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: December 31, 2009

¨ 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.

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	x	Smaller Reporting Company	¨

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 May 30, 2010.

UCI MEDICAL AFFILIATES, INC.

INDEX

			Page Number
PART I	FINANCIAL INFORMATION
	Item 1	Financial Statements
		Condensed Consolidated Balance Sheets – December 31, 2009 and September 30, 2009	3
		Condensed Consolidated Statements of Operations for the three months ended December 31, 2009 and December 31, 2008	4
		Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended December 31, 2009	5
		Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2009 and December 31, 2008	6
		Notes to Condensed Consolidated Financial Statements	7 - 10
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11 - 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

2

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

UCI Medical Affiliates, Inc.

Condensed Consolidated Balance Sheets

	(unaudited)
	December 31, 2009			September 30, 2009
Assets
Current Assets
Cash	$	2,452,861		$	2,755,156
Accounts receivable, net of allowance for doubtful accounts of $1,458,042 and $1,547,367		6,016,515			6,648,194
Inventory		1,196,903			1,196,903
Income taxes receivable		426,711			411,948
Deferred taxes		1,528,122			1,374,385
Prepaid expenses and other current assets		828,402			434,613
Total current assets		12,449,514			12,821,199
Property and equipment, less accumulated depreciation of $16,087,664 and $15,959,380		14,014,004			14,203,029
Leased property under capital leases, less accumulated amortization of $2,119,807 and $1,911,931		13,071,921			13,279,797
Deferred taxes		—			114,805
Restricted investments		1,873,885			1,765,294
Goodwill, less accumulated amortization of $2,493,255		3,350,501			3,350,501
Other assets		568,409			382,733
Total Assets	$	45,328,234		$	45,917,358
Liabilities and Stockholders’ Equity
Current liabilities
Line of credit	$	50,859		$	—
Current portion of long-term debt		976,507			924,839
Obligations under capital leases		306,670			327,031
Accounts payable		647,135			865,119
Payable to patients and insurance carriers		1,858,338			1,927,039
Accrued salaries and payroll taxes		3,265,851			3,736,387
Accrued compensated absences		662,024			618,025
Other accrued liabilities		1,056,759			1,202,535
Total current liabilities		8,824,143			9,600,975
Long-term liabilities
Deferred tax liability		201,051			—
Deferred compensation liability		1,573,402			1,461,002
Long-term debt, net of current portion		3,339,880			3,620,439
Obligations under capital leases		13,643,938			13,723,419
Total long-term liabilities		18,758,271			18,804,860
Total Liabilities		27,582,414			28,405,835
Commitments and contingencies		—			—
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		(4,894,097	)		(5,128,394	)
Total Stockholders’ Equity		17,745,820			17,511,523
Total Liabilities and Stockholders’ Equity	$	45,328,234		$	45,917,358

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

3

UCI Medical Affiliates, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended December 31,
	2009			2008
Revenues	$	21,868,730		$	18,307,786
Operating expenses		18,172,658			15,418,449
Operating margin		3,696,072			2,889,337
General and administrative expenses		3,314,419			3,160,454
Income (loss) before income taxes		381,653			(271,117	)
Income tax (expense) benefit		(147,356	)		104,689
Net income (loss)	$	234,297		$	(166,428	)
Basic income (loss) per share	$	0.02		$	(0.02	)
Basic weighted average common shares outstanding		9,934,072			9,943,768
Diluted income (loss) per share	$	0.02		$	(0.02	)
Diluted weighted average common shares outstanding		9,934,072			9,943,768

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

4

UCI Medical Affiliates, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(unaudited)

	Three Months Ended December 31, 2009
	Common Stock			Paid-in Capital		Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount
Balance at September 30, 2009	9,945,472	$	497,274	$	22,173,993	$	(31,350	)	$	(5,128,394	)	$	17,511,523
Net income										234,297			234,297
Balance at December 31, 2009	9,945,472	$	497,274	$	22,173,993	$	(31,350	)	$	(4,894,097	)	$	17,745,820

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

5

UCI Medical Affiliates, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended December 31,
	2009			2008
Operating activities:
Net income (loss)	$	234,297		$	(166,428	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for losses on accounts receivable		528,801			522,179
Depreciation and amortization		804,169			744,441
Loss on disposal		1,273			—
Deferred taxes		162,119			(104,678	)
Unrealized (gain) loss on restricted investments		(39,629	)		328,494
Changes in operating assets and liabilities:
Accounts receivable		102,878			(185,563	)
Inventory		—			(10,000	)
Income taxes receivable		(14,763	)		(225,000	)
Prepaid expenses and other current assets		(393,789	)		(174,723	)
Accounts payable and accrued expenses		(858,998	)		352,177
Deferred compensation		112,400			(183,066	)
Cash provided by operating activities		638,758			897,833
Investing activities:
Purchases of property and equipment		(408,541	)		(1,287,133	)
Increase in other assets		(185,676	)		(180	)
Purchase of restricted investments		(68,962	)		(171,744	)
Cash used in investing activities		(663,179	)		(1,459,057	)
Financing activities:
Net borrowings on line of credit		50,859			510,239
Principal payments on notes payable		(228,891	)		(255,638	)
Principal payments on capital lease obligations		(99,842	)		(88,407	)
Cash (used) provided by financing activities		(277,874	)		166,194
Decrease in cash		(302,295	)		(395,030	)
Cash at beginning of period		2,755,156			769,649
Cash at end of period	$	2,452,861		$	374,619
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	389,571		$	307,401
Income taxes	$	—		$	225,000
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations incurred	$	—		$	1,070,334
Issuance of common stock for compensation	$	—		$	70,537

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

6

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 December 31, 2009 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.

7

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 does 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, 2008, 2007, 2006, and 2005. During the quarters ended December 31, 2009 and December 31, 2008, the Company recorded an income tax expense of $147,356 and income tax benefit of $104,689, respectively.

8

NOTE 4. FINANCING ARRANGEMENTS

The Company maintains a line of credit of $1,000,000 with a commercial bank. At December 31, 2009, the amount outstanding under the line of credit was $50,859. There were no amounts outstanding under the line of credit at September 30, 2009. The line of credit bears interest at the commercial bank’s prime rate, which was 3.25% at December 31, 2009. On June 21, 2010, the line of credit was modified to extend the maturity date 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 December 31, 2009, $2,100,000 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%. The term loan is secured by substantially all the Company’s assets. At December 31, 2009, $1,563,870 was outstanding under the term loan agreement.

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 December 31, 2009, the outstanding balance on the mortgage loan was $652,517. 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 AND CONTINGENCIES

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. The Company has vigorously pursued its claims under the policies and has recently received a notification from one of the insurance carriers that the carrier has accepted coverage losses under its policy, subject to certain conditions and limitations. Accordingly, the Company believes that it may recover at least a portion of its losses under the applicable insurance policy; however, the insurance carrier has not executed a definitive agreement, or made payment. Accordingly, the Company has not recognized any net receivable associated with the insurance claims.

9

NOTE 7. SUBSEQUENT EVENT

On June 10, 2010, the Company acquired a building in Easley, South Carolina for the aggregate purchase price of $320,000 in which it will locate a Doctors Care center. Additional expenses in the aggregate amount of approximately $24,466 were paid by the Company, but the Company did not incur additional debt in connection with the acquisition.

10

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 2008 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 the ratio of cash collected in the preceding periods to gross revenues we billed.

11

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.

12

Comparison of the Three Month Period Ended December 31, 2009 to the Three Month Period Ended December 31, 2008

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 number of 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 month periods ended December 31, 2009 and 2008.

	For the three month periods ended December 31,
	2009		2008
Revenues	$	21,868,730	$	18,307,786
Operating Expenses		18,172,658		15,418,449
Operating Margin	$	3,696,072	$	2,889,337

Comparison of Revenues and Operating Expenses for the Three Month Periods Ended December 31, 2009 and 2008

We recognized revenues of $21,868,730 in the three month period ended December 31, 2009 (the first quarter of fiscal year 2010) compared to revenues of $18,307,786 in the comparable period in 2008 (the first quarter of fiscal year 2009). The overall increase in our revenues in the three month period ended December 31, 2009 compared to the same period in 2008 of $3,560,944, or 19.45%, was the result of two primary factors. First, we opened five new Doctors Care centers in fiscal year 2009. One of the new centers was opened during the first quarter of 2009 and the remaining four centers were opened subsequent to December 31, 2008. The centers that were opened in fiscal year 2009 contributed approximately $1,957,000 of revenues in the three month period ended December 31, 2009 in excess of the amount of revenues the same centers contributed in the comparable period in 2008. In addition, revenue associated with centers that were in operation prior to the first quarter of fiscal year 2009 increased approximately $1,616,000 due to an increase in patient encounters of approximately 7%. We believe that the increase in patient encounters was primarily due to the severity of the H1N1 flu virus during October and November of 2009.

Our operating expenses were $18,172,658 in the three month period ended December 31, 2009 compared to operating expenses of $15,418,449 in the comparable period in 2008. The increase of $2,754,209, or 17.86%, was primarily due to the additional cost related to the new centers we opened in fiscal year 2009. The operating expenses associated with the new centers were approximately $1,704,000 higher in the first quarter of 2010 compared to the corresponding period in 2009. In addition, salaries and benefits and medical supplies related to our other centers increased approximately $873,000 and $405,000, respectively. Such increases were related to increased patient encounters as described in the preceding paragraph.

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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 month periods ended December 31, 2009 and 2008.

	For the three month periods ended December 31,
	2009		2008
General and administrative expenses	$	3,314,419	$	3,160,454

Comparison of G&A Expenses for the Three Month Periods Ended December 31, 2009 and 2008

Our G&A expenses were $3,314,419 in the three month period ended December 31, 2009 compared to $3,160,454 in the comparable period in fiscal year 2009. The increase of $153,965, or 4.87%, was due to several factors. First, G&A expenses increased generally as a result of our relocation to a new corporate headquarters building. As a result, maintenance and utilities, taxes and insurance, communications and depreciation expenses increased, in aggregate, $136,072 in the first quarter of 2010 compared to the corresponding period in 2009. In addition, advertising expense increased $61,774.

The overall increase was partially offset by the elimination of misappropriation losses in the amount of $102,030, which were recognized in the first quarter of 2009. The elimination of misappropriation losses related to the investigation and termination of our former CFO, Jerry F. Wells, Jr.

Comparison of Income Tax Expense for the Three Month Periods Ended December 31, 2009 and 2008

Our income tax expense was $147,356 in the three month period ended December 31, 2009 compared to an income tax benefit of $104,689 in the comparable period in 2008. Our effective tax rates were 38.61% in both periods. 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. 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 December 31, 2009 and is secured by our accounts receivable. At December 31, 2009 we had $50,859 outstanding under the line of credit and at September 30, 2009, we had no outstanding borrowings under the line of credit. During the three month period ended December 31, 2009, the maximum amount outstanding under the line of credit was $173,168, the average amount outstanding was approximately $3,312. The weighted average interest rate on the line of credit during the three month period ended December 31, 2009 was 4.25%. 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 December 31, 2009, $2,100,000 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.

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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 December 31, 2009, $1,563,870 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 $652,517 was outstanding at December 31, 2009.

Long-term debt decreased from $4,545,278 at September 30, 2009 to $4,316,387 at December 31, 2009, 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 three month period ended December 31, 2009 was $638,758 compared to $897,833 for the comparable period in 2008. In the three month periods ended December 31, 2009 and 2008, 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 and depreciation and amortization. In aggregate, such non-cash charges increased cash provided by operating activities by $1,332,970 and $1,266,620 in the three month periods ended December 31, 2009 and 2008, respectively. In addition, cash provided by operating activities was negatively impacted by a decrease in accounts payable and accrued expenses of $858,998 in the three month period ended December 31, 2009. In the three month period ended December 31, 2008, cash provided by operating activities was increased by $352,117 due to an increase in accounts payable and accrued expenses.

Cash used in investing activities for the three month period ended December 31, 2009 was $663,179 compared to $1,459,057 for the comparable period in 2008. In the three month period ended December 31, 2009, the primary use of cash in investing activities related to the purchase of furniture, information technology equipment and medical equipment. In the three month period ended December 31, 2008, 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 for the new center we opened.

Cash used by financing activities for the three month period ended December 31, 2009 was $277,874 compared to $166,194 cash provided by financing activities for the comparable period in 2008. In both periods, cash used or provided by financing activities was the result of borrowings under our line of credit, net of payments we made on outstanding debt, capital lease obligations and other long-term obligations.

At December 31, 2009, we had cash of $2,452,861 compared to $2,755,156 at September 30, 2009, a decrease of $302,295. Our working capital was $3,625,371 at December 31, 2009 compared to $3,220,224 at September 30, 2009. The change in our cash and working capital was due to normal business operations

During the three month period ending December 31, 2009, contractual obligations related to the principal component of our long-term debt decreased $228,891.

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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 $653,000 of our debt at December 31, 2009 was subject to fixed interest rates. Approximately $3,715,000 of our debt, including amounts outstanding under our line of credit, at December 31, 2009 was subject to variable interest rates. Based on the outstanding amounts of variable rate debt at December 31, 2009, our interest expense on an annualized basis would increase approximately $37,000 for each increase of one percent in the prime rate.

We have $3,792,230 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 December 31, 2009. 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 December 31, 2009 and concluded that the disclosure controls and procedures were not effective. As discussed above, disclosure controls generally pertain to the reporting of financial information within the time periods specified in the SEC’s rules and forms. Due to the investigation explained in this Form 10-Q under the caption, “PART I. FINANCIAL INFORMATION – Item 1. Financial Statements – Note 6. Commitments and Contingencies,” we were unable to file this 10-Q on a timely basis. We believe that our inability to file this Form 10-Q on a timely basis indicates that our disclosure controls and procedures were not effective as of December 31, 2009.

There have been no significant changes in our internal controls over financial reporting that occurred during the first 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.

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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 June 28, 2010

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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.

UCI Medical Affiliates, Inc.
(Registrant)
/s/ D. Michael Stout, M.D.	/s/Joseph A. Boyle
D. Michael Stout, M.D.	Joseph A. Boyle
President and Chief Executive Officer	Executive Vice President,
	Chief Financial Officer and
	Principal Accounting Officer

Date: June 28, 2010

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