Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2010

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

For the transition period from: to

Commission file number 0-13265

UCI MEDICAL AFFILIATES, INC.

(Exact name of Registrant as specified in its charter)

Delaware

59-2225346

(State or other jurisdiction

of incorporation)

(IRS Employer

Identification No.)

1818 Henderson Street

Columbia, SC 29201

(Address of principal executive offices)

(803) 782-4278

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

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

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the registrant’s common stock, $.05 par value, was 9,934,072 at July 31, 2010.

UCI MEDICAL AFFILIATES, INC.

INDEX


			Page Number
PART I	FINANCIAL INFORMATION

	Item 1	Financial Statements

		Condensed Consolidated Balance Sheets – June 30, 2010 and September 30, 2009	3

		Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2010 and June 30, 2009	4

		Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended June 30, 2010	5

		Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2010 and June 30, 2009	6

		Notes to Condensed Consolidated Financial Statements	7 - 9

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10 -15

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	16

	Item 4T	Controls and Procedures	16

PART II	OTHER INFORMATION

	Item 1	Legal Proceedings	17

	Item 1A	Risk Factors	17

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	17

	Item 3	Defaults Upon Senior Securities	17

	Item 4	[Reserved]	17

	Item 5	Other Information	17

	Item 6	Exhibits	17

SIGNATURES			18

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

UCI Medical Affiliates, Inc.

Condensed Consolidated Balance Sheets


	*(unaudited)* June 30, 2010			September 30, 2009
Assets
Current Assets
Cash	$	3,844,419		$	2,755,156
Insurance settlement receivable		2,732,840			—
Accounts receivable, net of allowance for doubtful accounts of $1,419,684 and $1,547,367		5,758,104			6,648,194
Inventory		1,196,903			1,196,903
Income taxes receivable		—			411,948
Deferred taxes		1,214,355			1,374,385
Prepaid expenses and other current assets		649,016			434,613

Total current assets		15,395,637			12,821,199

Property and equipment, less accumulated depreciation of $16,853,529 and $15,959,380		14,812,004			14,203,029
Leased property under capital leases, less accumulated amortization of $2,528,750 and $1,911,931		12,656,153			13,279,797
Deferred taxes		428,213			114,805
Restricted investments		1,890,687			1,765,294
Goodwill, less accumulated amortization of $2,493,255		3,350,501			3,350,501
Other assets		590,278			382,733


Total Assets	$	49,123,473		$	45,917,358


Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt	$	995,042		$	924,839
Obligations under capital leases		321,926			327,031
Accounts payable		211,273			865,119
Payable to patients and insurance carriers		1,685,340			1,927,039
Income taxes payable		1,681,064			—
Accrued salaries and payroll taxes		4,049,440			3,736,387
Accrued compensated absences		687,027			618,025
Other accrued liabilities		1,087,153			1,202,535

Total current liabilities		10,718,265			9,600,975


Long-term liabilities
Deferred compensation liability		1,758,720			1,461,002
Long-term debt, net of current portion		2,835,908			3,620,439
Obligations under capital leases		13,479,067			13,723,419

Total long-term liabilities		18,073,695			18,804,860

Total Liabilities		28,791,960			28,405,835


Commitments and contingencies (Note 6)		—			—

Stockholders’ Equity
Preferred stock, par value $.01 per share: Authorized shares - 10,000,000; none issued		—			—
Common stock, par value $.05 per share: Authorized shares - 50,000,000; issued - 9,945,472 shares; outstanding - 9,934,072 shares		497,274			497,274
Treasury stock - 11,400 shares		(31,350	)		(31,350	)
Paid-in capital		22,173,993			22,173,993
Accumulated deficit		(2,308,404	)		(5,128,394	)

Total Stockholders’ Equity		20,331,513			17,511,523


Total Liabilities and Stockholders’ Equity	$	49,123,473		$	45,917,358

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

UCI Medical Affiliates, Inc.

Condensed Consolidated Statements of Operations

(unaudited)


	Three Months Ended June 30,				Nine Months Ended June 30,
	2010		2009		2010		2009
Revenues	$	21,041,896	$	19,264,467	$	65,025,434	$	58,117,092
Operating expenses		17,631,114		15,589,446		53,303,650		46,547,048

Operating margin		3,410,782		3,675,021		11,721,784		11,570,044

General and administrative expenses		3,181,937		2,954,050		9,919,997		9,194,179


Income from operations		228,845		720,971		1,801,787		2,375,865

Recovery of misappropriation loss		2,732,840		78,884		2,732,840		664,306


Income before income taxes		2,961,685		799,855		4,534,627		3,040,171

Income tax expense		1,107,324		308,824		1,714,637		1,173,797


Net income	$	1,854,361	$	491,031	$	2,819,990	$	1,866,374


Basic earnings per share	$	0.19	$	0.05	$	0.28	$	0.19

Basic weighted average shares outstanding		9,934,072		9,942,967		9,934,072		9,944,063

Diluted earnings per share	$	0.19	$	0.05	$	0.28	$	0.19

Diluted weighted average shares outstanding		9,934,072		9,942,967		9,934,072		9,944,063

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

UCI Medical Affiliates, Inc.

Condensed Consolidated Statement Of Changes in Stockholders’ Equity

(unaudited)


	Nine Months Ended June 30, 2010
	Common Stock			Paid-in Capital		Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Paid-in Capital		Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
Balance at September 30, 2009	9,945,472	$	497,274	$	22,173,993	$	(31,350	)	$	(5,128,394	)	$	17,511,523
Net income										2,819,990			2,819,990

Balance at June 30, 2010	9,945,472	$	497,274	$	22,173,993	$	(31,350	)	$	(2,308,404	)	$	20,331,513

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

UCI Medical Affiliates, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Nine Months Ended June 30,
	2010			2009
Operating activities:
Net income	$	2,819,990		$	1,866,374
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on accounts receivable		1,777,915			1,697,053
Depreciation and amortization		2,418,891			2,234,270
Loss on disposal		3,908			—
Deferred taxes		(153,378	)		1,173,808
Unrealized loss on investments		32,232			308,115
Recovery of common stock issued for compensation		—			(31,350	)
Changes in operating assets and liabilities:
Accounts receivable		(887,825	)		(708,343	)
Inventory		—			(20,000	)
Income taxes receivable		411,948			(225,000	)
Income taxes payable		1,681,064			—
Insurance settlement receivable		(2,732,840	)		—
Prepaid expenses and other current assets		(214,403	)		(169,174	)
Accounts payable and accrued expenses		(628,872	)		362,643
Deferred compensation		297,718			(673,221	)


Cash provided by operating activities		4,826,348			5,815,175


Investing activities:
Purchases of property and equipment		(2,408,130	)		(4,361,061	)
Increase in other assets		(167,447	)		(51,814	)
Purchase of restricted investments		(197,723	)		(313,990	)


Cash used in investing activities		(2,773,300	)		(4,726,865	)


Financing activities:
Proceeds from borrowings on notes		—			1,750,070
Principal payments on notes payable		(714,328	)		(731,725	)
Principal payments on capital lease obligations		(249,457	)		(281,315	)


Cash (used in) provided by financing activities		(963,785	)		737,030


Increase in cash		1,089,263			1,825,340
Cash at beginning of period		2,755,156			769,649


Cash at end of period	$	3,844,419		$	2,594,989


Supplemental cash flow information:
Cash paid during the period for:
Interest	$	1,160,073		$	933,204
Income taxes	$	—		$	225,000

Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations incurred	$	—		$	3,031,215
Issuance of common stock for compensation	$	—		$	70,537

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

UCI MEDICAL AFFILIATES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. BUSINESS AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010. For further information, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2009.

UCI Medical Affiliates, Inc. (“UCI”) is a Delaware corporation incorporated on August 25, 1982. Operating through its wholly-owned subsidiary, UCI Medical Affiliates of South Carolina, Inc. (“UCI-SC”), UCI provides nonmedical management and administrative services for a network of 67 freestanding medical centers, 66 of which are located throughout South Carolina and one is located in Knoxville, Tennessee (43 operating as Doctors Care in South Carolina, one as Doctors Care in Knoxville, Tennessee, 20 as Progressive Physical Therapy Services in South Carolina, one as Luberoff Pediatrics in South Carolina, one as Carolina Orthopedic & Sports Medicine in South Carolina and one as Doctors Wellness Center in South Carolina).

Principles of Consolidation

The consolidated financial statements include the accounts of UCI, UCI-SC, UCI Properties, LLC (“UCI-LLC”), Doctors Care, P.A., Progressive Physical Therapy, P.A. (“PPT”), Carolina Orthopedic & Sports Medicine, P.A. (“COSM”), and Doctors Care of Tennessee, P.C. (the four together as the “P.A.” and together with UCI, UCI-SC and UCI-LLC, the “Company”). Because of the corporate practice of medicine laws in the states in which the Company operates, the Company does not own medical practices but instead enters into exclusive long-term management and administrative services agreements with the P.A.s that operate the medical practices. UCI-SC, in its sole discretion, can effect a change in the nominee shareholder of each of the P.A.s at any time for a payment of $100 from the new nominee shareholder to the old nominee shareholder, with no limits placed on the identity of any new nominee shareholder and no adverse impact resulting to UCI-SC or the P.A. from such change. Because of the agreements between UCI-SC and the P.A.s, and the rights held by UCI-SC under those agreements, the financial statements of the P.A.s are consolidated with UCI, UCI-SC and UCI-LLC in accordance with accounting principles generally accepted in the United States of America. All significant intercompany accounts and transactions are eliminated in consolidation, including management fees.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates are related to the allowance for doubtful accounts, goodwill and intangible assets, income taxes, contingencies, and revenue recognition. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates in the near term.

New Accounting Pronouncements

In October 2009, an update was issued to ASC 605, Revenue Recognition, to provide guidance requiring companies to allocate revenue in multi-element arrangements. Under this guidance, products or services (deliverables) must be accounted for separately rather than as a combined unit utilizing a selling price hierarchy to determine the selling price of a deliverable. The selling price is based on vendor-specific evidence, third-party evidence or estimated selling price. The amendments in the update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. The Company does not expect the new guidance to have any material impact on its financial statements.

Guidance related to subsequent events was amended in February 2010 to remove the requirement for an SEC filer to disclose the date through which subsequent events were evaluated. The amendments were effective upon issuance and had no significant impact on the Company’s financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring additional accrual or disclosure.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no material impact on the Company’s financial position, results of operations or cash flows.

NOTE 2. INVENTORY

The Company’s inventory consists of medical supplies and drugs and both are carried at the lower of average cost or market. The volume of supplies carried at a center varies very little from month to month; therefore, management performs only an annual physical inventory count and does not maintain a perpetual inventory system.

NOTE 3. INCOME TAXES

Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets to amounts expected to be realized. Valuation allowances are provided against deferred tax assets when the Company determines it is more likely than not that the deferred tax asset will not be realized. The tax returns for the seven fiscal years ending September 30, 2009 are open for examination by the Internal Revenue Service and the open tax years by state authorities include returns for the fiscal years ending September 30, 2009, 2008, 2007, 2006, and 2005. During the three and nine month periods ended June 30, 2010, the Company recorded income tax expense of $1,107,324 and $1,714,637, respectively, as compared to the $308,824 and $1,173,797, for the three and nine month periods ended June 30, 2009, respectively.

The Company has analyzed the tax positions taken or expected to be taken in its federal, state and local tax filings and has concluded that it has no material liability related to uncertain tax positions.

NOTE 4. FINANCING ARRANGEMENTS

The Company maintains a line of credit of $1,000,000 with a commercial bank. At June 30, 2010 and September 30, 2009, there were no amounts outstanding under the line of credit. The line of credit bears interest at the commercial bank’s prime rate, which was 3.25% at June 30, 2010. On June 21, 2010, the line of credit was modified to extend the maturity to May 5, 2012. Borrowings are collateralized by the Company’s accounts receivable.

In 2008 the Company secured a mortgage loan commitment and agreement from a commercial bank in the amount of $3,200,000 for the purpose of acquiring and renovating its new corporate headquarters property. At June 30, 2010, $2,060,009 was outstanding under the mortgage loan agreement. Under the terms of the mortgage loan agreement the Company paid interest only at one-month LIBOR plus 2.5% until the modification date, at which time $2,100,000 of the amount outstanding converted to a permanent mortgage loan. The mortgage loan was modified on November 23, 2009. As explained below, approximately $1,100,000 of the $3,200,000 amount then outstanding was transferred to a term loan. Interest on the permanent mortgage loan will continue to be paid based on one-month LIBOR plus 2.5% and the Company will pay total monthly payments of $11,407. Any amount outstanding on March 5, 2015 will be due and payable on that date. The mortgage loan is secured by a lien on the Company’s corporate headquarters.

As explained in the preceding paragraph, on November 23, 2009 the Company modified an existing term loan and mortgage loan. Under the modified terms, $1,100,000 of the amount outstanding under the mortgage loan was added to the outstanding balance of the term loan. After modification, the aggregate balance of the term loan was $1,785,000. The term loan agreement was further modified to extend the maturity date until October 2013. The Company will continue to pay monthly installments of $76,033 and the interest rate on the term loan will continue to be paid at the commercial bank’s prime interest rate plus ¹/2%. At June 30, 2010, $1,134,306 was outstanding under the term note agreement. The term loan is secured by substantially all the Company’s assets.

On July 17, 2008, the Company purchased a Doctors Care building for a total purchase price of $815,000. This property was previously rented by the Company and occupied as a medical center. A portion of the purchase price was funded by a promissory note in the original principal amount of $695,000, and is collateralized by a lien on the property. At June 30, 2010, the outstanding balance on the mortgage loan was $636,635. The promissory note accrues interest at a rate of 5.95 percent per annum. Starting on August 16, 2008 and continuing for 59 months thereafter, principal and interest payments in the amount of $5,890 are payable. The entire unpaid balance of principal and interest will be due on July 16, 2013.

NOTE 5. EARNINGS PER SHARE

Basic earnings per share are calculated by dividing income available to common shareholders by the weighted-average number of shares outstanding for each period. Diluted earnings per common share are calculated by adjusting the weighted-average shares outstanding assuming conversion of all potentially dilutive stock options.

NOTE 6. COMMITMENTS, CONTINGENCIES AND INSURANCE SETTLEMENT

On December 10, 2008, the Company’s Audit Committee of the Board of Directors (the “Audit Committee”) commenced an internal investigation (the “Investigation”) of certain accounting irregularities with respect to its internal controls and improper expense reimbursements to Jerry F. Wells, Jr., the Company’s former Executive Vice-President of Finance, Chief Financial Officer, and Secretary. On December 17, 2008, the Board of Directors terminated the employment of Mr. Wells based upon the preliminary results of the Investigation. On February 27, 2009, Mr. Wells executed a Confession of Judgment (the “Judgment”) in favor of the Company in the amount of Two Million Nine Hundred Sixty-Seven Thousand Three Hundred and Eighty-Two ($2,967,382) Dollars.

The Company has filed claims with two insurance carriers under fidelity bond and employee dishonesty insurance policies. In conjunction with such claims in July 2010, the Company received an insurance settlement in the amount of $2,732,840, which was recognized as income in the third quarter of fiscal 2010. The recovery reflects a reduction from the amount of the Judgment for the policy deductible and other adjustments related to amounts the Company has collected from Mr. Wells and expenses the Company incurred in conjunction with the collection efforts. In conjunction with the recovery, the Company assigned its claims against certain third parties to the insurance carrier that paid the recovery. The Company, however, retained its right to pursue certain claims against its former independent registered public accounting firm which are unrelated to the fraud losses recovered from the insurance carrier.

The Company is from time to time involved in other litigation incidental to the conduct of its business, none of which is expected to be material to its business, financial condition, or operations.

Advisory Note Regarding Forward-Looking Statements

Certain of the statements contained in this Report on Form 10-Q that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We caution readers of this Form 10-Q that such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Although our management believes that their expectations of future performance are based on reasonable assumptions within the bounds of their knowledge of their business and operations, we can give no assurance that actual results will not differ materially from their expectations. Factors that could cause actual results to differ from expectations include, among other things, (1) the difficulty in controlling our costs of providing healthcare and administering our network of centers; (2) the possible negative effects from changes in reimbursement and capitation payment levels and payment practices by insurance companies, healthcare plans, government payers and other payment sources; (3) the difficulty of attracting primary care physicians; (4) the increasing competition for patients among healthcare providers; (5) possible government regulations negatively impacting our existing organizational structure; (6) the possible negative effects of prospective healthcare reform; (7) the challenges and uncertainties in the implementation of our expansion and development strategy; (8) the dependence on key personnel; (9) adverse conditions in the stock market, the public debt market, and other capital markets (including changes in interest rate conditions); (10) the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a reduced demand for practice management services; (11) the demand for our products and services; (12) technological changes; (13) the ability to increase market share; (14) the adequacy of expense projections and estimates of impairment loss; (15) the impact of change in accounting policies by the Securities and Exchange Commission; (16) unanticipated regulatory or judicial proceedings; (17) the impact on our business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; (18) other factors described in this Form 10-Q, the factors described in our 2009 10-K, including, but not limited to, those matters described under the caption “PART I – ITEM 1A. – RISK FACTORS,” and in our other reports filed with the Securities and Exchange Commission; and (19) our success at managing the risks involved in the foregoing.

PART I

FINANCIAL INFORMATION

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements included in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We consider critical accounting policies to be those that require more significant judgments and estimates in the preparation of our financial statements and include the following: (1) revenue recognition; (2) accounts receivable; (3) allowance for doubtful accounts; (4) consideration of impairment of intangible assets; and (5) valuation reserve on net deferred tax assets.

Revenue recognition -

We record revenues at the estimated net amount that we expect to receive from patients, employers, third party payers, and others at the time we perform the services. The amount of revenue we recognize pursuant to the services we provide is subject to significant judgments and estimates. We have stated billing rates which are billed as gross revenues when services are performed. The amounts we bill are then reduced by our estimate of amounts we do not expect to collect due to discounts (“Contractual Adjustments”) that are taken by third party payers or otherwise given to patients who pay us directly. We estimate Contractual Adjustments based on historical adjustment experience.

Accounts receivable -

Accounts receivable represent the net receivables we expect to collect related to the services we provide. The amount we record as net accounts receivable is subject to significant judgments and estimates. As explained in the above caption, “Revenue recognition,” the amounts we bill and record as accounts receivable are reduced by our estimate of amounts we will not collect due to Contractual Adjustments that are taken by third party payers or otherwise given to patients who pay us directly. Additionally, as explained below in the caption, “Allowance for doubtful accounts,” our accounts receivable are also reduced by our estimate of losses which may result from the inability of some of our patients or other payers to make required payments.

Allowance for doubtful accounts -

We maintain our allowance for doubtful accounts for estimated losses, which may result from the inability of our patients to make required payments. Most of our allowance for doubtful accounts relate to amounts owed to us by patients or other payers who are or become responsible for the payments associated with services we provide. We base our allowance on the likelihood of recoverability of accounts receivable considering such factors as past experience and current collection trends. Factors taken into consideration in estimating the allowance include: amounts past due, in dispute, or a payer that we believe might be having financial difficulties. If economic, industry, or specific customer business trends worsen beyond earlier estimates, we increase the allowance for doubtful accounts by recording additional bad debt expense.

Consideration of impairment of intangible assets -

We evaluate the recovery of the carrying amount of excess of cost over fair value of assets, primarily goodwill, acquired by determining if a permanent impairment has occurred. This evaluation is done annually as of September 30^th of each year or more frequently if indicators of permanent impairment arise. Indicators of a permanent impairment include, among other things, a significant adverse change in legal factors or the business climate, an adverse action by a regulator, unanticipated competition, loss of key personnel or allocation of goodwill to a portion of the business that is to be sold or otherwise disposed. At such time as impairment is determined, the intangible assets are written off during that period.

Valuation reserve on net deferred tax assets -

We record a valuation allowance to reduce our deferred tax assets to the amount that management considers is more likely than not to be realized. Based upon our current financial position, results from operations, and our forecast of future earnings, we do not believe we currently need a valuation allowance.

Comparison of the Three and Nine Month Periods Ended June 30, 2010 to the Three and Nine Month Periods Ended June 30, 2009

Revenues and Operating Expenses

Our revenues are derived from the medical services we provide to our patients. Amounts we earn as revenues are paid by our patients or collected from third-party payers, including insurance carriers, employers or other third-parties. Our revenues are affected by a number of different factors, including increases or decreases in reimbursement rates from third-party payers, the mix of our patients between the nature of the payment source, competitive factors, the severity of seasonal illnesses, the general economic environment and most importantly, the new centers we open in the current and preceding year.

Operating expenses are those costs that we incur in the direct delivery of our services to patients and include the costs to operate and maintain our medical centers. Such costs include the salaries and benefits associated with our medical providers and other center employees, rent, depreciation, interest expense on our capital leases, medical supplies and other expenses incurred by our medical centers.

The following table sets forth our revenues, operating expenses and operating margin for the three and nine month periods ended June 30, 2010 and 2009.


	For the three month periods ended June 30,				For the nine month periods ended June 30,
	2010		2009		2010		2009
Revenues	$	21,041,896	$	19,264,467	$	65,025,434	$	58,117,092
Operating Expenses		17,631,114		15,589,446		53,303,650		46,547,048

Operating Margin	$	3,410,782	$	3,675,021	$	11,721,784	$	11,570,044

Comparison of Revenues and Operating Expenses for the Three and Nine Month Periods Ended June 30, 2010 and 2009

We recognized revenues of $21,041,896 and $65,025,434 in the three and nine month periods ended June 30, 2010, respectively, compared to revenues of $19,264,467 and $58,117,092 in the same periods in 2009. The overall increase in our revenues between the three and nine month periods ended June 30, 2010 compared to the same periods in 2009 of $1,777,429 or 9.23%, and $6,908,342, or 11.89%, respectively, was the result of several factors. First, we opened four new Doctors Care centers during the third and fourth quarters of 2009 which contributed significantly to the increase in revenues for the three and nine month periods ended June 30, 2010. The centers we opened during the third and fourth quarters of 2009, contributed revenues of approximately $1,365,000 and $4,526,000 in the three and nine month periods ended June 30, 2010, respectively, in excess of the revenues those centers contributed in the corresponding periods in 2009. Revenues related to centers that were opened prior to the third quarter of 2009 increased by approximately $407,000 and $2,377,000 during the three and nine month periods ended June 30, 2010 compared to the revenues those centers contributed in the corresponding period in 2009. Most of the revenue increase associated with those centers was realized in the first quarter of 2010. We believe the revenue increase was due to the severity of the H1N1 flu virus during the first quarter of 2010.

Our operating expenses were $17,631,114 and $53,303,650 in the three and nine month periods ended June 30, 2010, respectively, compared to operating expenses of $15,589,446 and $46,547,048 in the same periods in 2009. The increase of $2,041,668, or 13.10%, in the three month period ended June 30, 2010 compared to the same period in 2009 was primarily due to an increase in operating expenses of approximately $1,335,000 associated with the four new Doctors Care centers we opened in the third and fourth quarter of 2009. In addition, compensation expense associated with centers opened prior to the third quarter of 2009 increased by approximately $817,000. Operating expenses (excluding compensation expense) associated with centers opened prior to the third quarter of 2009 decreased by approximately $110,000 during the three months ended June 30, 2010 compared to the same period in 2009.

Our operating expenses increased by $6,756,602, or 14.52%, in the nine month period ended June 30, 2010 compared to the same period in 2009. Operating expenses associated with the four new Doctors Care centers we opened in the third and fourth quarters of 2009 contributed approximately $4,137,000 to the total increase in operating expenses. In addition, compensation expense associated with centers opened prior to the third quarter of 2009 increased by approximately $2,772,000 in the nine month period ended June 30, 2010 compared to the corresponding period in 2009. The increase in compensation expense related to the overall increase in patient encounters in the first quarter of 2010 which we believe was due to the severity of the H1N1 flu virus, and other seasonal factors in the second quarter of 2010. Operating expenses (excluding compensation expense) associated with centers opened prior to the third quarter of 2009 decreased by approximately $152,000 during the nine months ended June 30, 2010 compared to the same period in 2009.

General and Administrative Expenses (G&A)

G&A expenses consist of the costs and expenses to administer and support our medical centers. Such costs include salaries and benefits of corporate employees (administrative, maintenance and billing departments), postage and shipping, professional fees, advertising, banking fees and other costs incidental to operating our corporate office.

The following table sets forth our G&A expenses for the three and nine month periods ended June 30, 2010 and 2009.


	For the three month periods ended June 30,				For the nine month periods ended June 30,
	2010		2009		2010		2009
General and adminstrative expenses	$	3,181,937	$	2,954,050	$	9,919,997	$	9,194,179

Comparison of G&A Expenses for the Three and Nine Month Periods Ended June 30, 2010 and 2009

Our G&A expenses were $3,181,937 and $9,919,997 in the three and nine month periods ended June 30, 2010 compared to $2,954,050 and $9,194,179 in the same periods in 2009. The overall increase in our G&A expenses between the three and nine month periods ended June 30, 2010 compared to the same periods in 2009 of $227,887, or 7.71%, and $725,818, or 7.89%, respectively, was the result of several factors. The overall increase was primarily due to the increase in compensation expense during the three and nine month periods ended June 30, 2010 of $203,528 and $498,885, respectively. The increases in compensation expense related to the addition of several corporate employees during the fourth quarter of 2009 and bonuses paid to non-executive employees during the nine month period ended June 30, 2010. In addition, G&A expenses generally increased during the three and nine month period ended June 30, 2010 due to the relocation of our corporate headquarters. As a result of the relocation of our corporate headquarters, maintenance and utilities increased $40,181 and $106,431, respectively, and depreciation expense increased $61,134 and $221,520, respectively.

The overall increase was offset by a decrease in professional fees of $81,082 and $253,720 in the three and nine month periods ended June 30, 2010, respectively, compared to the same periods in 2009. Misappropriation losses of $102,030 were also eliminated in fiscal year 2010. The decrease in professional fees and elimination of misappropriation losses were related to the termination and conclusion of the investigation of our former CFO, Jerry F. Wells, Jr.

Recovery of Misappropriation Loss

On December 10, 2008, our Audit Committee of the Board of Directors (the “Audit Committee”) commenced an internal investigation (the “Investigation”) of certain accounting irregularities with respect to our internal controls and improper expense reimbursements to Jerry F. Wells, Jr., the Company’s former Executive Vice-President of Finance, Chief Financial Officer, and Secretary. As a result of the Investigation, on February 27, 2009, Mr. Wells executed a Confession of Judgment (the “Judgment”) in our favor in the amount of $2,967,382.

In conjunction with our collection efforts pursuant to the Judgment, in the third quarter of 2009 we recovered 11,400 shares of our common stock which had been previously issued to Mr. Wells as compensation and other personal property, the aggregate value of which was $78,884. In addition, on February 20, 2009, our Board of Directors passed a resolution declaring a forfeiture of Mr. Wells’ interest in our deferred compensation plan. On February 23, 2009, Mr. Wells signed a voluntary relinquishment of his interest in the deferred compensation plan. We do not deem the forfeiture of Mr. Wells’ interest in the deferred compensation plan as a partial settlement of amounts he owes us under the Judgment. Rather, we deem such amount as being forfeited as of the date of the resolution of its Board of Directors because such credit in the deferred compensation plan had been credited to Mr. Wells under false pretenses. The amount of the liability associated with the deferred compensation plan at the time of forfeiture was $585,422. Such amount was recognized in the second quarter of 2009 and is included in our income in the nine month period ended June 30, 2009.

Further, we filed claims with two insurance carriers under fidelity bond and employee dishonesty insurance policies. In conjunction with such claims, we received an insurance settlement in the amount of $2,732,840 which was recognized in the third quarter of fiscal 2010. The recovery reflects a reduction from the amount of the Judgment for the policy deductible and other adjustments related to amounts we have collected from Mr. Wells and expenses we incurred in conjunction with our collection efforts. In conjunction with the recovery, we assigned our claims against certain third parties to the insurance carrier that paid the recovery. We, however, retained our right to pursue certain claims against our former independent registered public accounting firm which are unrelated to the fraud losses recovered from the insurance carrier.

Comparison of Income Tax Expense for the Three and Nine Month Periods Ended June 30, 2010 and 2009

Our income tax expense was $1,107,324 and $1,714,637 in the three and nine month periods ended June 30, 2010, respectively, compared to an income tax expense of $308,824 and $1,173,797 in the comparable periods in 2009. Our effective tax rates were 37.39% and 37.81%, respectively, in the three and nine month periods ended June 30, 2010 and 38.61% in the comparable periods in 2009. Our effective tax rates vary from the combined enacted federal and state tax rates due to the net effect of nondeductible expenses, offset by certain tax credits we recognize.

Liquidity and Capital Resources

Our primary liquidity and capital requirements are to fund working capital for current operations, including the expansion of our business through opening new centers, and servicing our long-term debt and lease obligations. Typically, the cash requirements associated with the opening of new centers have been limited to funding the purchase of furniture and medical equipment necessary to provide medical services and funding the operations of the new centers until such time as they generate positive cash flows. The primary sources to meet our liquidity and capital requirements are funds generated from operations, a $1,000,000 line of credit with a commercial bank and through term and mortgage loans.

The line of credit bears interest at the commercial bank’s prime interest rate which was 3.25% at June 30, 2010 and is secured by our accounts receivable. At June 30, 2010 and September 30, 2009, we had no outstanding borrowings under the line of credit. During the three and nine month periods ended June 30, 2010, the maximum amount outstanding under the line of credit was $520,976 for both periods, the average amount outstanding approximated $63,000 and $51,000, respectively. The line of credit matures on May 5, 2012.

In 2008 we secured a mortgage loan commitment and agreement from a commercial bank in the amount of $3,200,000 for the purpose of acquiring and renovating our new corporate headquarters property. At June 30, 2010, $2,060,009 was outstanding under the mortgage loan agreement. Under the terms of the mortgage loan agreement we paid interest only at one-month LIBOR plus 2.5% until the modification date, at which time $2,100,000 of the amount outstanding converted to a permanent mortgage loan. The mortgage loan was modified on November 23, 2009. As explained below, approximately $1,100,000 of the $3,200,000 amount then outstanding was transferred to a term loan. Interest on the permanent mortgage loan will continue to be paid based on one-month LIBOR plus 2.5% and we will pay total monthly payments of $11,407. Any amount outstanding on March 5, 2015 will be due and payable on that date. The mortgage loan is secured by a lien on our corporate headquarters.

As explained in the preceding paragraph, on November 23, 2009 we modified an existing term loan and mortgage loan. Under the modified terms, $1,100,000 of the amount outstanding under the mortgage loan was added to the outstanding balance of the term loan. After modification, the aggregate balance of the term loan was $1,785,000. The term loan agreement was further modified to extend the maturity date until October 2013. We will continue to pay monthly installments of $76,033 and the interest rate on the term loan will continue to be paid at the commercial bank’s prime interest rate plus ¹/2%. At June 30, 2010, $1,134,306 was outstanding under the term loan agreement.

Additionally, in the fiscal year ending September 30, 2008 we acquired a center in Surfside Beach, SC for $815,000. We financed the acquisition of the center with a mortgage loan in the amount of $695,000, of which approximately $636,635 was outstanding at June 30, 2010.

Long-term debt decreased from $4,545,278 at September 30, 2009 to $3,830,950 at June 30, 2010, due to regular principal pay-downs. Our management believes that for the next 12 months and the foreseeable future thereafter it will be able to continue to fund debt service requirements out of cash generated through operations.

Cash provided by operating activities for the nine month period ended June 30, 2010 was $4,826,348 compared to $5,815,175 for the comparable period in 2009. In the nine month periods ended June 30, 2010 and 2009, cash provided by operations was increased by non-cash charges to net income, the primary components of which were the provision for losses on accounts receivable, depreciation and amortization and the provision for deferred taxes. In aggregate, such non-cash charges increased cash provided by operating activities by $4,043,428 and $5,105,131 in the nine month periods ended June 30, 2010 and 2009, respectively. Cash provided by operating activities was positively impacted by an increase in accrued deferred compensation of $297,718, a decrease in income taxes receivable of $411,948, and an increase in income taxes payable of $1,681,064 in the nine month period ended June 30, 2010. In addition, cash provided by operating activities was reduced by increases in accounts receivable, prepaid expenses and other current assets, and insurance settlement receivable and a reduction in accounts payable and other accrued liabilities. In aggregate these items reduced cash provided by operations by $4,463,940. In the nine month period ended June 30, 2009, cash provided by operating activities was positively impacted by an increase in accounts payable and accrued expenses of $362,643. In addition, in the nine month period ended June 30, 2009, cash provided by operating activities was reduced by increases in accounts receivable, inventory, income taxes receivable, prepaid expenses and other current assets and a reduction in our deferred compensation liability. In aggregate these items reduced cash provided by operations by $1,795,738.

Cash used in investing activities for the nine month period ended June 30, 2010 was $2,773,300 compared to $4,726,865 for the comparable period in 2009. In the nine month period ended June 30, 2010, the primary use of cash in investing activities related to the purchase of furniture and medical equipment and improvements to several of our existing centers. In addition, in June 2010 we acquired a building in which we will locate a Doctors Care center. In accordance with the purchase, we expended approximately $350,000. In the nine month period ended June 30, 2009, the primary use of cash in investing activities related to the renovation of our new corporate office and the purchase of furniture and medical equipment to outfit new centers and improvements to several of our existing centers.

Cash used in financing activities for the nine month period ended June 30, 2010 was $963,785. In the nine month period ended June 30, 2010 we paid $714,328 and $249,457 in payments related to other long-term debt and capital lease obligations, respectively. Cash provided by financing activities for the nine month period ended June 30, 2009 was $737,030. In the nine month period ended June 30, 2009 proceeds from borrowings, related to draws on the mortgage loan associated with the renovation of our corporate headquarters building, were $1,750,070. During that period we paid $731,725 and $281,315 in payments related to other long-term debt and capital lease obligations, respectively.

At June 30, 2010, we had cash of $3,844,419 compared to $2,755,156 at September 30, 2009, an increase of $1,089,263. Our working capital was $4,677,372 at June 30, 2010 compared to $3,220,224 at September 30, 2009.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

We are exposed to changes in interest rates primarily as a result of our borrowing activities, which includes credit facilities with financial institutions used to maintain liquidity and fund our business operations, as well as notes payable to various third parties in connection with certain acquisitions of property and equipment. The nature and amount of our debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of our interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. We do not currently use derivative instruments to adjust our interest rate risk profile.

Approximately $637,000 of our debt at June 30, 2010 was subject to fixed interest rates. Approximately $3,194,000 of our debt at June 30, 2010 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at June 30, 2010, our interest expense on an annualized basis would increase approximately $32,000 for each increase of one percent in the prime rate.

We also have exposure to increases in the consumer price index associated with certain operating and capital leases we have entered, all of which relate to our leased real estate. We have $3,792,320 in aggregate annual lease payments that are subject to increases based on future changes in the consumer price index. Such lease payments include lease agreements in place at June 30, 2010 and lease agreements entered subsequent to that date. Typically, the lease agreements stipulate that the lease payments will increase every three years based on the aggregate increase in the consumer price index over the preceding three years. Of the aggregate annual lease payments subject to change based on the consumer price index, annual payments subject to change in 2010, 2011 and 2012 are $604,560, $2,240,901 and $946,769, respectively.

We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010 and concluded that the disclosure controls and procedures were effective.

There have been no significant changes in our internal controls over financial reporting that occurred during the third quarter of fiscal 2010 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II

OTHER INFORMATION

Item 1

Legal Proceedings

We are a party to certain litigation that we consider routine and incidental to our business. Management does not expect the results of any of these actions to have a material effect on our business, results of operations or financial condition.

Item 1A

Risk Factors

Information regarding risk factors appears in Part I - Item 1A - Risk Factors of our report on Form 10-K for the fiscal year ended September 30, 2009. There have been no material changes from the risk factors previously disclosed in our report on Form 10-K.

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

This item is not applicable.

Item 3

Defaults upon Senior Securities

This item is not applicable.

Item 4

[Reserved]

Item 5

Other Information

This item is not applicable.

Item 6

Exhibits



31.1		Rule 13a-14(a)/15d-14(a) Certification of D. Michael Stout, M.D.

31.2		Rule 13a-14(a)/15d-14(a) Certification of Joseph A. Boyle, CPA

32		Section 1350 Certification

99		Press Release dated August 16, 2010

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: August 16, 2010

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UCI MEDICAL AFFILIATES INC 10-Q