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U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 Form 10-Q (Mark One) þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended March 31, 2004. o
    
    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
incorporation or organization)
    
    (IRS Employer
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   o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   o   No   x Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 13,362,973 shares as of April
26, 2004. 1




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LCA-Vision Inc. 
   
 Facing Sheet
    
    
    1Index
    
    
    2Part
I. Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 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
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    14Part
II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    14Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    14Item 3.
    
    Defaults Upon Senior Securities
    
    
    14Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    14Item 5.
    
    Other Information
    
    
    14Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    14Signatures
    
    
    15EX-31.1EX-31.2EX-32
  2




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Item 1. Financial Statements LCA-Vision Inc. 
   March 31, 2004
    
    December 31, 2003AssetsCurrent assetsCash and cash equivalents
    
    $
    72,056
    
    
    $
    64,908Accounts receivable, net of allowance for doubtful accounts of $1,472 and $1,480
    
    
    4,538
    
    
    
    3,255Receivable from vendor
    
    
    713
    
    
    
    802Prepaid expenses, inventory and other
    
    
    1,854
    
    
    
    1,422Deferred tax asset
    
    
    5,900
    
    
    
    Total current assets
    
    
    85,061
    
    
    
    70,387Property and equipment
    
    
    42,597
    
    
    
    41,967Accumulated depreciation and amortization
    
    
    (26,329
    )
    
    
    (24,622
    )Property and equipment, net
    
    
    16,268
    
    
    
    17,345Accounts receivable, net of allowance for doubtful accounts of $712 and $416
    
    
    1,276
    
    
    
    749Goodwill
    
    
    275
    
    
    
    275Deferred compensation plan assets
    
    
    598
    
    
    
    461Investment in unconsolidated businesses
    
    
    407
    
    
    
    385Other assets
    
    
    440
    
    
    
    435Total assets
    
    $
    104,325
    
    
    $
    90,037Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    3,759
    
    
    $
    4,883Accrued liabilities and other
    
    
    5,830
    
    
    
    4,518Total current liabilities
    
    
    9,589
    
    
    
    9,401Deferred compensation liability
    
    
    597
    
    
    
    457Insurance reserve
    
    
    1,242
    
    
    
    963Minority equity interest
    
    
    538
    
    
    
    414Stockholders investmentCommon stock ($0.001 par value; 15,708,365 and 13,110,306 shares and
13,341,168 and 10,743,109 shares issued and outstanding, respectively)
    
    
    16
    
    
    
    16Contributed capital
    
    
    132,039
    
    
    
    131,203Common stock in treasury, at cost (2,367,197 shares and 2,367,197 shares)
    
    
    (15,462
    )
    
    
    (15,462
    )Accumulated deficit
    
    
    (24,340
    )
    
    
    (37,069
    )Accumulated other comprehensive income
    
    
    106
    
    
    
    114Total stockholders investment
    
    
    92,359
    
    
    
    78,802Total liabilities and stockholders investment
    
    $
    104,325
    
    
    $
    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 March 31,2004
    
    2003Revenues
    
    $
    31,650
    
    
    $
    19,982Operating costs and expensesMedical professional and license fees
    
    
    6,465
    
    
    
    4,071Direct costs of services
    
    
    9,630
    
    
    
    7,774General and administrative expenses
    
    
    2,289
    
    
    
    2,018Marketing and advertising
    
    
    4,789
    
    
    
    2,975Depreciation
    
    
    1,716
    
    
    
    1,505Operating income
    
    
    6,761
    
    
    
    1,639Equity in earnings from unconsolidated businesses
    
    
    72
    
    
    
    147Minority equity interest
    
    
    (124
    )
    
    
    (80
    )Interest income
    
    
    367
    
    
    
    36Other income
    
    
    
    
    
    
    53Income before taxes on income
    
    
    7,076
    
    
    
    1,795Income tax (benefit) expense
    
    
    (5,653
    )
    
    
    38Net income
    
    $
    12,729
    
    
    $
    1,757Income per common shareBasic
    
    $
    0.96
    
    
    $
    0.16Diluted
    
    $
    0.93
    
    
    $
    0.16Weighted average shares outstandingBasic
    
    
    13,320
    
    
    
    10,743Diluted
    
    
    13,751
    
    
    
    10,744
 The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 4




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LCA-Vision Inc. 
   Three Months Ended March 31,2004
    
    2003Cash flow from operating activities:Net income
    
    $
    12,729
    
    
    $
    1,757Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,716
    
    
    
    1,505Provision for loss on doubtful accounts
    
    
    288
    
    
    
    Deferred income taxes
    
    
    (5,900
    )Deferred compensation
    
    
    140
    
    
    
    82Insurance reserve
    
    
    279
    
    
    
    431Equity in earnings of unconsolidated affiliates
    
    
    (72
    )
    
    
    (147
    )Changes in working capital:Accounts receivable
    
    
    (2,098
    )
    
    
    (376
    )Receivables from vendors
    
    
    89
    
    
    
    (107
    )Prepaid expenses, inventory and other
    
    
    (432
    )
    
    
    554Accounts payable
    
    
    (1,124
    )
    
    
    (1,169
    )Accrued liabilities and other
    
    
    1,312
    
    
    
    766Net cash provided by operations
    
    
    6,927
    
    
    
    3,296Cash flow from investing activities:Purchase of property and equipment
    
    
    (646
    )
    
    
    (475
    )Deferred compensation plan
    
    
    (137
    )
    
    
    (72
    )Loans to shareholders
    
    
    
    
    
    
    (10
    )Other, net
    
    
    118
    
    
    
    133Net cash used in investing activities
    
    
    (665
    )
    
    
    (424
    )Cash flows from financing activities:Principal payments of long-term notes, debt and capital lease obligations
    
    
    
    
    
    
    (3
    )Exercise of stock options
    
    
    836
    
    
    
    Distribution of minority equity investees
    
    
    50
    
    
    
    15Net cash provided by financing activities
    
    
    886
    
    
    
    12Increase in cash and cash equivalents
    
    
    7,148
    
    
    
    2,884Cash and cash equivalents at beginning of period
    
    
    64,908
    
    
    
    18,298Cash and cash equivalents at end of period
    
    $
    72,056
    
    
    $
    21,182
 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 March 31, 2004
and December 31, 2003; condensed consolidated Statements of Income for the
three months ended March 31, 2004 and 2003; and condensed consolidated
Statements of Cash Flow for the three months ended March 31, 2004 and 2003. In
the opinion of management, these unaudited 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 period 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 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 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 350,000 laser vision correction procedures
in our vision centers, in the United States and Canada, since 1991. We currently operate 41 laser vision correction centers, including 37
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. The Company makes available free
of charge through a link provided at the website its 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
    
    Deferred income taxes  valuation allowance
    
    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, 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. Based upon our own experience with
patient financing and based upon the credit experience of others who provide
financing to customers similar to ours, we have established bad debt reserves
as of March 31, 2004 of $2,184,000 against accounts receivable of $7,998,000 Goodwill and Other Intangible Assets Goodwill is the excess of the acquisition cost of a business over the fair
value of the identifiable net assets acquired. The impairment tests of
goodwill as of December 31, 2003 indicated that the Company currently has no
goodwill impairment. 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 the primary insurance and
the 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 March 31, 2004, we recorded an insurance reserve amount of
$1,242,000 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 $5,900,000 for the three months
ended March 31, 2004, as a result of the reversal of a portion of our deferred
tax asset valuation allowance. The reversal of the allowance was made because
the Company currently believes 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. We will continue to evaluate on a
quarterly basis the amount, if any, of additional reduction of the valuation
allowance that should be made. 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 stock options are
exercised. Following is a reconciliation of basic and diluted earnings per share for the
three months ended March 31, 2004 and 2003 (in thousands, except per share
amounts): Three Months EndedMarch 31,2004
    
    2003Basic earnings:Net income
    
    $
    12,729
    
    
    $
    1,757Weighted average shares outstanding
    
    
    13,320
    
    
    
    10,743Basic earnings per share
    
    $
    0.96
    
    
    $
    0.16Diluted earnings:Net income
    
    $
    12,729
    
    
    $
    1,757Weighted average shares outstanding
    
    
    13,320
    
    
    
    10,743Effect of dilutive securities:Stock options
    
    
    431
    
    
    
    1Weighted average common shares and
potential dilutive shares
    
    
    13,751
    
    
    
    10,744Diluted earnings per share
    
    $
    0.93
    
    
    $
    0.16
 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. 8




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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): Three Months EndedMarch 31,2004
    
    2003Net income
    
    As reported
    
    $
    12,729
    
    
    $
    1,757Pro forma
    
    
    12,242
    
    
    
    1,537Basic per share income
    
    As reported
    
    $
    0.96
    
    
    $
    0.16Pro forma
    
    
    0.92
    
    
    
    0.14Diluted per share income
    
    As reported
    
    $
    0.93
    
    
    $
    0.16Pro forma
    
    
    0.89
    
    
    
    0.14
 Stockholders Investment No material changes from the Companys most recent Form 10-K. 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, 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 developer and operator of fixed-site laser vision correction
centers under the brand name LasikPlus. 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. In July 1999, we began converting our vision
centers to closed access facilities from open access facilities in order to
obtain increased control over the quality of care we provide to our patients
and greater operational growth and control of our business. Substantially all of our revenues currently are derived from LASIK procedures
performed in our U.S. vision centers. 9




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Our operating costs and expenses include:  
    
    Medical professional and license fees, including per
procedure fees for the ophthalmologists performing laser vision
correction and the license fees per procedure paid to VISX, Bausch &
Lomb and Alcon
    
    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 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. Revenues We derived substantially all of our revenues for the last three years from the
delivery of LASIK 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 such 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 used by us
    
    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 The following table details the number of laser vision correction procedures
performed at our consolidated vision centers. 2004
    
    2003Q1
    
    
    24,270
    
    
    
    17,028Q2
    
    
    
    
    
    
    16,432Q3
    
    
    
    
    
    
    15,965Q4
    
    
    
    
    
    
    16,060Year
    
    
    
    
    
    
    65,485
 We believe that improved marketing and advertising effectiveness, together with
third-party patient financing, and our own patient financing plan, helped to
grow procedure volume in the first three months of 2004 over the first three
months of 2003. In the first three months of 2004, revenues increased to $31,650,000, up 58.4%
from $19,982,000 in the first three months of 2003, primarily as a result of
higher procedure volume and increased pricing per procedure. 10




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Although the market for laser vision correction remains highly competitive, we
have raised our average price per procedure over the last 13 quarters. Our
average price per procedure has increased from $877 in the fourth quarter of
2000 to $1,304 in the quarter ended March 31, 2004. In the first quarter of
2003, the average price per procedure was $1,173. Expenses Medical professional and license fees Medical professional expenses increased by $1,610,000 from the first quarter of
2003; approximately $1,204,000 of this increase was due to costs and fees
associated with higher revenues, and $406,000 of this increase was due to the
consolidation of the Professional Corporations which began in July 2003.
License fees increased by $792,000 from the first quarter of 2003. This is
primarily the result of increased costs of $1,161,000 due to higher volume and
an increase in enhancement expenses of $134,000. These increases were partially
offset by purchasing rebates from suppliers of $503,000. 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
first quarter of 2004 by $1,859,000 over the first quarter of 2003
primarily as a result of increased salaries, employee incentives,
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 $271,000 in the first quarter
of 2004 from the first quarter of 2003, primarily due to increases in salaries
and benefits of $216,000. Marketing and advertising expenses Marketing and advertising expenses increased by $1,814,000 in the first quarter
of 2004 from the first quarter of 2003 to support new markets and grow volume
in existing markets. Depreciation and amortization Depreciation and amortization increased by $211,000 in the first quarter of
2004 from the first quarter of 2003, primarily as a result of laser upgrades
and the acquisition of diagnostic equipment to support custom LASIK. Non-operating income and expenses Investment income in the first quarter of 2004 increased $331,000 due both to
income on patient financing and to higher levels of invested cash. Income Taxes Income tax expense of $247,000 was recorded in the first quarter of 2004. U.S.
income tax was accrued for the amount of $99,000. The income tax provision of
our Canadian facility was $148,000. These expenses were more than offset by a
$5,900,000 income tax benefit from the partial reversal of the deferred tax
asset valuation allowance. 11




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Liquidity and Capital Resources Net cash provided by operating activities in the first three months of 2004 was
$6,927,000. Proceeds from stock option exercises in the quarter were $836,000.
The combination of cash provided by operations and cash provided by financing
activities more than offset the cash used in investing activities and resulted
in an increase in cash and cash equivalents to $72,056,000 as of March 31,
2004, an increase of 11% from $64,908,000 as of December 31, 2003. As of March 31, 2004, we had approximately $5.8 million in accounts receivable,
net of allowance for doubtful accounts, which was an increase of approximately
$1.8 million since December 31, 2003. Further growth in accounts receivable is
expected over the balance of 2004 and beyond. Our consolidated cash and cash equivalents includes $0.5 million of cash
maintained by our consolidated captive insurance company pursuant to statutory
requirements as of March 31, 2004. These funds are not available for general
corporate purposes. We expect cash reserves in our captive insurance company
to grow over time. Our costs associated with the opening of a new center generally consist of
capital expenditures such as 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 center to be
between $1.0 million and $1.5 million. Actual costs will vary from center to
center based upon the location of the market, the number of lasers purchased
for the center, the site of the center and the level of leasehold improvements
required. 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. We maintain a $10,000,000 revolving credit facility with The Provident Bank
(Provident). In addition to the revolving credit facility, the Company has a
discretionary credit line of $10,000,000 to fund acquisitions. Both of these
credit arrangements expire July 31, 2004. No borrowings were outstanding at
March 31, 2004 under these credit facilities. The ability to fund our marketing and advertising program, planned capital
expenditures and new 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, available cash and short-term
investments, and available borrowing under the credit facility from Provident
Bank 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 of the 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, 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. 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 other
providers of unsecured credit to similar customers. Interest income is
recorded over the term of the payment program. 12




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Based upon our own experience with patient financing and based upon the credit
experience of others who provide financing to customers similar to ours, we
have established bad debt reserves as of March 31, 2004 of $2,184,000 against
accounts receivable of $7,798,000. 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 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. As of March 31, 2004, the discount in receivables with an initial term over 12
months was $670,000. 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.
Beginning December 18, 2003, the Company elected to use the captive insurance
company for both the primary insurance and the 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 March 31,
2004, we recorded an insurance reserve amount of $1,242,000 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 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. Income Taxes The Company recorded an income tax benefit of $5,900,000 for the three months
ended March 31, 2004, as a result of the reversal of a portion of our deferred
tax asset valuation allowance. The reversal of the allowance was made because
the Company currently believes 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. We will continue to evaluate on
a quarterly basis the amount, if any, of additional reduction of the valuation allowance
that should be made. This will be based on managements estimate and
conclusions regarding the ultimate realization of the deferred tax asset,
including but not limited to, the Companys recent positive financial results
as well as projected earnings over future periods. The impact of further
reductions of the valuation allowance will be to record a tax benefit or
charge which will increase or decrease net income in the period the
determination is made. 
 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 very low exposure to changes in foreign currency
exchange rates and, as such, have not used derivative financial instruments to
manage foreign currency fluctuation risk. 13




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Item 4. Controls and Procedures  (a)
    
    Evaluation Of Disclosure Controls And Procedures Under the supervision 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 the end
of the period covered by this report. 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 Reporting There 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. 
 Part II. Other Information 
 Item 1. Legal Proceedings. None 
 Item 2. Changes in Securities and Use of Proceeds. None 
 Item 3. Defaults upon Senior Securities. None 
 Item 4. Submission of Matters to a Vote of Security Holders. None 
 Item 5. Other Information. None 
 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 filed March 8, 2004 under Item 5,
containing a press release announcing the appointment of E.
Anthony Woods and Craig P.R. Joffe to the Board of Directors. 14




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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, thereunto duly authorized. LCA-VISION INC.Date:
May 3, 2004
    
    /s/ Stephen N. JoffeStephen N. JoffeChairman and Chief Executive OfficerDate:
May 3, 2004
    
    /s/ Alan BuckeyAlan BuckeyChief Financial Officer
 15