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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) OFTHE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended March 31, 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
    
    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, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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
    
    
    16Item 4. Controls and Procedures
    
    
    16Part II. Other InformationItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 6. Exhibits
    
    
    16Signatures
    
    
    17EX-31.1EX-31.2EX-32
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LCA-Vision Inc.
 
 Condensed Consolidated Balance Sheets
  March 31,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assetsCash and cash equivalents
    
    $
    125,327
    
    
    $
    111,031Accounts receivable, net of allowance for doubtful accounts of $2,580
and $2,641
    
    
    10,783
    
    
    
    10,520Receivables from vendors
    
    
    4,109
    
    
    
    3,207Prepaid expenses, inventory and other
    
    
    4,642
    
    
    
    4,031Income taxes receivable
    
    
    
    
    
    
    2,875Deferred tax assets
    
    
    2,849
    
    
    
    3,542Total current assets
    
    
    147,710
    
    
    
    135,206Property and equipment
    
    
    65,865
    
    
    
    63,026Accumulated depreciation and amortization
    
    
    (40,268
    )
    
    
    (38,342
    )Property and equipment, net
    
    
    25,597
    
    
    
    24,684Accounts receivable, net of allowance for doubtful accounts of $483 and $504
    
    
    1,166
    
    
    
    1,132Deferred compensation plan assets
    
    
    3,019
    
    
    
    2,569Investment in unconsolidated businesses
    
    
    296
    
    
    
    158Deferred tax assets
    
    
    2,064
    
    
    
    2,064Other assets
    
    
    1,043
    
    
    
    1,039Total Assets
    
    $
    180,895
    
    
    $
    166,852Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    3,313
    
    
    $
    3,800Accrued liabilities and other
    
    
    11,534
    
    
    
    8,910Income taxes payable
    
    
    2,909
    
    
    
    Debt maturing in one year
    
    
    1,753
    
    
    
    2,122Total current liabilities
    
    
    19,509
    
    
    
    14,832Capital lease obligations
    
    
    2,259
    
    
    
    1,434Deferred compensation liability
    
    
    3,019
    
    
    
    2,569Insurance reserve
    
    
    4,772
    
    
    
    3,840Minority equity interest
    
    
    31
    
    
    
    41Stockholders investmentCommon stock ($0.001 par value; 24,437,431 and 24,368,992 shares
and 20,690,137 and 20,768,198 shares issued and outstanding, respectively)
    
    
    24
    
    
    
    24Contributed capital
    
    
    148,092
    
    
    
    145,262Common stock in treasury, at cost (3,747,294 shares and 3,600,794 shares)
    
    
    (23,919
    )
    
    
    (17,671
    )Retained earnings
    
    
    27,106
    
    
    
    16,514Accumulated other comprehensive income
    
    
    2
    
    
    
    7Total stockholders investment
    
    
    151,305
    
    
    
    144,136Total Liabilities and Stockholders Investment
    
    $
    180,895
    
    
    $
    166,852
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LCA-Vision Inc.
 
 Condensed Consolidated Statements of Income
  Three
Months Ended March 31,2006
    
    
    2005Revenues  Laser refractive surgery
    
    $
    73,396
    
    
    $
    50,190Operating costs and expensesMedical professional and license fees
    
    
    13,578
    
    
    
    9,520Direct costs of services
    
    
    20,915
    
    
    
    13,347General and administrative expenses
    
    
    4,930
    
    
    
    3,453Marketing and advertising
    
    
    11,346
    
    
    
    6,772Depreciation
    
    
    1,935
    
    
    
    1,750Operating income
    
    
    20,692
    
    
    
    15,348Equity in earnings from unconsolidated businesses
    
    
    138
    
    
    
    24Minority equity interest
    
    
    (8
    )
    
    
    (173
    )Interest expense
    
    
    (61
    )
    
    
    (13
    )Investment income
    
    
    1,503
    
    
    
    530Income before taxes on income
    
    
    22,264
    
    
    
    15,716Income tax expense
    
    
    9,172
    
    
    
    6,405Net income
    
    $
    13,092
    
    
    $
    9,311Income per common shareBasic
    
    $
    0.63
    
    
    $
    0.46Diluted
    
    $
    0.61
    
    
    $
    0.44Dividends declared per share
    
    $
    0.12
    
    
    $
    0.08Weighted average shares outstandingBasic
    
    
    20,745
    
    
    
    20,236Diluted
    
    
    21,465
    
    
    
    21,200
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LCA-Vision Inc.
 
 Condensed Consolidated Statements of Cash Flow
  Three
Months Ended March 31,2006
    
    
    2005Cash flow from operating activities:Net income
    
    $
    13,092
    
    
    $
    9,311Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    1,935
    
    
    
    1,750Provision for loss on doubtful accounts
    
    
    (82
    )
    
    
    318Deferred income taxes
    
    
    693
    
    
    
    3,713Tax benefit on disqualified disposition of stock options
    
    
    554
    
    
    
    Stock-based compensation
    
    
    1,249
    
    
    
    Deferred compensation
    
    
    450
    
    
    
    264Insurance reserve
    
    
    932
    
    
    
    694Equity in earnings of unconsolidated affiliates
    
    
    (138
    )
    
    
    (24
    )Changes in working capital:Accounts receivable
    
    
    (215
    )
    
    
    (1,135
    )Receivables from vendors
    
    
    (902
    )
    
    
    (443
    )Prepaid expenses, inventory and other
    
    
    (611
    )
    
    
    819Income taxes receivable
    
    
    2,875
    
    
    
    Accounts payable
    
    
    (487
    )
    
    
    (2,552
    )Income taxes payable
    
    
    2,909
    
    
    
    Accrued liabilities and other
    
    
    2,627
    
    
    
    3,139Net cash provided by operations
    
    $
    24,881
    
    
    $
    15,854Cash flow from investing activities:Purchase of property and equipment
    
    
    (1,702
    )
    
    
    (1,354
    )Distribution from minority equity investees
    
    
    
    
    
    
    95Deferred compensation plan
    
    
    (450
    )
    
    
    (161
    )Other, net
    
    
    
    
    
    
    176Net cash used in investing activities
    
    $
    (2,152
    )
    
    $
    (1,244
    )Cash flow from financing activities:Principal payments of long-term notes, debt and capital lease obligations
    
    
    (693
    )
    
    
    (100
    )Shares repurchased for treasury stock
    
    
    (6,248
    )
    
    
    Exercise of stock options
    
    
    1,027
    
    
    
    663Distribution paid to minority equity investees
    
    
    (19
    )
    
    
    Dividends paid to stockholders
    
    
    (2,500
    )
    
    
    (1,621
    )Net cash used by financing activities
    
    
    (8,433
    )
    
    
    (1,058
    )Increase in cash and cash equivalents
    
    
    14,296
    
    
    
    13,552Cash and cash equivalents at beginning of period
    
    
    111,031
    
    
    
    86,588Cash and cash equivalents at end of period
    
    $
    125,327
    
    
    $
    100,140
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Summary of Significant Accounting Policies
  About Our Company
 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
 Allowance for Doubtful Accounts
  Captive Insurance Company Reserves
  Per Share Data
   7




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Three Months EndedMarch 31,2006
    
    
    2005Basic earnings:Net income
    
    $
    13,092
    
    
    $
    9,311Weighted average shares outstanding
    
    
    20,745
    
    
    
    20,236Basic earnings per share
    
    $
    0.63
    
    
    $
    0.46Diluted earnings:Net income
    
    $
    13,092
    
    
    $
    9,311Weighted average shares outstanding
    
    
    20,745
    
    
    
    20,236Effect of dilutive securitiesStock options
    
    
    716
    
    
    
    964Restricted stock
    
    
    4
    
    
    
    Weighted average common shares and potential
dilutive shares
    
    
    21,465
    
    
    
    21,200Diluted earnings per share
    
    $
    0.61
    
    
    $
    0.44
 Stock-Based Compensation
      8




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Three Months EndedMarch 31,(in thousands, except per share data)
    
    2006
    
    
    2005Income before stock compensation expense
    
    $
    14,128
    
    
    $
    9,311Stock compensation expense included in net income
    
    
    (1,036
    )
    
    
    Net income
    
    $
    13,092
    
    
    $
    9,311Pro forma stock compensation expense
    
    
    
    
    
    
    (495
    )Pro forma net income
    
    
    
    
    
    $
    8,816Basic earnings per common share:Income before stock compensation expense
    
    $
    0.68
    
    
    $
    0.46Stock compensation expense included in net
income
    
    
    (0.05
    )
    
    
    Net income
    
    $
    0.63
    
    
    $
    0.46Pro forma compensation expense
    
    
    
    
    
    
    (0.02
    )Pro forma net income
    
    
    
    
    
    $
    0.44Diluted earnings per common share:Income before stock compensation expense
    
    $
    0.66
    
    
    $
    0.44Stock compensation expense included in net
income
    
    
    (0.05
    )
    
    
    Net income
    
    $
    0.61
    
    
    $
    0.44Pro forma stock compensation expense
    
    
    
    
    
    
    (0.02
    )Pro forma net income
    
    
    
    
    
    $
    0.42
 Stock Incentive Plans
    9




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Stock Options
    Dividend yield
    
    
    1.2Expected volatility
    
    
    80 - 81%Risk-free interest rate
    
    
    3.71 - 4.33%Expected lives (in years)
    
    
    3
     10




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WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicStock
    
    
    Exercise
    
    
    Contractual
    
    
    Value (inOptions
    
    
    Price
    
    
    Life
    
    
    millions)Outstanding at 1/1/06
    
    
    1,494,640
    
    
    $
    16.64Granted
    
    
    0
    
    
    
    0Exercised
    
    
    (68,439
    )
    
    
    15.08Cancelled/forfeited
    
    
    20,862
    
    
    
    26.77Outstanding at 3/31/06
    
    
    1,405,339
    
    
    $
    16.56
    
    
    
    7.22
    
    
    
    47.1Exercisable at 3/31/06
    
    
    620,650
    
    
    $
    14.01
    
    
    
    6.25
    
    
    
    22.4
  Restricted Stock
    Number of
    
    
    WeightedNon-Vested
    
    
    AverageShare Unit
    
    
    Grand DateAwards
    
    
    Fair ValueGranted
    
    
    134,351
    
    
    
    42.45
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Segment Information
  Commitments and Contingencies
  
 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 equipment suppliers of our excimer lasers
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
    
    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
  2006
    
    
    2005Procedures
    
    
    ProceduresQ1
    
    
    53,372
    
    
    
    37,578Q2
    
    
    
    
    
    
    36,010Q3
    
    
    
    
    
    
    34,187Q4
    
    
    
    
    
    
    34,225Year
    
    
    
    
    
    
    142,000
  Results of Operations for the Three Months Ended March 31, 2006 and 2005
   Medical professional and license fees
  Direct costs of services
  General and administrative
  13




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Marketing and advertising expenses
  Depreciation expense
  Non-operating income and expenses
  Income Taxes
  Q1 2006
    
    
    Q1 2005Federal income taxes
    
    $
    7,398
    
    
    $
    5,374State income taxes, net of federal benefit
    
    
    1,774
    
    
    
    820Foreign income taxes
    
    
    
    
    
    
    211Income tax provision (benefit)
    
    $
    9,172
    
    
    $
    6,405
 Liquidity and Capital Resources
        14




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New Accounting Pronouncements
  Critical Accounting Estimates
  Accounts Receivable and Allowance for Doubtful Accounts
   Captive Insurance Company Reserves
   15




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Item 3. Quantitative and Qualitative Disclosure About Market Risk.
   
 Item 4. Controls and Procedures.
     
 Part II. Other Information.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 (c) Total Number of
    
    
    (d) Maximum(a) Total
    
    
    
    
    
    
    Shares Purchased as
    
    
    Number of SharesNumber of
    
    
    (b) Average
    
    
    Part of Publicly
    
    
    that May Yet beShares
    
    
    Price Paid per
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    Plans or Program01/01/06 - 01/31/06
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    950,00002/01/06 - 02/28/06
    
    
    40,000
    
    
    $
    44.41
    
    
    
    40,000
    
    
    
    910,00003/01/06 - 03/31/06
    
    
    106,500
    
    
    $
    41.99
    
    
    
    106,500
    
    
    
    803,500Total
    
    
    146,500
    
    
    $
    42.65
    
    
    
    146,500
    
    
    
    803,500
 
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Item 6. Exhibits
  Number
    
    Description31.1
    
    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
 
 Signatures
  LCA-VISION INC.
 Date:   May 9, 2006
    /s/ Craig P. R. JoffeCraig P. R. JoffeInterim Chief Executive Officer,
Chief Operating Officer and General Counsel Date:   May 9, 2006
    /s/ Alan H. BuckeyAlan BuckeyChief Financial Officer 17