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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 June 30, 2002.

[    ]

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)

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: 42,964,762 outstanding shares as of  July 26, 2002.

LCA-VISION INC.

INDEX

LCA-VISION INC.

Notes to Condensed Consolidated Financial Statements

for the Three and Six Months Ended June 30, 2002 and 2001

Summary of Significant Accounting Policies

This filing includes condensed consolidated Balance Sheets as of December 31, 2001 and June 30, 2002; condensed consolidated Statements of Income for the three and six months ended June 30, 2002 and 2001; and condensed consolidated Statements of Cash Flow for the six months ended June 30, 2002 and 2001.  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.

Business

We are a leading developer and operator of free-standing laser refractive surgery centers. Our laser refractive surgery centers provide the staff, facilities, equipment and support services for performing laser vision correction that employ state-of-the-art laser technologies to correct nearsightedness, farsightedness and astigmatism.   The Company currently utilizes three primary excimer lasers:  the Bausch & Lomb Technolas 217, the VISX Star S2/S3 lasers and the Alcon LADARVision.  Substantially all of the revenues from our laser vision correction procedures are derived from our North American Centers.

Operating costs and expenses consist of:

•

Medical professional and license fees, including per-procedure fees for the ophthalmologist performing laser vision correction and the license fee per procedure paid to Bausch & Lomb, VISX and Alcon

•

Direct costs of services, including center rent and utilities, equipment lease and maintenance costs, surgical  supplies, center staff expense, costs related to other revenue, and all other costs associated with providing services in our centers

•

General and administrative associated with corporate overhead costs

•

Marketing and advertising costs

•

Depreciation and amortization of equipment and intangible assets recorded in the balance sheet

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 consolidation when we own a majority of the voting stock of the subsidiary. This means the accounts of our subsidiaries are combined with our accounts. We eliminate intercompany balances and transactions when we consolidate these accounts. Our condensed consolidated financial statements include the accounts of:

•

LCA-Vision Inc.,

•

LCA-Vision (Canada) Inc. and Subsidiaries, and

•

The Baltimore Laser Sight Center, Ltd.

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, and

•

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 and Eyemed LCA Vision LLC and report our investments under the equity method.  

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, 2001, 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.  During January 2002, the Company completed the first of the required impairment tests of goodwill as of January 1, 2002, which indicated that the Company currently has no goodwill impairment.

Use of Estimates

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. These estimates and assumptions affect various matters including:

•

our reported amounts of assets and liabilities in our Condensed Consolidated Balance Sheets at the dates of the financial statements,

•

our disclosure of contingent liabilities at the dates of the financial statements, and

•

our reported amounts of revenues and expenses in our Condensed Consolidated Statements of Income during the reporting periods.

Actual amounts could differ from those estimates.

Per Share Data

Basic per share data is income applicable to common shareholders divided by the weighted average common shares outstanding. Diluted per share data is income applicable to common shareholders divided by the weighted average common shares outstanding plus the potential issuance of common shares if stock options or warrants were exercised.

Following is a reconciliation of basic and diluted earnings per share for the three and six months ended June 30, 2002 and 2001 (in thousands, except per share amounts):

Shareholders' Investment

Common Stock

During the three months ended June 30, 2002, 95,000 shares of common stock were issued to individuals who exercised stock options. The average exercise price was $1.54 per share.

Segment Information

We operate in one segment - laser refractive surgery.

Commitments and Contingencies

None

Item 2.

Management's Discussion and Analysis of Financial Condition 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. For a discussion of important factors that could affect our results, refer to the Overview and financial statement line item discussions set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").

"MD&A" is an analysis of our operating results for the three and six months ended June 30, 2002 and 2001 and our financial condition as of June 30, 2002. It explains why our revenues and costs changed, our overall financial condition, and other matters.

Results of Operations - Revenues

Laser refractive surgery  

In most locations, laser refractive surgery revenues are the global fees charged to our patients.  Certain states prohibit us from practicing medicine, employing physicians to practice medicine on our behalf or employing optometrists to render optometry services on our behalf. Revenues and direct costs from centers in such states do not include the medical professionals fee component. The contribution from laser refractive surgery procedures for each of the three and six months ended June 30, 2002 and 2001 were (dollars in thousands):

The following table illustrates the volume of laser vision correction procedures performed at our centers.

Medical professional expenses and license fees

Medical professional expenses decreased by $319,000 from the second quarter of 2001 due to lower procedure revenues.  License fees were lower from second quarter 2001 by $613,000 as a result of lower procedure volume.

Direct costs of services

Direct costs of services include the salary component of physician compensation, staffing, equipment, medical supplies, and facility costs to operate laser vision correction centers.  These direct costs decreased in the second quarter of 2002 by $1,870,000 compared to the second quarter of 2001, largely because of a decrease in salaries and fringe benefits as a result of cost reduction efforts in prior year, and a decrease in laser rent due to purchase of lasers in 2001.  Medical supplies decreased by $453,000 in the second quarter of 2002 from the second quarter of 2001 as a result of lower procedure volume.  Exclusive of medical supplies, the average direct cost per center per month decreased to $66,100 in the second quarter of 2002 from $67,100 in the first quarter of 2002.    

General and administrative

General and administrative expenses decreased by $81,000 in the second quarter of 2002 from the second quarter of 2001, primarily due to salaries and travel and entertainment.  Costs have increased in insurance, state/local taxes and fringe benefits.  

Marketing and advertising expenses

Marketing and advertising expenses increased by $857,000 in the second quarter of 2002 from the first quarter of 2002.  Compared to the first quarter of 2002, marketing and advertising expenditures increased by $1,002,000.   Expenditures on creative services increased in the second quarter of 2002.  We expect to benefit from the new advertising creative in the second half of 2002 as marketing and advertising expenditures should decrease from the levels spent in the first half of the year.

Depreciation and amortization

Depreciation and amortization increased by $54,000 in the second quarter of 2002 from the second quarter of 2001, primarily by the result of the purchase of lasers and other equipment that had been leased in the past.

Non-operating income and expenses

Short-term interest decreased $163,000 in the second quarter of 2002 from the second quarter of 2001 as a result of lower short-term investments and decrease in interest rates.

Income Taxes

The Company utilized federal and state net operating loss carryforwards in the second quarter of 2002.  Income tax expense of $23,000 is due to non-U.S. operations.

Liquidity and Capital Resources

Net cash provided by operating activities in the first six months of 2002 was $2,696,000, which when combined with beginning-of-year cash and short-term investment balances, was used to purchase property and equipment and to fund the Company’s treasury stock purchases.

As of June 30, 2002 we have cash and cash equivalents of $16,388,000.  

During the second quarter of 2000, the directors initiated a program to encourage additional direct stock ownership by senior management of the company.  The Company offered loans to nine key managers and directors for the purpose of purchasing shares in the open market.  Each loan is a personal obligation of the borrower, and is evidenced by a promissory note.  The interest rate on the notes is prime less one and one-half percent.  The notes have a maximum term of three years, and contain provisions for early repayment.  A total of $1,510,000 has been loaned under this program since inception.

As of June 30, 2002 we maintained a $10,000,000 revolving credit facility with The Provident Bank (“Provident”).  In addition to the revolving credit facility, the company has a $10,000,000 credit commitment for funding acquisitions.  Both of these credit arrangements expire June 30, 2003.

Factors That May Affect Future Results and Market Price of Stock

For a detailed discussion that may affect future results, please refer to the Company's last 10-K and 10-Q.  No material new risks have developed since the filing of these reports.

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.

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

The Company held its Annual Meeting of Stockholders on May 13, 2002.  The only matter submitted to the vote of the stockholders was the election of directors.  All incumbent directors were re-elected, with the following vote totals:

Item 5.

Other Information

None

Part II.

Other Information (continued)

Item 6.

Exhibits and Reports on Form 8-K.

(a)

Exhibits

None

(a)

Reports on Form 8-K  

1)

Form 8-K dated April 26, 2002, containing a press release announcing that the Company will release 2002 first quarter financial results before market open on Wednesday, May 1, 2002.  

2)

Form 8-K dated May 13, 2002, containing a press release announcing that all four members of its board of directors were unanimously re-elected by stockholders at the company’s annual meeting.

3)

Form 8-K dated June 6, 2002, containing a press release endorsing the new professional guidelines for patient selection issued by the Eye Surgery Education Council of the American Society of Cataract and Refractive Surgery.

Signatures

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

LCA-VISION INC.