##### 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 March 31, 2007.
 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.
 (Exact name of registrant as specified in its charter)
 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 o
 o þ




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##### 



Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
    
    3Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    19Item 4. Controls and Procedures
    
    19Part II. Other InformationItem 6. Exhibits
    
    19Signatures
    
    20EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LCA-Vision Inc.
 
 Condensed Consolidated Balance Sheets (Unaudited)
 March 31, 2007
    
    
    December 31, 2006(Restated)AssetsCurrent assetsCash and cash equivalents
    
    $
    51,529
    
    
    $
    27,251Short-term investments
    
    
    71,550
    
    
    
    70,801Accounts receivable, net of allowance for doubtful accounts of $2,400 and $2,310
    
    
    13,870
    
    
    
    12,160Receivables from vendors
    
    
    5,853
    
    
    
    3,310Prepaid professional fees
    
    
    2,456
    
    
    
    2,223Prepaid expenses and other
    
    
    5,693
    
    
    
    6,414Prepaid income taxes
    
    
    
    
    
    
    1,667Deferred tax assets
    
    
    10,534
    
    
    
    11,155Total current assets
    
    
    161,485
    
    
    
    134,981Property and equipment
    
    
    80,157
    
    
    
    77,323Accumulated depreciation and amortization
    
    
    (48,535
    )
    
    
    (46,399
    )Property and equipment, net
    
    
    31,622
    
    
    
    30,924Accounts receivable, net of allowance for doubtful accounts of $869 and $532
    
    
    3,523
    
    
    
    2,174Deferred compensation plan assets
    
    
    4,518
    
    
    
    4,090Investment in unconsolidated businesses
    
    
    1,058
    
    
    
    904Deferred tax assets
    
    
    12,517
    
    
    
    12,141Other assets
    
    
    4,598
    
    
    
    4,256Total assets
    
    $
    219,321
    
    
    $
    189,470Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    10,518
    
    
    $
    5,264Accrued liabilities and other
    
    
    11,765
    
    
    
    9,111Deferred revenue
    
    
    24,562
    
    
    
    22,234Income taxes payable
    
    
    3,145
    
    
    
    Capital lease obligations maturing in one year
    
    
    3,977
    
    
    
    3,360Total current liabilities
    
    
    53,967
    
    
    
    39,969Capital lease obligations
    
    
    1,995
    
    
    
    2,431Deferred compensation liability
    
    
    4,519
    
    
    
    4,136Insurance reserve
    
    
    6,889
    
    
    
    6,163Deferred revenue
    
    
    30,902
    
    
    
    27,608Minority equity interest
    
    
    55
    
    
    
    47Stockholders investmentCommon stock ($0.001 par value; 25,070,597 and 24,814,542 shares and 20,066,649
and 19,821,348 shares issued and outstanding, respectively)
    
    
    25
    
    
    
    25Contributed capital
    
    
    167,556
    
    
    
    162,245Common stock in treasury, at cost (5,003,948 shares and 4,993,194 shares)
    
    
    (69,939
    )
    
    
    (69,487
    )Retained earnings
    
    
    23,390
    
    
    
    16,320Accumulated
other comprehensive (loss) income
    
    
    (38
    )
    
    
    13Total stockholders investment
    
    
    120,994
    
    
    
    109,116Total liabilities and stockholders investment
    
    $
    219,321
    
    
    $
    189,470
  3




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##### Table of Contents



LCA-Vision Inc.
 
 Condensed Consolidated Statements of Income (Unaudited)
 Three months ended March 31,2007
    
    
    2006(Restated)Revenues  Laser refractive surgery
    
    $
    78,663
    
    
    $
    66,750Operating costs and expensesMedical professional and license fees
    
    
    13,975
    
    
    
    12,914Direct costs of services
    
    
    24,465
    
    
    
    20,915General and administrative expenses
    
    
    5,198
    
    
    
    4,930Marketing and advertising
    
    
    17,178
    
    
    
    11,346Depreciation
    
    
    2,304
    
    
    
    1,935Operating income
    
    
    15,543
    
    
    
    14,710Equity in earnings from unconsolidated businesses
    
    
    154
    
    
    
    138Investment income
    
    
    1,694
    
    
    
    1,503Interest expense
    
    
    (83
    )
    
    
    (61
    )Other expense, net
    
    
    (10
    )
    
    
    (8
    )Income before taxes on income
    
    
    17,298
    
    
    
    16,282Income tax expense
    
    
    6,372
    
    
    
    6,855Net income
    
    $
    10,926
    
    
    $
    9,427Income per common shareBasic
    
    $
    0.55
    
    
    $
    0.45Diluted
    
    $
    0.54
    
    
    $
    0.44Dividends declared per share
    
    $
    0.18
    
    
    $
    0.12Weighted average shares outstandingBasic
    
    
    19,903
    
    
    
    20,745Diluted
    
    
    20,274
    
    
    
    21,465
  4




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LCA-Vision Inc.
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 Three Months Ended March 31,2007
    
    
    2006(Restated)Cash flow from operating activities:Net income
    
    $
    10,926
    
    
    $
    9,427Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    2,304
    
    
    
    1,935Provision for loss on doubtful accounts
    
    
    1,460
    
    
    
    693Deferred income taxes
    
    
    268
    
    
    
    (1,624
    )Tax benefit on disqualified disposition of stock options
    
    
    82
    
    
    
    12Stock based compensation
    
    
    1,240
    
    
    
    1,249Deferred compensation
    
    
    384
    
    
    
    450Insurance reserve
    
    
    726
    
    
    
    932Equity in earnings of unconsolidated affiliates
    
    
    (154
    )
    
    
    (138
    )Changes in
operating assets and liabilitiesAccounts receivable
    
    
    (4,519
    )
    
    
    (990
    )Receivables from vendors
    
    
    (2,543
    )
    
    
    (902
    )Prepaid expenses and other
    
    
    721
    
    
    
    (611
    )Prepaid income taxes
    
    
    1,667
    
    
    
    2,875Accounts payable
    
    
    5,254
    
    
    
    (487
    )Deferred revenue, net of professional fees
    
    
    5,060
    
    
    
    5,982Income taxes payable
    
    
    3,145
    
    
    
    2,909Accrued liabilities and other
    
    
    2,441
    
    
    
    2,627Net cash provided by operations
    
    $
    28,462
    
    
    $
    24,339Cash flow from investing activities:Purchases of property and equipment
    
    
    (1,973
    )
    
    
    (1,702
    )Purchases of investment securities
    
    
    (63,163
    )
    
    
    Proceeds from sale of investment securities
    
    
    62,324
    
    
    
    Deferred compensation plan
    
    
    (429
    )
    
    
    (450
    )Other, net
    
    
    (18
    )
    
    
    Net cash used in investing activities
    
    $
    (3,259
    )
    
    $
    (2,152
    )Cash flow from financing activities:Principal payments of capital lease obligations
    
    
    (849
    )
    
    
    (693
    )Shares repurchased for treasury stock
    
    
    (452
    )
    
    
    (6,248
    )Tax benefits related to stock-based compensation
    
    
    1,094
    
    
    
    542Exercise of stock options
    
    
    2,895
    
    
    
    1,027Distribution paid to minority equity investees
    
    
    
    
    
    
    (19
    )Dividends paid to stockholders
    
    
    (3,613
    )
    
    
    (2,500
    )Net cash used in financing activities
    
    
    (925
    )
    
    
    (7,891
    )Increase in cash and cash equivalents
    
    
    24,278
    
    
    
    14,296Cash and cash equivalents at beginning of period
    
    
    27,251
    
    
    
    110,531Cash and cash equivalents at end of period
    
    $
    51,529
    
    
    $
    124,827
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Summary of Significant Accounting Policies
  Restatement of Financial Information
 Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts
  Year after Initial
    AmortizationSurgery
    Rate3
    15%4
    13%5
    11%6
    7%7
    3%
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##### Table of Contents



Three months ended March 31,2006PreviouslyReported
    
    
    RestatedRevenues  Laser refractive surgery
    
    $
    73,396
    
    
    $
    66,750Operating costs and expensesMedical professional and license fees
    
    
    13,578
    
    
    
    12,914Direct costs of services
    
    
    20,915
    
    
    
    20,915General and administrative expenses
    
    
    4,930
    
    
    
    4,930Marketing and advertising
    
    
    11,346
    
    
    
    11,346Depreciation
    
    
    1,935
    
    
    
    1,935Operating income
    
    
    20,692
    
    
    
    14,710Equity in earnings from unconsolidated businesses
    
    
    138
    
    
    
    138Investment income
    
    
    1,503
    
    
    
    1,503Interest expense
    
    
    (61
    )
    
    
    (61
    )Other expense, net
    
    
    (8
    )
    
    
    (8
    )Income before taxes on income
    
    
    22,264
    
    
    
    16,282Income tax expense
    
    
    9,172
    
    
    
    6,855Net income
    
    $
    13,092
    
    
    $
    9,427Income per common shareBasic
    
    $
    0.63
    
    
    $
    0.45Diluted
    
    $
    0.61
    
    
    $
    0.44Dividends declared per share
    
    $
    0.12
    
    
    $
    0.12Weighted average shares outstandingBasic
    
    
    20,745
    
    
    
    20,745Diluted
    
    
    21,465
    
    
    
    21,465
 7




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##### Table of Contents



December 31, 2006Previously Reported
    
    
    RestatedAssetsCurrent assetsCash and cash equivalents
    
    $
    27,251
    
    
    $
    27,251Short-term investments
    
    
    70,801
    
    
    
    70,801Accounts receivable, net of allowance for doubtful accounts of $2,400 and $2,310
    
    
    12,160
    
    
    
    12,160Receivables from vendors
    
    
    3,310
    
    
    
    3,310Prepaid professional fees
    
    
    
    
    
    
    2,223Prepaid expenses and other
    
    
    6,414
    
    
    
    6,414Prepaid income taxes
    
    
    1,667
    
    
    
    1,667Deferred tax assets
    
    
    3,022
    
    
    
    11,155Total current assets
    
    
    124,625
    
    
    
    134,981Property and equipment
    
    
    77,323
    
    
    
    77,323Accumulated depreciation and amortization
    
    
    (46,399
    )
    
    
    (46,399
    )Property and equipment, net
    
    
    30,924
    
    
    
    30,924Accounts receivable, net of allowance for doubtful accounts of $869 and $532
    
    
    2,174
    
    
    
    2,174Deferred compensation plan assets
    
    
    4,090
    
    
    
    4,090Investment in unconsolidated businesses
    
    
    904
    
    
    
    904Deferred tax assets
    
    
    2,775
    
    
    
    12,141Other assets
    
    
    1,495
    
    
    
    4,256Total assets
    
    $
    166,987
    
    
    $
    189,470Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    5,264
    
    
    $
    5,264Accrued liabilities and other
    
    
    9,111
    
    
    
    9,111Deferred revenue
    
    
    
    
    
    
    22,234Capital lease obligations maturing in one year
    
    
    3,360
    
    
    
    3,360Total current liabilities
    
    
    17,735
    
    
    
    39,969Capital lease obligations
    
    
    2,431
    
    
    
    2,431Deferred compensation liability
    
    
    4,136
    
    
    
    4,136Insurance reserve
    
    
    6,163
    
    
    
    6,163Deferred revenue
    
    
    
    
    
    
    27,608Minority equity interest
    
    
    47
    
    
    
    47Stockholders investmentCommon stock ($0.001 par value; 25,070,597 and 24,814,542 shares and 20,066,649
and 19,821,348 shares issued and outstanding, respectively)
    
    
    25
    
    
    
    25Contributed capital
    
    
    162,245
    
    
    
    162,245Common stock in treasury, at cost (5,003,948 shares and 4,993,194 shares)
    
    
    (69,487
    )
    
    
    (69,487
    )Retained earnings
    
    
    43,679
    
    
    
    16,320Accumulated other comprehensive income
    
    
    13
    
    
    
    13Total stockholders investment
    
    
    136,475
    
    
    
    109,116Total liabilities and stockholders investment
    
    $
    166,987
    
    
    $
    189,470
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##### Table of Contents



Three Months Ended March 31,2006PreviouslyReported
    
    
    RestatedCash flow from operating activities:Net income
    
    $
    13,092
    
    
    $
    9,427Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    1,935
    
    
    
    1,935Provision for loss on doubtful accounts
    
    
    693
    
    
    
    693Deferred income taxes
    
    
    693
    
    
    
    (1,624
    )Tax benefit on disqualified disposition of stock options
    
    
    12
    
    
    
    12Stock based compensation
    
    
    1,249
    
    
    
    1,249Deferred compensation
    
    
    450
    
    
    
    450Insurance reserve
    
    
    932
    
    
    
    932Equity in earnings of unconsolidated affiliates
    
    
    (138
    )
    
    
    (138
    )Changes in
operating assets and liabilitiesAccounts receivable
    
    
    (990
    )
    
    
    (990
    )Receivables from vendors
    
    
    (902
    )
    
    
    (902
    )Prepaid expenses and other
    
    
    (611
    )
    
    
    (611
    )Prepaid income taxes
    
    
    2,875
    
    
    
    2,875Accounts payable
    
    
    (487
    )
    
    
    (487
    )Deferred revenue, net of professional fees
    
    
    
    
    
    
    5,982Income taxes payable
    
    
    2,909
    
    
    
    2,909Accrued liabilities and other
    
    
    2,627
    
    
    
    2,627Net cash provided by operations
    
    $
    24,339
    
    
    $
    24,339Cash flow from investing activities:Purchases of property and equipment
    
    
    (1,702
    )
    
    
    (1,702
    )Deferred compensation plan
    
    
    (450
    )
    
    
    (450
    )Net cash used in investing activities
    
    $
    (2,152
    )
    
    $
    (2,152
    )Cash flow from financing activities:Principal payments of capital lease obligations
    
    
    (693
    )
    
    
    (693
    )Shares repurchased for treasury stock
    
    
    (6,248
    )
    
    
    (6,248
    )Tax benefits related to stock-based compensation
    
    
    542
    
    
    
    542Exercise of stock options
    
    
    1,027
    
    
    
    1,027Distribution paid to minority equity investees
    
    
    (19
    )
    
    
    (19
    )Dividends paid to stockholders
    
    
    (2,500
    )
    
    
    (2,500
    )Net cash used in financing activities
    
    
    (7,891
    )
    
    
    (7,891
    )Increase in cash and cash equivalents
    
    
    14,296
    
    
    
    14,296Cash and cash equivalents at beginning of period
    
    
    110,531
    
    
    
    110,531Cash and cash equivalents at end of period
    
    $
    124,827
    
    
    $
    124,827
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##### Table of Contents



About Our Company
 Plus
  Internet
 www.lca-vision.com www.lasikplus.com
 Consolidation and Basis of Presentation
 Application of FASB Statement 94
and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual
Management Agreements
 Use of Estimates
  Reclassification
  Short-term Investments
  10




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Estimated FairGross
    
    Gross
    
    Value (NetAmortized
    
    Unrealized
    
    Unrealized
    
    CarryingCost
    
    Gains
    
    Losses
    
    Value)Corporate bonds
    
    $
    13,438
    
    
    $
    
    
    
    $
    
    
    
    $
    13,438US Government securities
    
    
    10,968
    
    
    
    19
    
    
    
    (2
    )
    
    
    10,985Municipal bonds
    
    
    47,278
    
    
    
    12
    
    
    
    (163
    )
    
    
    47,127Total short term investments
    
    $
    71,684
    
    
    $
    31
    
    
    $
    (165
    )
    
    $
    71,550
    Amortized
    
    EstimatedCost
    
    Fair ValueDue in one year or less
    
    $
    28,084
    
    
    $
    28,011Due after one year through three years
    
    
    12,163
    
    
    
    12,109Due after three years
    
    
    31,437
    
    
    
    31,430Total securities
    
    $
    71,684
    
    
    $
    71,550
  Allowance for Doubtful Accounts
  11




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Accrued Enhancement Expense and Deferred Revenue
  Accounting for Separately Priced Extended Warranty and Product
Maintenance Contracts.
 Captive Insurance Company Reserves
  Income Taxes
  Accounting for Uncertainty in Income
Taxes
   12




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##### Table of Contents



Per Share Data
   Three Months EndedMarch 31,2007
    
    2006(Restated)Basic Earnings:Net income
    
    $
    10,926
    
    
    $
    9,427Weighted average shares outstanding  basic
    
    
    19,903
    
    
    
    20,745Basic earnings per share
    
    $
    0.55
    
    
    $
    0.45Diluted Earnings:Net income
    
    $
    10,926
    
    
    $
    9,427Weighted average shares outstanding  basic
    
    
    19,903
    
    
    
    20,745Effect of dilutive securitiesStock options
    
    
    336
    
    
    
    716Restricted stock
    
    
    35
    
    
    
    4Weighted average common shares and potential
dilutive shares
    
    
    20,274
    
    
    
    21,465Diluted earnings per share
    
    $
    0.54
    
    
    $
    0.44
 Revenue Recognition
  Stock-Based Compensation
 Share Based Payment
 13




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Commitments and Contingencies
    New Accounting Pronouncement
 Fair Value Measurements
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  14




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Quarter EndedMarch 31, 2006Previously reported
    
    $
    13,092Pre-tax adjustments:Deferred revenues
    
    
    (6,646
    )Deferred professional fees
    
    
    664Total pre-tax adjustments
    
    $
    (5,982
    )Related tax effect  provision for /
(benefit from)
    
    
    2,317Net after-tax adjustments
    
    
    (3,665
    )Restated
    
    $
    9,427
 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
    
    Pricing of our services and acuity plans
 15




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##### Table of Contents




    
    Medical professional and license fees, including per procedure fees for the
ophthalmologists performing laser vision correction and license fees per procedure paid to
certain equipment 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
    
    General and administrative costs, including headquarters staff expense and other overhead costs
    
    Marketing and advertising costs
    
    Depreciation of equipment
  2007
    
    2006Procedures
    
    ProceduresQ1
    
    
    59,101
    
    
    
    53,372Q2
    
    
    
    
    
    
    47,308Q3
    
    
    
    
    
    
    42,539Q4
    
    
    
    
    
    
    42,049Year
    
    
    
    
    
    
    185,268
  Results of Operations for the Three Months Ended March 31, 2007 and 2006
  Revenue from higher procedure volume
    
    $
    7,879,000Impact from average selling price, before revenue deferral
    
    $
    3,010,0001st quarter 2007 deferred revenue
    
    ($
    12,117,000
    )1st quarter 2007 benefit from amortization of prior deferred revenue
    
    $
    6,495,0001st quarter 2006 deferred revenue
    
    $
    10,665,0001st quarter 2006 benefit from amortization of prior deferred revenue
    
    ($
    4,019,000
    )
   Medical professional and license fees
  16




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Direct costs of services
  General and administrative
  Marketing and advertising expenses
  Depreciation expense
  Non-operating income and expenses
  Income Taxes
  March 31,
    
    
    March 31,2007
    
    
    2006(Restated)Federal income taxes
    
    $
    5,374
    
    
    $
    5,304State income taxes, net of federal benefit
    
    
    998
    
    
    
    1,551Income tax provision
    
    $
    6,372
    
    
    $
    6,855
  Liquidity and Capital Resources
   17




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New Accounting Pronouncements
 Fair Value Measurements
 Critical Accounting Estimates
  18




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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 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
March 31, 2007. Based on this evaluation, and giving effect to the remediation actions
discussed in Item 4(b) below, 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 ReportingWe have fully remediated the material weakness in our internal control over financial
reporting with respect to the deferral of revenues associated with separately priced
extended warranties pursuant to FTB 90-1 as more fully described in our Amended Annual
Report on Form 10-K/A. Our remediation actions included:
 
    
    The review of and deferral of revenues associated with all historical
sales of separately priced extended warranties consistent with the application of
FTB 90-1, and the recording of accounting adjustments as appropriate; and
    
    Implementation of controls and processes to properly account for the
deferral of revenues associated with separately priced extended warranties going forward. These controls
and processes include new reconciliation and monitoring controls.
 Otherwise, there were no significant changes in internal control over financial reporting,
or in other factors, that occurred during the period covered by this quarterly report that
have materially affected, or are reasonable likely to materially affect, the Companys
internal control over financial reporting.
 
 PART II. OTHER INFORMATION.
 
 Item 6. Exhibits
 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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##### Table of Contents



Signatures
  LCA-VISION INC.Date: May 10, 2007
    
    /s/ Steven C. StrausSteven C. StrausChief Executive OfficerDate: May 10, 2007
    
    /s/ Alan H. BuckeyAlan BuckeyChief Financial Officer
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