##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
 For
the quarterly period ended June 30, 2005.
 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
  þ o
  þ o




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##### Table of Contents



Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flow for the Three and Six Months Ended June 30, 2005 and 2004
    
    
    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 5. Submission of Matters to Vote of Security Holders
    
    
    14Item 6. Exhibits
    
    
    14Signatures
    
    
    15EX-31.1EX-31.2EX-32
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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 LCA-Vision Inc.
 
 Condensed Consolidated Balance Sheets
 June 30, 2005
    
    December 31, 2004AssetsCurrent assetsCash and cash equivalents
    
    $
    107,277
    
    
    $
    86,588Accounts receivable, net of allowance for doubtful accounts of $2,839
and $2,260
    
    
    11,221
    
    
    
    8,662Receivables from vendors
    
    
    1,580
    
    
    
    1,077Prepaid expenses and other
    
    
    2,238
    
    
    
    2,420Deferred tax assets
    
    
    2,974
    
    
    
    6,015Total current assets
    
    
    125,290
    
    
    
    104,762Property and equipment
    
    
    55,862
    
    
    
    50,374Accumulated depreciation and amortization
    
    
    (35,474
    )
    
    
    (31,743
    )Property and equipment, net
    
    
    20,388
    
    
    
    18,631Accounts receivable, net of allowance for doubtful accounts of $652 and $605
    
    
    1,407
    
    
    
    1,171Goodwill
    
    
    275
    
    
    
    275Deferred compensation plan assets
    
    
    1,742
    
    
    
    1,187Investment in unconsolidated businesses
    
    
    5
    
    
    
    168Deferred tax assets
    
    
    2,117
    
    
    
    2,593Other assets
    
    
    787
    
    
    
    790Total Assets
    
    $
    152,011
    
    
    $
    129,577Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    1,905
    
    
    $
    4,964Accrued liabilities and other
    
    
    8,202
    
    
    
    7,474Income taxes payable
    
    
    3,716
    
    
    
    100Debt maturing in one year
    
    
    867
    
    
    
    542Total current liabilities
    
    
    14,690
    
    
    
    13,080Capital lease obligations
    
    
    495
    
    
    
    376Deferred compensation liability
    
    
    1,742
    
    
    
    1,215Insurance reserve
    
    
    3,606
    
    
    
    2,568Minority equity interest
    
    
    912
    
    
    
    501Stockholders investmentCommon stock ($0.001 par value; 24,093,084 and 23,767,353 shares and
20,542,290 and 20,216,559 shares issued and outstanding, respectively)
    
    
    24
    
    
    
    24Contributed capital
    
    
    139,578
    
    
    
    134,708Common stock in treasury, at cost (3,550,794 shares and 3,550,794 shares)
    
    
    (15,462
    )
    
    
    (15,462
    )Accumulated
earnings (deficit)
    
    
    6,150
    
    
    
    (7,732
    )Accumulated other comprehensive income
    
    
    276
    
    
    
    299Total stockholders investment
    
    
    130,566
    
    
    
    111,837Total Liabilities and Stockholders Investment
    
    $
    152,011
    
    
    $
    129,577
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LCA-Vision Inc.
 
 Condensed Consolidated Statements of Income
 Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Revenues    Laser refractive surgery
    
    $
    48,391
    
    
    $
    31,554
    
    
    $
    98,581
    
    
    $
    63,204Operating costs and expensesMedical professional and license fees
    
    
    8,745
    
    
    
    5,891
    
    
    
    18,264
    
    
    
    12,356Direct costs of services
    
    
    13,577
    
    
    
    10,350
    
    
    
    26,924
    
    
    
    19,981General and administrative expenses
    
    
    3,111
    
    
    
    2,306
    
    
    
    6,563
    
    
    
    4,595Marketing and advertising
    
    
    8,030
    
    
    
    4,991
    
    
    
    14,803
    
    
    
    9,780Depreciation
    
    
    2,006
    
    
    
    1,743
    
    
    
    3,756
    
    
    
    3,458Operating income
    
    
    12,922
    
    
    
    6,273
    
    
    
    28,271
    
    
    
    13,034Equity in earnings from unconsolidated businesses
    
    
    
    
    
    
    113
    
    
    
    24
    
    
    
    185Minority equity interest
    
    
    (237
    )
    
    
    (181
    )
    
    
    (411
    )
    
    
    (305
    )Interest expense
    
    
    (36
    )
    
    
    (1
    )
    
    
    (49
    )
    
    
    (1
    )Interest income
    
    
    779
    
    
    
    498
    
    
    
    1,289
    
    
    
    865Dividend income
    
    
    23
    
    
    
    8
    
    
    
    42
    
    
    
    8Income before taxes on income
    
    
    13,451
    
    
    
    6,710
    
    
    
    29,166
    
    
    
    13,786Income tax
expense (benefit)
    
    
    5,623
    
    
    
    (4,139
    )
    
    
    12,028
    
    
    
    (9,792
    )Net income
    
    $
    7,828
    
    
    $
    10,849
    
    
    $
    17,138
    
    
    $
    23,578Income per common shareBasic
    
    $
    0.38
    
    
    $
    0.54
    
    
    $
    0.84
    
    
    $
    1.18Diluted
    
    $
    0.36
    
    
    $
    0.52
    
    
    $
    0.80
    
    
    $
    1.14Dividends declared per share
    
    $
    0.08
    
    
    $
    
    
    
    $
    0.16
    
    
    $
    Weighted average shares outstandingBasic
    
    
    20,429
    
    
    
    20,078
    
    
    
    20,333
    
    
    
    20,030Diluted
    
    
    21,548
    
    
    
    20,806
    
    
    
    21,390
    
    
    
    20,723
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LCA-Vision Inc.
 
 Condensed Consolidated Statements of Cash Flow
 Six Months Ended June 30,2005
    
    2004Cash flow from operating activities:Net income
    
    $
    17,138
    
    
    $
    18,677Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation
    
    
    3,756
    
    
    
    3,458Provision for loss on doubtful accounts
    
    
    626
    
    
    
    762Deferred income taxes
    
    
    3,517
    
    
    
    (5,900
    )Deferred compensation
    
    
    527
    
    
    
    280Insurance reserve
    
    
    1,038
    
    
    
    737Equity in earnings of unconsolidated affiliates
    
    
    (24
    )
    
    
    (113
    )Changes in working capital:Accounts receivable
    
    
    (3,421
    )
    
    
    (3,988
    )Receivables from vendors
    
    
    (503
    )
    
    
    (167
    )Prepaid expenses and other
    
    
    182
    
    
    
    804Accounts payable
    
    
    (3,059
    )
    
    
    (2,040
    )Income taxes payable
    
    
    3,616
    
    
    
    38Accrued liabilities and other
    
    
    727
    
    
    
    2,414Net cash provided by operations
    
    
    24,120
    
    
    
    14,962Cash flow from investing activities:Purchase of property and equipment
    
    
    (4,667
    )
    
    
    (1,746
    )Purchase of investments  equity
    
    
    
    
    
    
    (300
    )Deferred compensation plan
    
    
    (555
    )
    
    
    (312
    )Other, net
    
    
    414
    
    
    
    258Net cash used in investing activities
    
    
    (4,808
    )
    
    
    (2,100
    )Cash flow from financing activities:Principal payments of long-term notes, debt and capital lease obligations
    
    
    (424
    )
    
    
    Dividends paid to stockholders
    
    
    (3,256
    )
    
    
    Exercise of stock options
    
    
    4,870
    
    
    
    1,718Distribution from minority equity investees
    
    
    187
    
    
    
    78Net cash provided by financing activities
    
    
    1,377
    
    
    
    1,796Increase in cash and cash equivalents
    
    
    20,689
    
    
    
    14,658Cash and cash equivalents at beginning of period
    
    
    86,588
    
    
    
    64,908Cash and cash equivalents at end of period
    
    $
    107,277
    
    
    $
    79,566
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Summary of Significant Accounting Policies
  About Our Company
 Plus
  Internet
 www.lca-vision.com www.lasikplus.com
 Consolidation Policy
 Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and
Certain Other Entities with Contractual Management Agreements Consolidation of
Variable Interest Entities, An Interpretation of ARB No. 51.
 Use of Estimates
  
    
    Allowance for doubtful accounts  patient financing
    
    Loss reserves  insurance captive
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Allowance for Doubtful Accounts
  Captive Insurance Company Reserves
  Income Tax Benefit
  Per Share Data
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    

June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Basic EarningsNet Income
    
    $
    7,828
    
    
    $
    10,849
    
    
    $
    17,138
    
    
    $
    23,578Weighted average shares outstanding
    
    
    20,429
    
    
    
    20,078
    
    
    
    20,333
    
    
    
    20,030Basic earnings per share
    
    $
    0.38
    
    
    $
    0.54
    
    
    $
    0.84
    
    
    $
    1.18Diluted earnings:Net income
    
    $
    7,828
    
    
    $
    10,849
    
    
    $
    17,138
    
    
    $
    23,578Weighted average shares outstanding
    
    
    20,429
    
    
    
    20,078
    
    
    
    20,233
    
    
    
    20,030Effect of dilutive securitiesStock options
    
    
    1,119
    
    
    
    728
    
    
    
    1,057
    
    
    
    693Weighted average common shares and potential dilutive shares
    
    
    21,548
    
    
    
    20,806
    
    
    
    21,390
    
    
    
    20,723Diluted earnings per share
    
    $
    0.36
    
    
    $
    0.52
    
    
    $
    0.80
    
    
    $
    1.14
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Stock-Based Compensation
 Accounting for Stock-Based Compensation  Transition and
Disclosure Accounting for Stock-Based Compensation
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    As reported
    
    $
    7,828
    
    
    $
    10,849
    
    
    $
    17,138
    
    
    $
    23,578Pro forma
    
    $
    7,105
    
    
    $
    10,340
    
    
    $
    15,912
    
    
    $
    22,582Basic per share income
    
    As reported
    
    $
    0.38
    
    
    $
    0.54
    
    
    $
    0.84
    
    
    $
    1.18Pro forma
    
    $
    0.35
    
    
    $
    0.51
    
    
    $
    0.78
    
    
    $
    1.13Diluted per share
income
    
    As reported
    
    $
    0.36
    
    
    $
    0.52
    
    
    $
    0.80
    
    
    $
    1.14Pro forma
    
    $
    0.33
    
    
    $
    0.50
    
    
    $
    0.74
    
    
    $
    1.09
 (R) Share-Based Payment (R) (R) (R)
 Segment Information
  Commitments and Contingencies
  8




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Overview
 Plus
   
    
    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
    
    
    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
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
    
    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
  2005
    
    
    2004Procedures
    
    
    ProceduresQ1
    
    
    37,578
    
    
    
    24,270Q2
    
    
    36,010
    
    
    
    24,093Q3
    
    
    
    
    
    
    23,248Q4
    
    
    
    
    
    
    24,224Year
    
    
    73,578
    
    
    
    95,835
  Results of Operations for the Three Months Ended June 30, 2005 and 2004
   Medical professional and license fees
  Direct costs of services
  General and administrative
  Marketing and advertising expenses
  10




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Depreciation and amortization
  Non-operating income and expenses
  Income Taxes
  Q2 2005
    
 Q2 2004Federal income taxes
    
    $
    4,537
    
    
    $
    2,427State income taxes, net of federal benefit
    
    
    801
    
    
    
    340Foreign income taxes
    
    
    285
    
    
    
    188Change in valuation allowance
    
    
    
    
    
    
    (7,094
    )Income tax provision (benefit)
    
    $
    5,623
    
    
    $
    (4,139
    )
  Results of Operations for the Six Months Ended June 30, 2005 and 2004
   Medical professional and license fees
  Direct costs of services
  General and administrative
  Marketing and advertising expenses
  11




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Depreciation and amortization
  Non-operating income and expenses
  Income Taxes
  For the Six Months EndedJune 30,2005
    
    2004Federal income taxes
    
    $
    9,911
    
    
    $
    4,810State income taxes, net of federal benefit
    
    
    1,621
    
    
    
    743Foreign income taxes
    
    
    496
    
    
    
    336Change in valuation allowance
    
    
    
    
    
    
    (15,681
    )Income tax provision (benefit)
    
    $
    12,028
    
    
    $
    (9,792
    )
  Liquidity and Capital Resources
       12




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Critical Accounting Estimates
  Accounts Receivable and Allowance for Doubtful Accounts
   Captive Insurance Company Reserves
   Income Taxes
  13




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Item 3. Quantitative and Qualitative Disclosure About Market Risk.
   
 Item 4. Controls and Procedures.
 (a)
    
    Evaluation Of Disclosure Controls And Procedures
  (b)
    
    Changes In Internal Control Over Financial Reporting
  
 Part II. Other Information.
 
 Item 5. Submission of Matters to Vote of Security Holders.
  Shares Voted
    
    
    AuthorityFor
    
    
    WithheldStephen N. Joffe
    
    
    18,894,054
    
    
    
    1,136,687William F. Bahl
    
    
    18,934,782
    
    
    
    1,095,959Thomas G. Cody
    
    
    18,931,944
    
    
    
    1,098,796William O. Coleman
    
    
    18,501,178
    
    
    
    1,529,563John H. Gutfreund
    
    
    18,113,721
    
    
    
    1,917,019John C. Hassan
    
    
    18,131,634
    
    
    
    1,899,107Craig P. R. Joffe
    
    
    18,932,099
    
    
    
    1,098,642E. Anthony Woods
    
    
    18,505,568
    
    
    
    1,525,173
 
 Item 6. 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
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Signatures
  LCA-VISION INC.
 Date: August 3, 2005
    
    /s/ Stephen N. JoffeStephen N. JoffeChairman and Chief Executive OfficerDate: August 3, 2005
    
    /s/ Alan H. BuckeyAlan BuckeyChief Financial Officer
 15