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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

Form  10-Q

(Mark One)

[ X ]

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2003.

[    ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT.

For the transition period from __________ to __________

Commission file number 0-27610

LCA-Vision Inc.

(Exact name of registrant as specified in its charter)

Delaware

11-2882328

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

7840 Montgomery Road, Cincinnati, Ohio  45236

(Address of principal executive offices)

(513) 792-9292

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    X  

No         

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,846,718 shares as of November 12, 2003.

1

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LCA-Vision Inc.

INDEX

Facing Sheet

1

Index

2

Part I.

Financial Information

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2003

and December 31, 2002

3

Condensed Consolidated Statements of Income for the Three

and Nine Months Ended September 30, 2003 and 2002

4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended

September 30, 2003 and 2002

5

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

10

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

15

Item 4.

Controls and Procedures

15

Part II.

Other Information

16

Item 1.

Legal Proceedings

16

Item 2.

Changes in Securities and Use of Proceeds

16

Item 3.

Defaults Upon Senior Securities

16

Item 4.

Submission of Matters to a Vote of Security Holders

16

Item 5.

Other Information

16

Item 6.

Exhibits and Reports on Form 8-K

16

Signatures

17

2

3

4

5

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements

for the Three and Nine Months Ended September 30, 2003 and 2002

1.

Summary of Significant Accounting Policies

This filing includes condensed consolidated Balance Sheets as of September 30, 2003 and December 31, 2002; condensed consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002; and condensed consolidated Statements of Cash Flow for the nine months ended September 30, 2003 and 2002.  In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim period reported.  We suggest that these financial statements be read together with the financial statements and notes in our annual report on Form 10-K.

About Our Company

We are a leading developer and operator of fixed-site laser vision correction centers under the brand name LasikPlus. Our vision centers provide the staff, facilities, equipment and support services for performing laser vision correction that employs advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism.  We currently utilize fixed-site excimer lasers manufactured by Bausch & Lomb, VISX and Alcon.  Our vision centers are supported mainly by full-time credentialed board-certified ophthalmologists, optometrists and other health care professionals.  The ophthalmologists perform the laser vision correction procedures in our vision centers, and either ophthalmologists or optometrists generally carry out the pre-procedure evaluations and post-procedure follow-ups in-center as well.  We have performed over 300,000 laser vision correction procedures in our vision cente rs, in the United States and Canada, since 1991.  

We currently operate 37 laser vision correction centers, including 34 wholly-owned vision centers located in large metropolitan markets throughout the United States, two joint ventures in Canada and one joint venture in Europe.  We recently announced the opening of our newest LasikPlus vision center in Las Vegas.

Consolidation Policy

We use the consolidation method to report our investment in our subsidiaries and other companies when we own a majority of the voting stock of the subsidiary.  In addition, we consolidate the results of operations of professional corporations with which we contract to provide the services of ophthalmologists or optometrists at our vision centers, in accordance with EITF 97-2, Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual Management Agreements.  Prior to September 2002, our contractual management arrangements did not permit consolidation of our relationships with professional corporations pursuant to EITF 97-2 because we did not maintain a “controlling financial interest” in the professional corporations.  Beginning in September 2002, we began a process of renewing our agreements with the professional corporations and opening new vision c enters with agreements that meet the “controlling financial interest” criteria of EITF 97-2.

As a result of the FASB’s issuance of FIN 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, in January 2003, we have evaluated the contractual management arrangements entered into with professional corporations after January 1, 2003 and have determined that consolidation of these entities is appropriate under the FIN 46 guidance.  With respect to the three remaining professional corporations with which we had a contractual management arrangement prior to January 1, 2003, we have determined that we should consolidate these entities under the FIN 46 guidance beginning July 1, 2003, which we do not believe will have a material impact on our consolidated financial statement.  Our condensed consolidated financial statements include the accounts of:

▪

LCA-Vision Inc.

▪

LCA-Vision (Canada) Inc. and Subsidiaries

▪

The Baltimore Laser Sight Center, Ltd

▪

Columbus Eye Associates, Inc. (effective September 1, 2002)

▪

LasikPlus Medical Associates, Inc. (effective January 1, 2003)

▪

LasikPlus Medical Associates, S.C. (effective March 1, 2003)

▪

Lasik Insurance Company Ltd.

▪

LasikPlus Medical Associates, P.C. (effective July 1, 2003)

6

▪

LasikPlus Medical Associates, P.A. (effective July 1, 2003)

▪

Capital Region Vision Laser Associates, P.C. (effective July 1, 2003)

Equity Method

We use the equity method to report investments in businesses where we hold a 20% to 50% voting interest, giving us the ability to exercise significant influence, but not control, over operating and financial policies. Under the equity method we report:

▪

our interest in the entity as an investment in our Condensed Consolidated Balance Sheets

▪

our percentage share of the earnings (losses) in our Condensed Consolidated Statements of Operations

We own 43% of Silmalaseri Oy and 50% of both Cole LCA Vision LLC (through June 30, 2002) and Eyemed LCA Vision LLC and report our investments under the equity method.  

Allowance for Doubtful Accounts

We provide patient financing to some of our customers, including those who could not otherwise obtain third-party financing.  The terms of the financing require the patient to pay an up-front fee which is intended to cover some or all of our variable costs, and the remainder is deducted automatically from the patient’s checking account over a period of 12 to 36 months.  We began our patient financing program in May, 2002.  As a result of a recent expansion of this program, we are currently exposed to more credit risk than we have experienced in the past.  Based upon our own experience with patient financing and based upon the credit experience of centers who provide financing to customers similar to ours, we have established bad debt reserves as of September 30, 2003 of $1,386,000 against accounts receivable of  $4,413,000.  To the extent that our actual bad debt write-offs are greater than our estimated bad debt reserve, i t would adversely impact our results of operations and cash flows and to the extent that our actual bad debt write-offs are less than our estimated bad debt reserve, it would favorably impact our results of operations and cash flows.

Goodwill and Other Intangible Assets

Goodwill is the excess of the acquisition cost of the businesses over the fair value of the identifiable net assets acquired.  Through December 31, 2002, we amortized goodwill using the straight-line method over the estimated useful life.  The Company adopted Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002.  SFAS No. 142 discontinued the amortization of goodwill and requires companies to perform an annual impairment test of goodwill.  Application of the non-amortization provision of the SFAS No. 142 resulted in a decrease in annual operating expenses of $76,000.  The impairment tests of goodwill as of December 31, 2002 indicated that the Company currently has no goodwill impairment.

Captive Insurance Company Reserves

Effective December 18, 2002, we established a captive insurance company to provide professional liability insurance coverage for claims brought against us after December 17, 2002.  In addition, our captive insurance company's charter allows it to provide professional liability insurance for our doctors, some of whom are currently insured by the captive.  Our captive insurance company is managed by an independent insurance consulting and management firm, and it is capitalized and funded by us based on actuarial studies performed by an affiliate of the consulting and management firm.  For the year ending December 17, 2003, our captive insurance company purchased excess liability coverage for 80% of our losses in the year in excess of $1,000,000 per occurrence, up to $11,000,000.  Our captive insurance company is responsible for 20% of our aggregate losses in excess of $1,000,000 per claim, up to $11,000,000.  Under that arrangement, th e coverage providers’ obligation arises only after our captive pays the first $1,000,000 of any loss and the coverage providers are only obligated to pay an aggregate of $8,000,000 in a given policy year.  These excess liability coverage policies are currently up for renewal, and our management may elect to purchase similar, less, more or no excess liability coverage depending on the premiums quoted, among other factors.  A number of claims covered by our captive insurance company are now pending.  The financial statements of the captive insurance company are consolidated with our financial statements since it is a wholly-owned enterprise.  As of September 30, 2003, we recorded an insurance reserve amount of $1,384,000, which primarily represents an actuarially determined estimate of claims incurred but not yet reported.  To the extent that our actual claim experience is greater than our estimated insurance reserve, it would adversely impact our results of operations and cash fl ows and to the extent that our actual claim experience is less than our estimated insurance reserve, it would favorably impact our results of operations and cash flows.  

7

Income Taxes

As a result of our operating loss during the third quarter of 2001 and throughout 2002, and continuing uncertainties regarding the general economic conditions in the United States and the impact on our ongoing operations, we continue to record a full valuation reserve for deferred tax assets.  This reserve was established according to the requirements of SFAS No. 109 “Accounting for Income Taxes.”  Favorable changes in our operating profitability, as a result of improved general economic conditions in the United States or otherwise, could impact our determination as to whether reduction, in whole or in part, to the valuation reserve is necessary in the future.  To the extent that such a reduction in the valuation reserve is necessary, an income tax benefit would be recorded in the consolidated statement of operations, which would favorably impact our results of operations.  In addition, future taxable income may be absorbed by t he net operating loss carryforward that we maintain, which would favorably impact our results of operations and cash flows.  During the nine months ended September 30, 2003, we applied approximately $4,725,000 of our net operating losses against our taxable income for the period, which resulted in reduced federal income tax expenses and tax payments of approximately $1,654,000.  The valuation reserve and net operating loss carryforward was $17,118,000 and $44,040,000, respectively, as of September 30, 2003.

Consolidation

We use the consolidation method to report our investment in our subsidiaries and other companies when we own a majority of the voting stock of the subsidiary. In addition, we consolidate the results of operations of professional corporations with which we contract to provide the services of ophthalmologists or optometrists at our vision centers, in accordance with EITF 97-2, Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual Management Arrangements.  Prior to September 2002, our contractual management arrangements did not permit consolidation of our relationships with professional corporations pursuant to EITF 97-2 because we did not maintain a “controlling financial interest” in the professional corporations.  Beginning in September 2002, we began a process of renewing our agreements with the professional corporations and opening new vision centers with agreements that meet the “controlling financial interest” criteria of EITF 97-2.

As a result of the FASB’s issuance of FIN 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, in January 2003, we have evaluated the contractual management arrangements entered into with professional corporations after January 1, 2003 and have determined that consolidation of these entities is appropriate under the FIN 46 guidance.  With respect to the three remaining professional corporations with which we had a contractual management arrangement prior to January 1, 2003, we have determined that we should consolidate these entities under the FIN 46 guidance beginning July 1, 2003, which we do not believe will have a material impact on our consolidated financial statements.  If modifications are made to existing management agreements, or if new agreements are made under different terms than existing management agreements, then the financial statements of the professional corporations may not be consolidated in the future.

Use of Estimates

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may differ significantly from management’s expectations.  These estimates and assumptions affect various matters including:

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Allowance for doubtful accounts – patient financing

▪

Deferred income taxes – valuation allowance

▪

Loss reserves – insurance captive

8

Per Share Data

Basic per share data is income (loss) applicable to common shares divided by the weighted average common shares outstanding. Diluted per share data is income (loss) applicable to common shares divided by the weighted average common shares outstanding plus the potential issuance of common shares if stock options or warrants were exercised or convertible preferred stock were converted into common stock.

Following is a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2003 and 2002 (in thousands, except per share amounts):

Stock-Based Compensation

In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," was issued. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires more prominent and more frequent disclosures in the financial statements of the effects of stock-based compensation. The provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002.

We apply APB No. 25 and related interpretations utilizing the intrinsic value method in accounting for our stock option plans. We have adopted the disclosure-only provisions of SFAS No. 123. We recognize no compensation expense for our stock options granted to employees or directors. Compensation expense for options granted to non-employees in each of the three quarters ended September 30, 2002 and 2003 was immaterial. If we had elected to recognize compensation expense based on the fair value at the grant dates consistent with the provisions of SFAS No. 123, net income and income per share would have been changed to the pro forma amounts indicated below (dollars in thousands, except per share amounts):