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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, 2006.
 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
(State or other jurisdiction of
incorporation or organization)
    
    11-2882328
(IRS Employer
Identification No.)
 7840
Montgomery Road, Cincinnati, Ohio 45236
 (513) 792-9292
   þ o
  þ o o
  o þ




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##### Table of Contents



LCA-Vision Inc.
INDEX
 Part I. Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30,
2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2006
and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17Part II. Other InformationItem 4.
    
    Submission of Matters to Vote of Security Holders
    
    
    17Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits
    
    
    18Signatures
    
    
    19EX-31.1EX-31.2EX-32
 2




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##### Table of Contents



LCA-Vision Inc.
Condensed Consolidated Balance Sheets
 June 30, 2006
    
    
    December 31, 2005AssetsCurrent assetsCash and cash equivalents
    
    $
    131,051
    
    
    $
    111,031Accounts receivable, net of allowance for doubtful accounts of $2,600
and $2,641
    
    
    11,387
    
    
    
    10,520Receivables from vendors
    
    
    3,795
    
    
    
    3,207Prepaid expenses, inventory and other
    
    
    5,612
    
    
    
    4,031Prepaid income taxes
    
    
    4,485
    
    
    
    2,875Deferred tax assets
    
    
    3,561
    
    
    
    3,542Total current assets
    
    
    159,891
    
    
    
    135,206Property and equipment
    
    
    68,641
    
    
    
    63,026Accumulated depreciation and amortization
    
    
    (42,428
    )
    
    
    (38,342
    )Property and equipment, net
    
    
    26,213
    
    
    
    24,684Accounts receivable, net of allowance for doubtful accounts of $508 and $504
    
    
    1,296
    
    
    
    1,132Deferred compensation plan assets
    
    
    3,230
    
    
    
    2,569Investment in unconsolidated businesses
    
    
    481
    
    
    
    158Deferred tax assets
    
    
    2,064
    
    
    
    2,064Other assets
    
    
    1,066
    
    
    
    1,039Total Assets
    
    $
    194,241
    
    
    $
    166,852Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    2,920
    
    
    $
    3,800Accrued liabilities and other
    
    
    11,419
    
    
    
    8,910Debt maturing in one year
    
    
    2,581
    
    
    
    2,122Total current liabilities
    
    
    16,920
    
    
    
    14,832Capital lease obligations
    
    
    1,457
    
    
    
    1,434Deferred compensation liability
    
    
    3,230
    
    
    
    2,569Insurance reserve
    
    
    5,402
    
    
    
    3,840Minority equity interest
    
    
    37
    
    
    
    41Stockholders investmentCommon stock ($0.001 par value; 24,685,172 and 24,368,992 shares and
20,937,878 and 20,768,198 shares issued and outstanding, respectively)
    
    
    25
    
    
    
    24Contributed capital
    
    
    155,619
    
    
    
    145,262Common stock in treasury, at cost (3,747,294 shares and 3,600,794 shares)
    
    
    (23,919
    )
    
    
    (17,671
    )Retained earnings
    
    
    35,449
    
    
    
    16,514Accumulated other comprehensive income
    
    
    21
    
    
    
    7Total stockholders investment
    
    
    167,195
    
    
    
    144,136Total Liabilities and Stockholders Investment
    
    $
    194,241
    
    
    $
    166,852
  3




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LCA-Vision Inc.
Condensed Consolidated Statements of Income
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues    Laser refractive surgery
    
    $
    65,453
    
    
    $
    48,391
    
    
    $
    138,849
    
    
    $
    98,581Operating costs and expensesMedical professional and license fees
    
    
    11,312
    
    
    
    8,745
    
    
    
    24,890
    
    
    
    18,264Direct costs of services
    
    
    18,259
    
    
    
    13,577
    
    
    
    39,174
    
    
    
    26,924General and administrative expenses
    
    
    5,312
    
    
    
    3,111
    
    
    
    10,241
    
    
    
    6,563Marketing and advertising
    
    
    11,421
    
    
    
    8,030
    
    
    
    22,768
    
    
    
    14,803Depreciation
    
    
    2,107
    
    
    
    2,006
    
    
    
    4,042
    
    
    
    3,756Operating income
    
    
    17,042
    
    
    
    12,922
    
    
    
    37,734
    
    
    
    28,271Equity in earnings from unconsolidated businesses
    
    
    185
    
    
    
    
    
    
    
    323
    
    
    
    24Minority equity interest
    
    
    (7
    )
    
    
    (237
    )
    
    
    (15
    )
    
    
    (411
    )Interest expense
    
    
    (64
    )
    
    
    (36
    )
    
    
    (125
    )
    
    
    (49
    )Interest income
    
    
    1,403
    
    
    
    779
    
    
    
    2,841
    
    
    
    1,289Dividend income
    
    
    75
    
    
    
    23
    
    
    
    140
    
    
    
    42Income before taxes on income
    
    
    18,634
    
    
    
    13,451
    
    
    
    40,898
    
    
    
    29,166Income tax expense
    
    
    7,757
    
    
    
    5,623
    
    
    
    16,929
    
    
    
    12,028Net income
    
    $
    10,877
    
    
    $
    7,828
    
    
    $
    23,969
    
    
    $
    17,138Income per common shareBasic
    
    $
    0.52
    
    
    $
    0.38
    
    
    $
    1.15
    
    
    $
    0.84Diluted
    
    $
    0.51
    
    
    $
    0.36
    
    
    $
    1.12
    
    
    $
    0.80Dividends declared per share
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.24
    
    
    $
    0.16Weighted average shares outstandingBasic
    
    
    20,836
    
    
    
    20,429
    
    
    
    20,791
    
    
    
    20,333Diluted
    
    
    21,474
    
    
    
    21,548
    
    
    
    21,469
    
    
    
    21,390
  4




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LCA-Vision Inc.
Condensed Consolidated Statements of Cash Flow
 Six Months Ended June 30,2006
    
    
    2005Cash flow from operating activities:Net income
    
    $
    23,969
    
    
    $
    17,138Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    4,042
    
    
    
    3,756Provision for loss on doubtful accounts
    
    
    (37
    )
    
    
    626Deferred income taxes
    
    
    (19
    )
    
    
    3,517Tax benefit
on disqualified disposition of stock options
    
    
    3,303
    
    
    
    Stock-based compensation
    
    
    2,852
    
    
    
    Deferred compensation
    
    
    661
    
    
    
    527Insurance reserve
    
    
    1,562
    
    
    
    1,038Equity in earnings of unconsolidated affiliates
    
    
    (323
    )
    
    
    (24
    )Changes in working capital:Accounts receivable
    
    
    (994
    )
    
    
    (3,421
    )Receivables from vendors
    
    
    (588
    )
    
    
    (503
    )Prepaid expenses, inventory and other
    
    
    (1,581
    )
    
    
    182Prepaid income taxes
    
    
    (1,610
    )
    
    
    Accounts payable
    
    
    (880
    )
    
    
    (3,059
    )Income taxes payable
    
    
    
    
    
    
    3,616Accrued liabilities and other
    
    
    2,502
    
    
    
    727Net cash provided by operations
    
    $
    32,859
    
    
    $
    24,120Cash flow from investing activities:Purchase of property and equipment
    
    
    (3,856
    )
    
    
    (4,667
    )Distribution from minority equity investees
    
    
    
    
    
    
    187Deferred compensation plan
    
    
    (661
    )
    
    
    (555
    )Other, net
    
    
    (17
    )
    
    
    414Net cash (used in) investing activities
    
    $
    (4,534
    )
    
    $
    (4,621
    )Cash flow from financing activities:Principal payments of long-term notes, debt and capital lease obligations
    
    
    (1,226
    )
    
    
    (424
    )Shares repurchased for treasury stock
    
    
    (6,248
    )
    
    
    Exercise of stock options
    
    
    4,203
    
    
    
    4,870Dividends paid to stockholders
    
    
    (5,034
    )
    
    
    (3,256
    )Net cash (used in) provided by financing activities
    
    
    (8,305
    )
    
    
    1,190Increase in cash and cash equivalents
    
    
    20,020
    
    
    
    20,689Cash and cash equivalents at beginning of period
    
    
    111,031
    
    
    
    86,588Cash and cash equivalents at end of period
    
    $
    131,051
    
    
    $
    107,277
  5




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Summary of Significant Accounting Policies
  About Our Company
 Plus
 Plus
 Internet
 www.lca-vision.com www.lasikplus.com
 Consolidation Policy
  Consolidation  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.
 Equity Method
 6




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
    
    our interest in the entity as an investment on our balance sheets, and
    
    our percentage share of earnings or losses in our income statements
  Use of Estimates
  
    
    Allowance for doubtful accounts  patient financing
 
    
    Loss reserves  insurance captive
 Reclassification
  Allowance for Doubtful Accounts
  Captive Insurance Company Reserves
  Income Taxes
  Per Share Data
  7




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Basic EarningsNet Income
    
    $
    10,877
    
    
    $
    7,828
    
    
    $
    23,969
    
    
    $
    17,138Weighted average shares outstanding
    
    
    20,836
    
    
    
    20,429
    
    
    
    20,791
    
    
    
    20,333Basic earnings per share
    
    $
    0.52
    
    
    $
    0.38
    
    
    $
    1.15
    
    
    $
    0.84Diluted EarningsNet income
    
    $
    10,877
    
    
    $
    7,828
    
    
    $
    23,969
    
    
    $
    17,138Weighted average shares outstanding
    
    
    20,836
    
    
    
    20,429
    
    
    
    20,791
    
    
    
    20,233Effect of dilutive securitiesStock options
    
    
    638
    
    
    
    1,119
    
    
    
    678
    
    
    
    1,057Weighted average common shares and potential dilutive shares
    
    
    21,474
    
    
    
    21,548
    
    
    
    21,469
    
    
    
    21,390Diluted earnings per share
    
    $
    0.51
    
    
    $
    0.36
    
    
    $
    1.12
    
    
    $
    0.80
 Stock-Based Compensation
     8




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Period EndedJune 30, 2006Three Months
    
    Six MonthsDecrease in income before income taxes
    
    $
    1,603
    
    
    $
    2,852Decrease in net income
    
    $
    1,251
    
    
    $
    2,287Decrease in earnings per shareBasic
    
    $
    0.06
    
    
    $
    0.11Diluted
    
    $
    0.06
    
    
    $
    0.11
  Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net income, as reported
    
    $
    7,828
    
    
    $
    17,138Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax
    
    
    (723
    )
    
    
    (1,226
    )Pro forma net income
    
    $
    7,105
    
    
    $
    15,912Earnings per share:Basic  as reported
    
    $
    0.38
    
    
    $
    0.84Basic  pro forma
    
    $
    0.35
    
    
    $
    0.78Diluted  as reported
    
    $
    0.36
    
    
    $
    0.80Diluted  pro forma
    
    $
    0.33
    
    
    $
    0.74
 Stock Incentive Plans
   9




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Stock Options
    Dividend yield
    
    
    1.2Expected volatility
    
    
    75  81
    %Risk-free interest rate
    
    
    3.71  4.33
    %Expected lives (in years)
    
    
    2  3
     10




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Weighted AverageWeighted Average
    
    Remaining
    
    Aggregate IntrinsicStock Options
    
    Exercise Price
    
    Contractual Life
    
    Value (in millions)Outstanding at 1/1/06
    
    
    1,496,640
    
    
    $
    16.64Granted
    
    
    0
    
    
    
    0Exercised
    
    
    (316,180
    )
    
    
    13.29Cancelled/forfeited
    
    
    (24,942
    )
    
    
    25.71Outstanding at 6/30/06
    
    
    1,153,518
    
    
    $
    17.36
    
    
    
    7.23
    
    
    $
    41.0Exercisable at 6/30/06
    
    
    461,365
    
    
    $
    13.80
    
    
    
    6.22
    
    
    $
    18.0
 Restricted Stock
     Number ofNon-Vested Share Unit
    
    Weighted Average GrantAwards
    
    Date Fair ValueOutstanding at 1/1/06
    
    
    0Granted
    
    
    143,271Forfeited
    
    
    (3,375
    )Outstanding at 6/30/06
    
    
    139,896
    
    
    $
    42.73
 Segment Information
  Commitments and Contingencies
  11




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Overview
 Plus
   
    
    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
    
    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
  
    
    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, financing charges and
costs related to other revenues
 12




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
    
    General and administrative costs, including headquarters staff expense and other overhead costs
    
    Marketing and advertising costs
    
    Depreciation of equipment
  2006
    
    2005Procedures
    
    ProceduresQ1
    
    
    53,372
    
    
    
    37,578Q2
    
    
    47,308
    
    
    
    36,010Q3
    
    
    
    
    
    
    34,187Q4
    
    
    
    
    
    
    34,225Year
    
    
    
    
    
    
    142,000
  Results of Operations for the Three Months Ended June 30, 2006 and 2005
  Medical
professional and license fees
  Direct
costs of services
  General
and administrative
  Marketing
and advertising expenses
  13




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Depreciation
expense
  Non-operating
income and expenses
  Income
Taxes
  Q2 2006
    
    
    Q2 2005Federal income taxes
    
    $
    6,415
    
    
    $
    4,537State income taxes, net of federal benefit
    
    
    1,342
    
    
    
    801Foreign income taxes
    
    
    
    
    
    
    285Income tax provision
    
    $
    7,757
    
    
    $
    5,623
 Results of Operations for the Six Months Ended June 30, 2006 and 2005
  Medical
professional and license fees
  Direct
costs of services
  General
and administrative
  Marketing
and advertising expenses
  Depreciation
and amortization
  Non-operating
income and expenses
  14




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Income
Taxes
  For the Six Months EndedJune 30,2006
    
    
    2005Federal income taxes
    
    $
    13,813
    
    
    $
    9,911State income taxes, net of federal benefit
    
    
    3,116
    
    
    
    1,621Foreign income taxes
    
    
    
    
    
    
    496Income tax provision
    
    $
    16,929
    
    
    $
    12,028
 Liquidity and Capital Resources
         15




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New Accounting Pronouncements
  Critical Accounting Estimates
  Accounts Receivable and Allowance for Doubtful Accounts
   Captive Insurance Company Reserves
   16




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Item 3. Quantitative and Qualitative Disclosure About Market 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 Interim 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 June 30, 2006. Based on this evaluation, the Interim CEO and CFO have
concluded that the Companys disclosure controls and procedures are effective to ensure that
material information is (1) accumulated and communicated to our management to allow timely
decisions regarding disclosure and (2) 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 ReportingUnder the supervision of and with the participation of the Companys Interim CEO and CFO, an
evaluation of the Companys internal control over financial reporting was performed as of
June 30, 2006. Based on this evaluation, the Interim CEO and CFO have concluded that 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 like to materially
affect, the Companys internal control over financial reporting.
 Part II. Other Information.
 
 Item 4. Submission of Matters to Vote of Security Holders.
 The Company held its Annual Meeting of Stockholders on June 12, 2006. Four matters were
submitted to the vote of the stockholders. Results were as outlined below:
 Election of directors
 Shares Voted For
    
    Authority WithheldWilliam F. Bahl
    
    
    19,055,980
    
    
    
    523,984Thomas G. Cody
    
    
    19,053,742
    
    
    
    526,222John H. Gutfreund
    
    
    18,734,765
    
    
    
    845,200John C. Hassan
    
    
    19,055,082
    
    
    
    524,882Craig P. R. Joffe
    
    
    19,060,025
    
    
    
    519,940David W. Whiting, M.D.
    
    
    19,134,761
    
    
    
    445,203E. Anthony Woods
    
    
    19,065,323
    
    
    
    514,642
 17




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Amendment of the Companys Restated Certificate of Incorporation, increased the
authorized number of shares of common stock from 27,500,000 to 55,000,000:
 Shares Voted For
    
    Shares Voted Against
    
    Shares Abstaining
    
    Broker Non-Votes18,270,116
    
    
    1,293,281
    
    
    
    16,567
    
    
    
    -0-
 Approval of the LCA-Vision Inc. 2006 Stock Incentive Plan:
 Shares Voted For
    
    Shares Voted Against
    
    Shares Abstaining
    
    Broker Non-Votes13,669,751
    
    
    1,686,499
    
    
    
    50,702
    
    
    
    4,173,012
 Ratification of Ernst & Young as auditors of the Company for the fiscal year
ending December 31, 2006:
 Shares Voted For
    
    Shares Voted Against
    
    Shares Abstaining
    
    Broker Non-Votes19,551,113
    
    
    19,988
    
    
    
    8,863
    
    
    
    -0-
 
 Item 5. Other Information
 Effective July 27, 2006, Dr. Stephen N. Joffe agreed to provide LCA-Vision through December
31, 2006 certain services on an exclusive basis in connection with technological issues,
international expansion opportunities or other non-operational matters. These services will
be provided without additional consideration to that described in LCA-Visions report on
Form 8-K dated as of February 21, 2006. In addition, the parties agreed to mutually release
and not disparage each other.
 
 Item 6. Exhibits
 Number
    
    Description10.1
    
    
    Form of Restricted Stock Unit Award Agreement for Non-Employee
Directors (incorporated by reference from Current Report on Form 8-K dated June
12, 2006, filed June 16, 2006)31.1
    
    
    Interim 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
 18




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Signatures
  LCA-VISION INC.
 Date: August 2, 2006
    /s/ Craig P. R. JoffeCraig P. R. JoffeInterim Chief Executive Officer, Chief Operating
Officer and General CounselDate: August 2, 2006
    /s/ Alan H. BuckeyAlan BuckeyExecutive Vice President/Finance
and Chief Financial Officer 19