchases all or part of the
Surviving Corporation’s, or PainCare’s, business. In the event a court of
competent jurisdiction determines that the provisions of this covenant not to
compete are excessively broad as to duration, geographical scope or activity, it
is expressly agreed that this covenant not to compete shall be construed so that
the remaining provisions shall not be affected, but shall remain in full force
and effect, and any such over broad provisions shall be deemed, without further
action on the part of any person, to be modified, amended and/or limited, but
only to the extent necessary to render the same valid and enforceable in such
jurisdiction.

 

(b) Consideration. PainCare, Subsidiary and Shareholder have carefully
considered the nature and extent of the restrictions imposed by this Section
11.1 and the rights and remedies conferred upon PainCare and Subsidiary
hereunder and hereby expressly acknowledge and agree that: (i) the restricted
territory, period, and activities are reasonable and are necessary and fully
required to protect the legitimate business interests of PainCare and
Subsidiary; (ii) any violation of the terms of these restrictive covenants would
have a substantial detrimental effect on PainCare’s and Subsidiary’s businesses;
(iii) the restrictive covenants do not stifle Shareholder’s inherent skill and
experience; and (iv) would not operate as a bar to any of Shareholder’s means of
support. Because of the difficulty of measuring economic losses to PainCare and
the Surviving Corporation as a result of the breach of the foregoing covenants,
and because of the immediate and irreparable damage that would be caused to
PainCare and the Surviving Corporation for which it would have no other adequate
remedy, Shareholder agrees that, in the event of a breach by him of the
foregoing covenants, the covenants set forth in this Section 11.1 may be
enforced by PainCare and the Surviving Corporation by injunctions and
restraining orders, in addition to all other available legal remedies.

 

(c) Third-Party Beneficiaries. All successors and assigns of PainCare,
Subsidiary, all Affiliates of PainCare and Subsidiary, and all successors and
assigns of such Affiliates are third-party beneficiaries of the restrictive
covenants contained in this Section 11.1 and the provisions of this Section 11.1
are intended for the benefit of, and may be enforced by, PainCare’s and
Subsidiary’s successors and assigns and PainCare’s and Subsidiary’s Affiliates
and such Affiliates’ successors and assigns.

 

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11.2 Intentionally Omitted.

 

11.3 No Running of Covenant During Breach. The covenants set forth in this
Section 11 shall apply for the applicable periods as set forth above. If
Shareholder violates such covenants, and PainCare, the Surviving Corporation or
any of their successors and assigns or Affiliates bring a legal action for
injunctive or other relief, such party bringing the action shall not, as a
result of the time involved in obtaining the relief, be deprived of the benefit
of the full period of the covenant period, unless a court of competent
jurisdiction holds that the covenant is not enforceable in whole or in part.
Accordingly, for any time period that Shareholder is in violation of the
covenant, such time period shall not be included in calculating the applicable
time period of the covenant.

 

11.4 Blue Pencil Doctrine. The covenants set forth in this Section 11 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.

 

11.5 Confidentiality, Press Releases, and Public Announcements.

 

(a) No Party shall issue any press release or make any public announcement
relating to the subject matter of this Agreement without the prior written
approval of the other Parties.

 

(b) The Parties covenant and agree that from and after the Execution Date,
neither of the Parties nor their Affiliates (to the extent any such Affiliate
has received Confidential Information as defined below or Trade Secrets, as
defined below) shall disclose, divulge, furnish or make accessible to anyone any
Confidential Information or Trade Secrets, or in any way use any Confidential
Information or Trade Secrets in the conduct of any business; provided, however,
that nothing in this Section 11.5 will prohibit the disclosure of any
Confidential Information or Trade Secrets which is required to be disclosed by a
Party or any of its or his Affiliates in connection with any court action or any
proceeding before any authority. Notwithstanding the foregoing, in the case of a
disclosure contemplated by this Section 11.5, no disclosure shall be made until
the disclosing Party shall give notice to the non-disclosing Party of the
intention to disclose such Confidential Information or Trade Secrets so that the
non-disclosing Party may contest the need for disclosure, and the disclosing
Party will cooperate (and will cause its or his Affiliates and their respective
representatives to cooperate) with the non-disclosing in connection with any
such proceeding. Notwithstanding any provision of this Agreement which may be to
the contrary, the foregoing provisions restricting the use of Confidential
Information and Trade Secrets shall survive the Closing for the time period
equal to five (5) years from the Execution Date. For the purpose of this
Agreement, the term “Confidential Information” shall mean all records, files,
reports, protocols, policies, manuals, databases, processes, procedures,
computer systems, materials and other documents pertaining to the operations of
a Party and the term “Trade Secrets” shall mean information, including a
formula, pattern, compilation, program, device, method, technique, or process
that: (i) derives independent economic value, actual or potential, from not
being generally known to, and not being readily ascertainable by proper means
by, other persons who can obtain economic value from its disclosure or use; and
(ii) is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.

 

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11.6 Conduct of Business. From the date hereof through the Closing, the
Shareholder shall, except as contemplated by this Agreement, or as consented to
by PainCare in writing, cause the Company to be operated in the ordinary course
and in accordance with past practice and will not take any action inconsistent
with this Agreement or with the consummation of the Closing. Without limiting
the generality of the foregoing, the Company shall not, and, with respect to the
Company, the Shareholder shall not, except as specifically contemplated by this
Agreement, as set forth in Section 11.6 of the Disclosure Schedule, or as
consented to by PainCare in writing (such consent not to be unreasonably
withheld or delayed):

 

(a) change or amend the organizational documents of the Company;

 

(b) enter into, extend, materially modify, terminate or renew any lease or any
contract, except in the ordinary course of business or as contemplated by this
Agreement;

 

(c) sell, assign, transfer, convey, lease, mortgage, pledge or otherwise dispose
of or encumber any of the assets or any interests therein of the Company except
in the ordinary course of business and, without limiting the generality of the
foregoing, the Company will maintain, dispose of, and sell inventory consistent
with past practices;

 

(d) incur any liability for indebtedness for borrowed money, guarantee the
obligations of others, indemnify or agree to indemnify others or, except in the
ordinary course of business, incur any other liability;

 

(e) take any action with respect to the grant of any bonus, severance or
termination pay (otherwise than pursuant to policies or agreements of the
Company in effect on the date hereof that are described in the Disclosure
Schedule) or with respect to any increase of benefits payable under its
severance or termination pay policies or agreements in effect on the date hereof
or increase in any manner the compensation or fringe benefits of any employee of
the Company or pay, any benefit not required by any existing Employee Plan or
policy;

 

(f) make any change in the key management structure of the Company, including,
without limitation, the hiring of additional officers or the termination of
existing officers;

 

(g) adopt, enter into or amend any Employee Plan, agreement (including, without
limitation, any collective bargaining or employment agreement), trust, fund or
other arrangement for the benefit or welfare of any employee, except for any
such amendment as may be required to comply with applicable regulations;

 

(h) fail to maintain all Employee Plans in accordance with applicable
Regulations;

 

(i) acquire by merger or consolidation with, or merge or consolidate with, or
purchase substantially all of the assets of, or otherwise acquire any material
assets or business of, any corporation, partnership, association or other
business organization or division thereof or acquire any subsidiary;

 

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(j) willingly allow or permit to be done any act by which any of the insurance
policies of the Company or Shareholder may be suspended, impaired or canceled;

 

(k) enter into, renew, modify or revise any agreement or transaction relating to
the Company with any of its Affiliates except as contemplated by this Agreement;

 

(l) fail to maintain the assets of the Company in substantially their current
state of repair, excepting normal wear and tear, or fail to replace (consistent
with the Company’s past practice) inoperable, worn-out or obsolete or destroyed
assets;

 

(m) make any loans or advances relating to the Company to any partnership, firm,
individual, or corporation, except for expenses incurred in the ordinary course
of business consistent with past practice;

 

(n) fail to comply in all material respects with all laws and regulations
applicable to the Company;

 

(o) intentionally do any other act which would cause any representation or
warranty of the Company or the Shareholder in this Agreement to be or become
untrue, or any covenant in this Agreement to be breached, in any material
respect;

 

(p) fail to use reasonable efforts consistent with past business practice to (i)
maintain the Company so that the services of its officers, employees,
consultants and agents will remain available to it on and after the Closing
Date, (ii) maintain existing relationships with suppliers, patients, customers
and others having business dealings with the Company and (iii) otherwise
preserve the goodwill of the business of the Company so that such relationships
and goodwill will be preserved on and after the Closing Date;

 

(q) enter into any agreement, or otherwise become obligated, to do any action
prohibited hereunder;

 

(r) except as provided herein, declare, set aside for payment, or pay any
dividend or distribution in respect of any capital stock of the Company, redeem,
purchase or otherwise acquire any of the Company’s equity securities; or
otherwise transfer any of the assets of the Company to or on behalf of any
Shareholder of the Company or any Affiliate of the Company, including, without
limitation, any payment of principal of or interest on any debt owed to any of
the foregoing or any payment of a bonus, fee or other payment to any of the
foregoing as an employee of the Company; or

 

(s) fail to comply with all applicable filing, payment, withholding, collection
and record retention obligations under all applicable federal, state, local or
foreign Tax laws.

 

11.7 No Third-Party Beneficiaries. Other than with respect to the restrictive
covenants set forth in Section 11, this Agreement shall not confer any rights or
remedies upon any Person other than the Parties and their respective successors
and permitted assigns.

 

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12. MISCELLANEOUS.

 

12.1 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the Parties and supersedes any
prior understandings, agreements, or representations by or between the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.

 

12.2 Succession and Assignment. This Agreement shall be binding upon and inure
to the benefit of the Parties named herein and their respective successors,
assigns, distributees, heirs, and grantors of any revocable trusts of a Party
hereto. No Party may assign either this Agreement or any of its or his rights,
interests, or obligations hereunder without the prior written approval of the
other Parties; provided, however, PainCare and Subsidiary, may, without the
prior consent of the other Party, assign this Agreement to their Affiliates.

 

12.3 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.

 

12.4 Headings. The section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.

 

12.5 Notices. All notices, requests, demands, claims, and other communications
hereunder will be in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed duly given: (a) upon receipt if it is
sent by facsimile, (b) the next business day if sent by reputable overnight
courier, or (c) five (5) days after mailing if by certified mail return receipt
requested, postage prepaid, and addressed or otherwise sent to the intended
recipient as set forth below:

 

If to PainCare

   

or Subsidiary:

 

PainCare Holdings, Inc.

   

37 North Orange Avenue

   

Suite 500

   

Orlando, Florida 32801

   

Attention: President

If to the Shareholder:

 

Rick Taylor, D.O.

   

3404 Comanche Trace Drive

   

Kerrville, Texas 78028

With a copy in each case to:

 

W. Marc McDonald, Esq.

   

Bourland, Wall & Wenzel, P.C.

   

301 Commerce Street

   

Suite 1500

   

Fort Worth, Texas 76102

 

45

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Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address or facsimile number set forth
above using any other means (including personal delivery, messenger service,
ordinary mail, or electronic mail), but no such notice, request, demand, claim,
or other communication shall be deemed to have been duly given unless and until
it actually is received by the intended recipient. Any party may change the
address or facsimile number to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.

 

12.6 Governing Law; Jurisdiction; Attorney’s Fees. This Agreement, and all
proceedings hereunder, shall be governed by and construed in accordance with the
domestic laws of the State of Florida without giving effect to any choice or
conflict of law provision or rule (either of the State of Texas or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Florida. In the event of any suit under this Agreement
or otherwise between the parties hereto, the prevailing Party shall be entitled
to all reasonable attorney’s fees and costs to be included in any judgment
recovered. In addition, the prevailing Party shall be entitled to recover
reasonable attorney’s fees and costs incurred in enforcing any judgment arising
from a suit under this Agreement. This post-judgment attorney’s fees and costs
provision shall be severable from the other provisions of this Agreement and
shall survive any judgment on such suit and is not to be deemed merged into the
judgment.

 

12.7 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by the Parties. No
waiver by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence and all waivers must be in writing, signed
by the waiving Party, to be effective.

 

12.8 Severability. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction.

 

12.9 Expenses. Except as set forth herein, Shareholder shall bear and be
responsible and shall pay for all costs and expenses (including, but not limited
to, legal and accounting fees and expenses) incurred by Shareholder, the Company
and the New PA in connection with this Agreement and the transactions
contemplated hereby.

 

12.10 Further Assurances. Each Party shall, at the reasonable request of any
other Party hereto, execute and deliver to such other Party all such further
instruments, assignments, assurances and other documents, and take such actions
as such other Party may reasonably request in connection with the carrying out
the terms and provisions of this Agreement.

 

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12.11 Construction. Any reference to any federal, state, local, or foreign
statute or law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. The word
“including” shall mean including without limitation. Nothing in the Disclosure
Schedule shall be deemed adequate to disclose an exception to a representation
or warranty made herein, unless the Disclosure Schedule identifies the exception
with reasonable particularity. The Parties intend that each representation,
warranty, and covenant contained herein shall have independent significance. If
any Party has breached any representation, warranty, or covenant contained
herein in any respect, the fact that there exists another representation,
warranty, or covenant relating to the same subject matter (regardless of the
relative levels of specificity) which the Party has not breached shall not
detract from nor mitigate the fact that the Party is in breach of the first
representation, warranty, or covenant.

 

12.12 Survival. Subject to Section 10.8 above, all of the representations,
warranties, covenants and agreements including but not limited to Articles IV
and V made by the Parties in this Agreement or pursuant hereto in any
certificate, instrument or document shall survive the consummation of the
transactions described herein shall survive for all applicable statute of
limitations, and may be fully and completely relied upon by Shareholder and the
Acquiring Companies, as the case may be, notwithstanding any investigation
heretofore or hereafter made by any of them or on behalf of any of them, and
shall not be deemed merged into any instruments or agreements delivered at
Closing or thereafter.

 

12.13 Incorporation of Exhibits and Schedules. The following are incorporated
herein by reference and made a part hereof: (i) all exhibits and schedules
(including the Disclosure Schedules) identified in this Agreement; (ii) the
recitals first set forth above; and (iii) any other document, memorandum and/or
letter signed by the Parties or their legal counsel with instructions to
incorporate such document, memorandum and/or letter into to this Section.

 

12.14 Submission to Jurisdiction. With respect to any legal proceeding brought
by PainCare which arises out of or relates to this Agreement or the transactions
contemplated hereby, exclusive jurisdiction and venue with respect to such
matter shall lie in any state or federal court within Kerr County, TX. With
respect to any legal proceeding brought by the Shareholder or the Company which
arises out of or relates to this Agreement or the transactions contemplated
hereby, exclusive jurisdiction and venue with respect to such matter shall lie
in any state or federal court within Orange County, FL. Each party to this
Agreement hereby irrevocably waives, to the fullest extent permitted by law, any
objections which it may now or hereafter have to the laying of the venue of any
such proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.

 

[SIGNATURES APPEAR ON NEXT PAGE]

 

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
date first above written.

 

PAINCARE: PAINCARE HOLDINGS, INC., a Florida corporation By:  

/S/ MARK SZPORKA

--------------------------------------------------------------------------------

Print:  

MARK SZPORKA

--------------------------------------------------------------------------------

Its:  

CFO

--------------------------------------------------------------------------------

ACQUISITION: PAINCARE ACQUISITION COMPANY XIII, INC., a Florida corporation By:
 

/S/ MARK SZPORKA

--------------------------------------------------------------------------------

Print:  

MARK SZPORKA

--------------------------------------------------------------------------------

Its:  

CFO

--------------------------------------------------------------------------------

COMPANY:

RICK TAYLOR, D.O., P.A.

By:  

/S/ RICK TAYLOR

--------------------------------------------------------------------------------

Print:  

RICK TAYLOR

--------------------------------------------------------------------------------

Its:  

PRESIDENT

--------------------------------------------------------------------------------

SHAREHOLDER:

/S/ RICK TAYLOR

--------------------------------------------------------------------------------

Rick Taylor, D.O.

 

48

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EXHIBITS

 

Exhibit 1    Definitions Exhibit 2.3    Articles of Merger

 

DISCLOSURE SCHEDULES

 

2.13    Shareholder Consent and Release 3.3(b)    Financial Statements 4.1   
Officers and Directors 4.2    Capitalization 4.4(a)    Consents to be Obtained
Prior to Closing 4.4(b)    Consents to be Obtained After Closing 4.6    Assets
4.8    Financial Statements 4.10    Liabilities 4.11    Tax Returns 4.12    Real
Property 4.15    Material Contracts 4.17    Insurance 4.18    Litigation 4.19   
Third Party Payor Agreements 4.23    Medical Staff 4.24    Employment Matters
4.25    Employment Benefits 4.26    Physician Matters 4.27    Guaranties 4.28   
Environmental Permits, Licenses and Approvals 4.30    Third Party Payors 4.31   
Bank Accounts 4.37    HIPAA 4.39    Accounts Receivable 5.4    Consents and
Approvals 5.6(a)    Capitalization 5.6(b)    Financing proposed to be raised by
PainCare in connection with the transactions contemplated by this Agreement 5.7
   Litigation 5.8    Undisclosed Liabilities of PainCare 7.1(e)    Payoffs 10.2
   Indemnification 11.1    Restricted Period 11.6    Conduct of Business

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EXHIBIT 1

 

DEFINITIONS

 

For purposes of this Agreement, the following terms shall have the meanings set
forth below:

 

1.1 “Accounts Receivable” means the accounts receivable of the Company and the
New PA determined in accordance with GAAP with respect to the operations of the
Company and New PA prior to the Closing Date arising from the rendering of
services to patients through the Closing Date, including, without limitation,
those from private pay patients, private insurance payors, third party payors
and governmental programs.

 

1.2 “Adjustment Payment Date” has the meaning set forth in Section 3.3(c).

 

1.3 “Adverse Consequences” means all actions, suits, proceedings, hearings,
investigations, complaints, claims, demands, injunctions, judgments, orders,
decrees, rulings, damages (other than incidental or consequential damages),
dues, penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, liens, losses, expenses, and fees, including court costs and
reasonable attorneys’ fees and expenses.

 

1.4 “Affiliate” shall mean, with respect to any Person: (a) any corporation,
proprietorship, partnership, limited liability company, or any other business
entity whatsoever that, directly or indirectly, owns or controls, is under
common ownership or control with, or is owned or controlled by, such Person; and
(b) if the Person is an individual, any other individual who is related to such
Person. For the purposes of this definition, the terms “controls,” “is
controlled by” and “is under common control with” shall mean the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract, or otherwise. Neither PainCare nor Subsidiary is an
Affiliate of the Company or the Shareholder for purposes of this Agreement and
neither the Shareholder nor the Company is an Affiliate of PainCare or
Subsidiary for purposes of this Agreement.

 

1.5 “Agreement” has the meaning set forth in the Preamble.

 

1.6 “Articles of Merger” has the meaning set forth in Section 2.3.

 

1.7 “Cash Due at Closing” has the meaning set forth in Section 3.1.

 

1.8 “Certificate(s)” has the meaning set forth in Section 2.10.

 

1.9 “Closing” has the meaning set forth in Section 6.

 

2

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1.10 “Closing Date” has the meaning set forth in Section 6.

 

1.11 “Closing Date Balance Sheet” has the meaning set forth in Section 3.3.

 

1.12 “Code” means the Internal Revenue Code of 1986, as amended.

 

1.13 “Commission” means the U.S. Securities and Exchange Commission.

 

1.14 “Company” has the meaning set forth in the Preamble.

 

1.15 “Company Shares” means any share of common stock of the Company.

 

1.16 “Disclosure Schedule” has the meaning set forth in Section 4.

 

1.17 “ Earnings Threshold” has the meaning set forth in Section 3.4.

 

1.18 “EBITDA” has the meaning set forth in Section 3.4.

 

1.19 “Employee Benefit Plan” means any: (a) nonqualified deferred compensation
or retirement plan or arrangement which is an Employee Pension Benefit Plan; (b)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan; (c) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan); (d) Employee Welfare Benefit Plan; or (e) any bonus,
incentive, severance, stock option, stock purchase, short-term disability plan
or other material fringe benefit plan, program or arrangement, including
policies concerning holidays, vacations and salary continuation during short
absences for illness or otherwise.

 

1.20 “Employee Pension Benefit Plan” has the meaning set forth in ERISA Section
3(2).

 

1.21 “Employee Welfare Benefit Plan” has the meaning set forth in ERISA Section
3(1).

 

1.22 “Environmental, Health, and Safety Requirements” means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, the Clean Air Act, the Federal Water
Pollution Control Act, the Safe Drinking Water Act, the Toxic Substance Control
Act, the Emergency Planning and Community Right-to-Know Act of 1986, the
Hazardous Material Transportation Act, and the Occupational Safety and Health
Act of 1970, each as amended, together with all other laws (including rules,
regulations, codes, injunctions, judgments, orders, decrees, and rulings) of
federal, state, local, and foreign governments (and all agencies thereof)
concerning pollution or protection of the environment, public health and safety,
or employee health and safety, including laws relating to emissions, discharges,
releases, or threatened releases of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials (including petroleum products and
asbestos) or wastes into

 

3

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ambient air, surface water, ground water, or lands or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes.

 

1.23 “ERISA” means the Employee Retirement Income Security Act of 1974, as
amended.

 

1.24 “Fair Market Value” has the meaning set forth in Section 3.4.

 

1.25 “Fiduciary” has the meaning set forth in ERISA Section 3(21).

 

1.26 “Financial Statements” has the meaning set forth in Section 4.8.

 

1.27 “Florida Act” and “Texas Act” have the meanings set forth in Section 2.1.

 

1.28 “Formula Period” has the meaning set forth in Section 3.4.

 

1.29 “Formula Period Profits Statement” has the meaning set forth in Section
3.4.

 

1.30 “GAAP” means the United States generally accepted accounting principles in
effect from time to time.

 

1.31 “HIPAA” has the meaning set forth in Section 4.37.

 

1.32 “Indemnified Party” has the meaning set forth in Section 10.4.

 

1.33 “Indemnifying Party” has the meaning set forth in Section 10.4.

 

1.34 “Intended Installment Payment” has the meaning set forth in Section 3.4.

 

1.35 “Installment Payment” has the meaning set forth in Section 3.4.

 

1.36 “Installment Payment Discount” has the meaning set forth in Section 3.4.

 

1.37 “Installment Payment Premium” has the meaning set forth in Section 3.4.

 

1.38 “Intellectual Property” means: (a) all trade secrets and confidential
business information (including customer and supplier lists, ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
pricing and cost information, and business and marketing plans and proposals);
(b) all trademarks, service marks, trade dress, logos, trade names, and
corporate names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith; (c) all
inventions (whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereto, and all patents, patent applications, and
patent disclosures, together with all reissuances, continuations,
continuations-in-part, revisions,

 

4

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extensions, and reexaminations thereof; (d) all copyrightable works, all
copyrights, and all applications, registrations, and renewals in connection
therewith; (e) all computer software (including data and related documentation);
(f) all other proprietary rights; and (g) all copies and tangible embodiments
thereof (in whatever form or medium).

 

1.39 “IRS” means the U.S. Internal Revenue Service.

 

1.40 “Knowledge” An individual will be deemed to have “Knowledge of a particular
fact or other matter if:

 

(a) such individual is actually aware of such fact or other matter; or

 

(b) a prudent individual could be expected to discover or otherwise become aware
of such fact or other matter in the course of conducting a reasonably
comprehensive investigation concerning the existence of such fact or other
matter, or

 

(c) A Person (other than an individual) will be deemed to have “Knowledge” of a
particular fact or other matter if any individual who is a serving, or who has
at any time served, as a director, officer, partner, executor, or trustee of
such Person (or in any similar capacity) has, or at any time had, Knowledge of
such fact or other matter.

 

1.41 Liability” means any liability, whether known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due, including,
but not in any way limited to, any liability for Taxes.

 

1.42 “Management Agreement” means that certain Management Services Agreement by
and among PainCare Acquisition Company XIII, Inc., the New PA and Shareholder,
dated as of the Statutory Merger Time.

 

1.43 “Medical Assets” has the meaning set forth in Section 2.11.

 

1.44 “Medical Waste” has the meaning set forth in Section 4.40

 

1.45 “Merger” has the meaning set forth in Section 2.1.

 

1.46 “Most Recent Year End” has the meaning set forth in Section 4.9.

 

1.47 “Multiemployer Plan” has the meaning set forth in ERISA Section 3(37).

 

1.48 “NASDAQ” has the meaning set forth in Section 3.4.

 

1.49 “New PA” has the meaning set forth in Paragraph D of the Recitals.

 

1.50 “Other Net Equity Adjustment” has the meaning set forth in Section 3.3.

 

5

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1.51 “PainCare” has the meaning set forth in the Preamble.

 

1.52 “PainCare Shares” means any share of common stock, $.0001 par value per
share, of PainCare.

 

1.53 “Party(ies)” has the meaning set forth in the Preamble.

 

1.54 “PBGC” means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

 

1.55 “Person” means an individual, a partnership, a corporation, an association,
a joint stock company, a limited liability company or partnership, a trust, a
joint venture, an unincorporated organization, any other form of entity
whatsoever, or a governmental entity (or any department, agency, or political
subdivision thereof).

 

1.56 “Prohibited Transaction” has the meaning set forth in ERISA Section 406 and
Code Section 4975.

 

1.57 “Reportable Event” has the meaning set forth in ERISA Section 4043.

 

1.58 “Securities Act” means the Securities Act of 1933, as amended.

 

1.59 “Securities Exchange Act” means the Securities Exchange Act of 1934, as
amended.

 

1.60 “Security Interest” means any lien, claim, encumbrance, mortgage,
hypothecation, pledge, or other security interest, excluding purchase money
security interests arising in the ordinary course of business and liens arising
by operation of law for Taxes not yet due and payable.

 

1.61 “Shareholder” has the meaning set forth in the recitals.

 

1.62 “Subsidiary” has the meaning set forth in the Preamble.

 

1.63 “Surviving Corporation” has the meaning set forth in Section 2.1.

 

1.64 “Tax” or “Taxes” means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, production, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind whatsoever,
including interest, penalty, or additions thereto, whether disputed or not, and
whether or not accrued on the Financial Statements.

 

1.65 “Tax Return” means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.

 

6

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1.66 “Third Party Claim” has the meaning set forth in Section 10.4.

 

1.67 “Trade Secrets” has the meaning set forth in Section 11.5.

 

1.68 “Transaction” has the meaning set forth in Section 2.1.

 

1.69 “Transaction Consideration” has the meaning set forth in Section 3.1.

 

7