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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, 2004.
 [  ]
    
    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. 
  Delaware
    
    11-2882328(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 7840 Montgomery Road, Cincinnati, Ohio 45236 
  (513) 792-9292 
  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 was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
   [X]   
No   [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
   [  ]    No   [X] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 13,444,676 shares as of
October 18, 2004. 1




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LCA-Vision Inc.
INDEX Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    14Part II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    15Signatures
    
    
    15EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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LCA-Vision Inc. 
 
 September 30, 2004
    
    December 31, 2003AssetsCurrent assetsCash and cash equivalents
    
    $
    82,821
    
    
    $
    64,908Accounts receivable, net of allowance for doubtful accounts of $2,142 and $1,480
    
    
    6,601
    
    
    
    3,255Receivables from vendors
    
    
    834
    
    
    
    802Prepaid expenses, inventory and other
    
    
    907
    
    
    
    1,422Deferred tax asset
    
    
    9,101
    
    
    
    Total current assets
    
    
    100,264
    
    
    
    70,387Property and equipment
    
    
    46,416
    
    
    
    41,967Accumulated depreciation and amortization
    
    
    (29,866
    )
    
    
    (24,622
    )Property and equipment, net
    
    
    16,550
    
    
    
    17,345Accounts receivable, net of allowance for doubtful accounts of $700 and $416
    
    
    1,318
    
    
    
    749Goodwill
    
    
    275
    
    
    
    275Deferred compensation plan assets
    
    
    1,053
    
    
    
    461Investment in unconsolidated businesses
    
    
    519
    
    
    
    385Other assets
    
    
    764
    
    
    
    435Total assets
    
    $
    120,743
    
    
    $
    90,037Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    1,963
    
    
    $
    4,883Accrued liabilities and other
    
    
    6,874
    
    
    
    4,518Current portion of capital lease obligations
    
    
    352
    
    
    
    Total current liabilities
    
    
    9,189
    
    
    
    9,401Capital lease obligations
    
    
    339
    
    
    
    Deferred compensation liability
    
    
    1,047
    
    
    
    457Insurance reserve
    
    
    2,074
    
    
    
    963Minority equity interest
    
    
    869
    
    
    
    414Stockholders investmentCommon stock ($0.001 par value; 15,811,872 and 15,643,561 shares and
13,444,676 and 13,276,364 shares issued and outstanding, respectively)
    
    
    16
    
    
    
    16Contributed capital
    
    
    133,464
    
    
    
    131,203Common stock in treasury, at cost (2,367,197 shares)
    
    
    (15,462
    )
    
    
    (15,462
    )Accumulated deficit
    
    
    (10,971
    )
    
    
    (37,069
    )Accumulated other comprehensive income
    
    
    178
    
    
    
    114Total stockholders investment
    
    
    107,225
    
    
    
    78,802Total liabilities and stockholders investment
    
    $
    120,743
    
    
    $
    90,037
 The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 3




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LCA-Vision Inc. 
 
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues  Laser refractive surgery
    
    $
    31,203
    
    
    $
    20,455
    
    
    $
    94,406
    
    
    $
    60,661Operating costs and expensesMedical professional and license fees
    
    
    5,733
    
    
    
    3,873
    
    
    
    18,090
    
    
    
    11,846Direct costs of services
    
    
    10,526
    
    
    
    8,365
    
    
    
    30,506
    
    
    
    23,982General and administrative expenses
    
    
    2,232
    
    
    
    2,062
    
    
    
    6,827
    
    
    
    6,073Marketing and advertising
    
    
    5,400
    
    
    
    3,034
    
    
    
    15,180
    
    
    
    9,164Depreciation and amortization
    
    
    1,775
    
    
    
    1,653
    
    
    
    5,233
    
    
    
    4,692Operating income
    
    
    5,537
    
    
    
    1,468
    
    
    
    18,570
    
    
    
    4,904Equity in earnings from unconsolidated businesses
    
    
    99
    
    
    
    39
    
    
    
    284
    
    
    
    245Minority equity interest
    
    
    (150
    )
    
    
    (64
    )
    
    
    (455
    )
    
    
    (215
    )Net interest
    
    
    627
    
    
    
    155
    
    
    
    1,491
    
    
    
    263Other income
    
    
    17
    
    
    
    
    
    
    
    25
    
    
    
    52Income before taxes on income
    
    
    6,130
    
    
    
    1,598
    
    
    
    19,915
    
    
    
    5,249Income tax expense (benefit)
    
    
    2,535
    
    
    
    81
    
    
    
    (7,258
    )
    
    
    181Net income
    
    $
    3,595
    
    
    $
    1,517
    
    
    $
    27,173
    
    
    $
    5,068Income (loss) per common shareBasic
    
    $
    0.27
    
    
    $
    0.14
    
    
    $
    2.03
    
    
    $
    0.47Diluted
    
    $
    0.26
    
    
    $
    0.14
    
    
    $
    1.96
    
    
    $
    0.47Dividends declared per share
    
    $
    0.08
    
    
    
    
    
    
    $
    0.08
    
    
    
    Weighted average shares outstandingBasic
    
    
    13,432
    
    
    
    10,771
    
    
    
    13,379
    
    
    
    10,753Diluted
    
    
    13,868
    
    
    
    11,044
    
    
    
    13,832
    
    
    
    10,856
 The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 4




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LCA-Vision Inc. 
 
 Nine Months Ended Sept. 30,2004
    
    2003Cash flow from operating activities:Net income
    
    $
    27,173
    
    
    $
    5,068Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    5,233
    
    
    
    4,692Provision for loss on doubtful accounts
    
    
    946
    
    
    
    1,155Deferred income taxes
    
    
    (9,101
    )
    
    
    Deferred compensation
    
    
    506
    
    
    
    247Insurance reserve
    
    
    1,111
    
    
    
    1,329Equity in earnings of unconsolidated affiliates
    
    
    (284
    )
    
    
    (245
    )Other, net
    
    
    
    
    
    
    (2
    )Changes in working capital:Accounts receivable
    
    
    (4,861
    )
    
    
    (3,789
    )Receivables from vendors
    
    
    (32
    )
    
    
    (169
    )Prepaid expenses, inventory and other
    
    
    515
    
    
    
    450Accounts payable
    
    
    (2,920
    )
    
    
    (2,216
    )Accrued liabilities and other
    
    
    2,357
    
    
    
    1,830Net cash provided by operations
    
    
    20,643
    
    
    
    8,350Cash flow from investing activities:Purchase of property and equipment
    
    
    (3,745
    )
    
    
    (3,251
    )Deferred compensation plan
    
    
    (508
    )
    
    
    (252
    )Loan payments made by shareholders
    
    
    
    
    
    
    1,329Loans to shareholders
    
    
    
    
    
    
    (22
    )Other, net
    
    
    187
    
    
    
    378Net cash used in investing activities
    
    
    (4,066
    )
    
    
    (1,818
    )Cash flows from financing activities:Principal payments of long-term notes, debt and capital lease obligations
    
    
    
    
    
    
    (10
    )Exercise of stock options
    
    
    2,261
    
    
    
    326Dividends paid to shareholders
    
    
    (1,075
    )
    
    
    Distribution from minority equity investees
    
    
    150
    
    
    
    114Net cash provided by financing activities
    
    
    1,336
    
    
    
    430Increase in cash and cash equivalents
    
    
    17,913
    
    
    
    6,962Cash and cash equivalents at beginning of period
    
    
    64,908
    
    
    
    18,298Cash and cash equivalents at end of period
    
    $
    82,821
    
    
    $
    25,260Supplemental InformationIncrease in capital lease obligations
    
    $
    691
    
    
    
    
 The notes to the Consolidated Condensed Financial Statements are an integral part of this statement. 5




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LCA-Vision Inc. 
  Summary of Significant Accounting Policies This filing includes condensed consolidated Balance Sheets as of September 30,
2004 and December 31, 2003; condensed consolidated Statements of Income for the
three and nine months ended September 30, 2004 and 2003; and condensed
consolidated Statements of Cash Flow for the nine months ended September 30,
2004 and 2003. In the opinion of management, these condensed consolidated
financial statements contain all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for the interim periods reported. We
suggest that these financial statements be read together with the financial
statements and notes in our 2003 annual report on Form 10-K. About Our Company We are a leading provider of fixed-site laser vision correction services at our
LasikPlusvision centers. 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, and our vision centers are supported primarily by 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. We have performed over 388,000 laser vision correction procedures
in our vision centers in the United States and Canada since 1991. We currently operate 44 laser vision correction centers, including 40
wholly-owned vision centers located in large metropolitan markets throughout
the United States, three joint ventures in Canada and one joint venture in
Europe. Internet The Companys website is www.lasikplus.com. We make available free of charge
through a link provided at the website our Forms 10-K, 10-Q and 8-K, as well as
any amendments thereto. These reports are available as soon as reasonably
practicable after they are filed or furnished to the Securities and Exchange
Commission. To obtain a copy of Form 10-K by mail, please send a request to
Investor Relations at LCA-Vision Inc., 7840 Montgomery Road, Cincinnati, Ohio
45236. Consolidation Policy We use two different methods to report our investments in our subsidiaries and
other companies  consolidation and the equity method. 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
Agreements, and FASB FIN 46 Consolidation of Variable Interest Entities, An
Interpretation of ARB No. 51. 6




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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 or losses in our Condensed Consolidated Statements of Income We own 43% of Silmalaseri Oy, our joint venture in Europe, and 50% of EyeMed
LCA Vision LLC and report these investments under the equity method. 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:  
    
    Allowance for doubtful accounts  patient financing
    
    Loss reserves  insurance captive 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, with the remainder due from the patient over a
period of 12 to 36 months. We began our patient financing program in May 2002.
Based upon our own experience with patient financing and based upon our
knowledge of the credit experience of others who provide financing to customers
similar to ours, we have established bad debt reserves as of September 30, 2004
of $2,842,000. Captive Insurance Company Reserves Effective as of 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 is capitalized and funded by us based on actuarial studies performed by an
affiliate of the consulting and management firm. For the 12 months 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. Beginning December 18, 2003, the Company
elected to use the captive insurance company for both primary insurance and
excess liability coverage. The captive insurance company continues to be
funded at a rate determined by actuarial studies performed by an independent
consulting firm. 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, 2004, we recorded an insurance reserve amount
of $2,074,000, which represents an estimate of costs to settle existing claims
and an actuarially determined estimate of claims incurred but not yet reported. 7




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Income Tax Benefit The Company recorded an income tax benefit of $10,489,000, or $0.76 per share,
for the nine months ended September 30, 2004, as a result of the reversal of
our deferred tax asset valuation allowance. A benefit of $5,900,000, or $0.43
per share, was recorded in the first quarter of 2004, and the balance of
$4,589,000, or $0.33 per share, was recorded in the second quarter of 2004.
The reversal of the valuation allowance on deferred tax assets was made because
of continued profitability in 2004 and expected future profitability. As a
result, we currently believe it is more likely than not that the deferred tax
asset relating primarily to our U.S. net operating loss carryforwards will be
realized to the extent of the tax benefit recorded. The computation of our
deferred tax asset and valuation allowance is based on taxable income we expect
to earn over future periods, which will include the utilization of previously
accumulated net operating tax losses. Per Share Data Basic per share data is income applicable to common shares divided by the
weighted average common shares outstanding. Diluted per share data is income
applicable to common shares divided by the weighted average common shares
outstanding plus the potential issuance of common shares if in-the-money stock
options are exercised. Following is a reconciliation of basic and diluted earnings per share for the
three and nine months ended September 30, 2004 and 2003 (in thousands, except
per share amounts): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Basic earnings:Net income
    
    $
    3,595
    
    
    $
    1,517
    
    
    $
    27,173
    
    
    $
    5,068Weighted average shares outstanding
    
    
    13,432
    
    
    
    10,771
    
    
    
    13,379
    
    
    
    10,753Basic earnings per share
    
    $
    0.27
    
    
    $
    0.14
    
    
    $
    2.03
    
    
    $
    0.47Diluted earnings:Net income
    
    $
    3,595
    
    
    $
    1,517
    
    
    $
    27,173
    
    
    $
    5,068Weighted average shares outstanding
    
    
    13,432
    
    
    
    10,771
    
    
    
    13,379
    
    
    
    10,753Effect of dilutive securitiesStock options
    
    
    436
    
    
    
    273
    
    
    
    453
    
    
    
    103Weighted average common shares and
potential dilutive shares
    
    
    13,868
    
    
    
    11,044
    
    
    
    13,832
    
    
    
    10,856Diluted earnings per share
    
    $
    0.26
    
    
    $
    0.14
    
    
    $
    1.96
    
    
    $
    0.47
 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. 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): 8




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    As reported
    
    $
    3,595
    
    
    $
    1,517
    
    
    $
    27,173
    
    
    $
    5,068Pro forma
    
    $
    3,262
    
    
    
    1,275
    
    
    
    26,244
    
    
    
    4,365Basic per share income
    
    As reported
    
    $
    0.27
    
    
    $
    0.14
    
    
    $
    2.03
    
    
    $
    0.47Pro forma
    
    
    0.24
    
    
    
    0.12
    
    
    
    1.96
    
    
    
    0.41Diluted per share income
    
    As reported
    
    $
    0.26
    
    
    $
    0.14
    
    
    $
    1.96
    
    
    $
    0.47Pro forma
    
    
    0.24
    
    
    
    0.12
    
    
    $
    1.90
    
    
    
    0.40
 Segment Information We operate in one segment: laser refractive surgery. Commitments and Contingencies In the opinion of management, there are currently no commitments or
contingencies that will have a material adverse effect on our financial
position or results of operations. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations. This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
important factors including, but not limited to, market acceptance of our
services, competition in the laser vision correction industry, an inability to
attract new patients, the possibility of long-term side effects and adverse
publicity regarding laser vision correction, regulatory action against us or
others in the laser vision correction industry, adverse economic conditions and
the relatively high fixed-cost structure of our business, among other factors.
In addition to the information given below, please refer to Item 1. Business 
Factors That May Affect Future Results and Market Price of Stock in our 2003
annual report on Form 10-K for a discussion of important factors that could
affect our results. Overview We are a leading provider of fixed-site laser vision correction services at our
LasikPlusvision centers. Our vision centers provide the facilities, equipment
and support services for performing laser vision correction that employs
advanced laser technologies to help correct nearsightedness, farsightedness and
astigmatism. Substantially all of our revenues currently are derived from laser vision
correction procedures performed in our U.S. vision centers. During the first
nine months of 2004, we opened six vision centers, three of which were opened
in the third quarter. Our operating costs and expenses include:  
    
    Medical professional and license fees, including per
procedure fees for the ophthalmologists performing laser vision
correction and license fees per procedure paid to certain suppliers
of our excimer lasers  
    
    Direct costs of services, including center rent and
utilities, equipment lease and maintenance costs, surgical supplies,
center staff expense and costs related to other revenues
    
    General and administrative costs, including headquarters staff expense and other overhead costs
    
    Marketing and advertising costs
    
    Depreciation of equipment 9




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Our vision centers have a relatively high degree of operating leverage due to
the fact that many of our costs are fixed in nature. As a result, our level of
procedure volume can have a significant impact on our level of profitability. We derive substantially all of our revenues from the delivery of laser vision
correction services. Our revenues in any period are primarily a function of
the number of laser vision correction procedures performed and the pricing for
those services. Our revenues are impacted by a number of factors, including the following:  
    
    Our ability to generate customers through our arrangements with
managed care companies, direct- to-consumer advertising and
word-of-mouth referrals
    
    Our mix of procedures among the different types of laser technology that we use
    
    New vision center openings and our ability to increase procedure volume at existing vision centers
    
    The availability of patient financing
    
    General economic conditions and consumer confidence levels
    
    The continued growth and increased acceptance of laser vision correction
    
    The effect of competition and discounting practices in our industry
    
    Adverse publicity regarding laser vision correction The following table details the number of laser vision correction procedures
performed at our consolidated vision centers. 2004
    
    2003Q1
    
    24,270
    
    
    
    17,028Q2
    
    24,093
    
    
    
    16,432Q3
    
    23,248
    
    
    
    15,965Q4
    
    
    
    
    
    16,060Year
    
    
    
    
    
    65,485
 Our strongest quarter in terms of procedures performed historically has been
the first quarter of the year. We believe this seasonality is caused primarily
because of the use of employer sponsored medical flexible spending programs
which commonly use the calendar year as the plan year. Results of Operations for the Three Months Ended September 30, 2004 and 2003 In the third quarter of 2004, revenues increased to $31,203,000, up 53% from
$20,455,000 in the third quarter of 2003, primarily as a result of higher
procedure volume and increased pricing per procedure. For vision centers open
at least 12 months, revenues increased by 38% in the third quarter of 2004
compared to the third quarter of 2003. We believe that continued improvement in marketing and advertising
effectiveness and continued growth and increased acceptance of laser vision
correction, together with third-party patient financing and our own patient
financing plan, among other factors, helped to grow procedure volume in the
third quarter of 2004 over the third quarter of 2003. Although the market for laser vision correction remains highly competitive, we
have raised our average price per procedure over the last 15 quarters. Our
average price per procedure has increased from $877 in the fourth quarter of
2000 to $1,342 in the quarter ended September 30, 2004. In the third quarter
of 2003, the average price per procedure was $1,281. 10




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Medical professional and license fees
Medical professional expenses increased by $1,243,000 from the third quarter of
2003. This increase was due to costs and fees associated with higher revenues.
License fees increased by $595,000 from the third quarter of 2003, primarily
as a result of higher volume. Direct costs of services
Direct costs of services include the salary component of physician
compensation, staffing, equipment, medical supplies, and facility costs of
operating laser vision correction centers. These direct costs increased in the
third quarter of 2004 by $2,161,000 over the third quarter of 2003, primarily
as a result of increased salaries, employee incentives, fringe benefits, rent
and utilities, financing fees and surgical supplies in connection with an
increase in the number of vision centers and our higher procedure volumes. General and administrative
General and administrative expenses increased by $170,000 in the third quarter
of 2004 from the third quarter of 2003, primarily due to increases in salaries
and employee incentives at our corporate offices. Marketing and advertising expenses
Marketing and advertising expenses increased by $2,366,000 in the third quarter
of 2004 from the third quarter of 2003, primarily as a result of our efforts to
support new markets and help grow volume in existing markets. Depreciation and amortization
Depreciation and amortization increased by $122,000 in the third quarter of
2004 from the third quarter of 2003, primarily as a result of laser upgrades,
the acquisition of certain diagnostic equipment to support custom LASIK and an
increase in new vision centers. Non-operating income and expenses
Net interest in the third quarter of 2004 increased $472,000, due both to
income on patient financing and to higher levels of invested cash. Income Taxes
Income tax expense of $2,535,000 was recorded in the third quarter of 2004, as
compared to $81,000 in the third quarter of 2003. U.S. income tax was accrued
for the amount of $159,000. The income tax provision of our Canadian facility
was $182,000. The remaining $2,194,000 was recorded against the deferred tax
asset. Results of Operations for the Nine Months Ended September 30, 2004 and 2003 In the first nine months of 2004, revenues increased to $94,406,000 up 56% from
$60,661,000 in the third quarter of 2003, primarily as a result of higher
procedure volume and increased pricing per procedure. We believe that improved marketing and advertising effectiveness and continued
growth and increased acceptance of laser vision correction, together with
third-party patient financing and our own patient financing plan, among other
factors, helped to grow procedure volume in the first nine months of 2004 over
the first nine months of 2003. In the first nine months of 2004, the average price per procedure was $1,318,
as compared to the average of $1,227 for the first nine months of 2003. Medical professional and
license fees
Medical professional expenses increased by $4,363,000 from the first nine
months of 2003; approximately $3,763.000 of this increase was due to costs and
fees associated with higher revenues, and $600,000 was due to the consolidation
of three Professional Corporations subsequent to June 2003. License fees
increased by $1,850,000 from the first nine months of 2003, primarily as a
result of increased procedure volume. These increases were partially offset by
purchasing rebates from suppliers. 11




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Direct costs of services
Direct costs of services increased in the first nine months of 2004 by
$6,524,000 over the first nine months of 2003, primarily as a result of
increased salaries, fringe benefits, employee incentives, financing fees,
rent/utilities and surgical supplies in connection with an increase in the
number of vision centers and our higher procedure volumes. General and administrative
General and administrative expenses increased by $754,000 in the first nine
months of 2004 from the first nine months of 2003, primarily due to increases
in salaries, benefits, employee incentives, and state and local taxes. Marketing and advertising expenses
Marketing and advertising expenses increased by $6,016,000 in the first nine
months of 2004 from the first nine months of 2003, primarily as a result of our
efforts to support new markets and help grow volume in existing markets. Depreciation and amortization
Depreciation and amortization increased by $541,000 in the first nine months of
2004 from the first nine months of 2003, primarily as a result of laser
upgrades, the acquisition of diagnostic equipment to support custom LASIK and
new vision center openings. Non-operating income and expenses
Net interest in the first nine months of 2004 increased $1,228,000, due both to
income on patient financing and to higher levels of invested cash. Income Taxes
Income tax expense of $3,231,000 was recorded in the first nine months of 2004,
as compared to $181,000 in the first nine months of 2003. U.S. income tax was
accrued for the amount of $520,000. The income tax provision of our Canadian
facility was $517,000. The remaining $2,194,000 reduced the deferred tax asset
because of the utilization of net operating loss carryforwards. These expenses
were more than offset by a $10,489,000 income tax benefit from the reversal of
the deferred tax asset valuation allowance, resulting in a year-to-date income
tax benefit of $7,258,000. Liquidity and Capital Resources Net cash provided by operating activities in the first nine months of 2004 was
$20,643,000. Proceeds from the exercise of 168,311 stock options totaled
$2,261,000. The combination of cash provided by operations and cash provided
by financing activities more than offset the cash used in investing activities.
This caused an increase in cash and cash equivalents to $82,821,000 as of
September 30, 2004, an increase of 28% from $64,908,000 as of December 31,
2003. In the third quarter of 2004, the board of directors declared a dividend to
common stock of $0.08 per share, which resulted in a cash payment of
$1,075,000. In view of our increased cash and cash equivalents, we did not renew our line
of credit with Provident Bank, which expired on July 31, 2004. As of September 30, 2004, we had approximately $7,919,000 in accounts
receivable, net of allowance for doubtful accounts, which was an increase of
approximately $3,915,000 since December 31, 2003. Our consolidated cash and cash equivalents includes $500,000 of cash maintained
by our consolidated captive insurance company pursuant to statutory
requirements as of September 30, 2004. These funds are not available for
general corporate purposes. 12




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Our costs associated with the opening of a new vision center primarily consist
of capital expenditures, including the purchase or lease of lasers, diagnostic
equipment, office equipment, leases and leasehold improvements. In addition,
we typically incur other startup expenses and pre-opening advertising expenses.
Generally, we estimate the costs associated with opening a new vision center
to be between $1,000,000 and $1,500,000. Actual costs will vary from vision
center to vision center based upon the market, the number of lasers purchased
or leased for the vision center, the site of the vision center and the level of
leasehold improvements required, among other variables. Our capital
expenditures consist primarily of investments incurred in connection with the
opening of new vision centers and equipment purchases or upgrades at existing
facilities. Year-to-date, we have opened six new vision centers in Orlando, Florida,
Toronto, Canada, San Antonio, Texas, Jacksonville, Florida, St. Louis, Missouri
and Kansas City, Kansas. Capital expenditures year-to-date in 2004 were
$3,745,000. We currently have additional facilities under development. The ability to fund our marketing and advertising program, planned capital
expenditures and new vision center rollouts depends on our future performance,
which, to a certain extent, is subject to general economic, competitive,
legislative, regulatory and other factors that are beyond our control. Based
upon our current level of operations and anticipated revenue growth, we
currently believe that cash flow from operations and available cash and
short-term investments should provide sufficient cash reserves and liquidity to
fund our working capital needs and our capital expenditures. Critical Accounting Estimates Significant accounting policies are disclosed in the Notes to Condensed
Consolidated Financial Statements. Critical accounting estimates are discussed
in the following paragraphs. Accounts Receivable and 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, with the remainder due from the patient over a
period of 12 to 36 months. We began our patient financing program in May 2002.
Accounts receivable for patients that we finance for a period of 12 months or
less are recorded at the undiscounted total expected payments less an estimated
allowance for doubtful accounts. For patients we finance with an initial term
over 12 months, we record the present value of expected payments discounted at
a rate of 17.5% per year. The discount rate assumption is based upon current
market rates charged by some other providers of unsecured credit to similar
customers. Interest income is recorded over the term of the payment program. Based upon our own experience with patient financing and based upon the credit
experience of some others who provide financing to customers similar to ours,
we have established bad debt reserves as of September 30, 2004 of $2,842,000
against accounts receivable of $10,761,000. To the extent that our actual bad
debt write-offs are greater than our estimated bad debt reserve, it would
adversely impact our results of operations and cash flows. 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. As of September 30, 2004, the discount in receivables with an initial term over
12 months was $544,000. 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
31, 2003, our captive insurance company purchased excess liability coverage for
80% of our aggregate losses in a given policy year in excess of $1,000,000, up
to $11,000,000. Our captive insurance company was responsible for 20% of our
aggregate losses in excess of $1,000,000 per claim, up to $11,000,000. 13




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Beginning December 18, 2003, the Company elected to use the captive insurance
company for both primary insurance and excess liability coverage. 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, 2004, we recorded an insurance reserve amount of $2,074,000, which
represents an estimate of costs to settle existing claims and 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 flows.
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. Income Taxes The Company recorded an income tax benefit of $10,489,000 for the nine months
ended September 30, 2004, as a result of the reversal of our deferred tax asset
valuation allowance. The reversal of the allowance was made because we
currently believe it is more likely than not that the deferred tax asset
relating to our U.S. net operating loss carryforward will be realized to the
extent of the tax benefit recorded. The computation of our deferred tax asset
and valuation allowance is based on taxable income we expect to earn over
future periods, which will include the utilization of previously accumulated
net operating tax losses. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk. The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable, approximate fair value
because of the short maturity of these instruments. We have historically had low exposure to changes in foreign currency exchange
rates and, as such, have not used derivative financial instruments to manage
foreign currency fluctuation risk. 
 Item 4. Controls and Procedures.  (a)
    
    Evaluation Of Disclosure Controls And ProceduresUnder the supervision of and with the participation of the Companys
management, including the Companys Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), an evaluation of the effectiveness of the
Companys disclosure controls and procedures was performed as of
September 30, 2004. Based on this evaluation, the CEO and CFO have
concluded that the Companys disclosure controls and procedures are
effective to ensure that material information is recorded, processed,
summarized and reported by management of the Company on a timely basis in
order to comply with the Companys disclosure obligations under the
Securities Exchange Act of 1934 and the SEC rules thereunder.(b)
    
    Changes In Internal Control Over Financial ReportingThere were no changes in the Companys internal control over financial
reporting that occurred during the last quarter that have materially
affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting. 14




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Part II. Other Information. 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Number
    
    Description31.1
    
    CEO Certification under Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    CFO Certification under Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K  1.
    
    Form 8-K, dated and furnished July 17, 2004 under
Item 12, containing a press release reporting 2004 second
quarter financial results.2.
    
    Form 8-K, dated and furnished August 19, 2004 under
Item 9, containing a press release announcing the declaration of
a cash dividend. 
 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, thereunto duly authorized. LCA-VISION INC. Date:
November 1, 2004
    
    /s/ Stephen N. JoffeStephen N. Joffe
Chairman and Chief Executive OfficerDate:
November 1, 2004
    
    /s/ Alan BuckeyAlan Buckey
Chief Financial Officer
 15