##### 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.
  o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT.
 
 0-27610
 LCA-Vision Inc.
 
  Delaware
    
    11-2882328(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)
  
   
   þ o
  þ o o
  o þ




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##### 



LCA-Vision Inc.
INDEX
 Part I.   Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2006
and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    18Part II.   Other InformationItem 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 6.
    
    Exhibits
    
    
    19Signatures
    
    
    20EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LCA-Vision Inc.
 
 Condensed Consolidated Balance Sheets
  September 30, 2006
    
    
    December 31, 2005AssetsCurrent assetsCash and cash equivalents
    
    $
    53,662
    
    
    $
    110,531Short-term investments
    
    
    76,377
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of $2,420 and$2,641
    
    
    12,234
    
    
    
    10,520Receivables from vendors
    
    
    3,335
    
    
    
    3,207Prepaid expenses and other
    
    
    4,916
    
    
    
    4,031Prepaid income taxes
    
    
    2,172
    
    
    
    2,875Deferred tax assets
    
    
    3,501
    
    
    
    3,542Total current assets
    
    
    156,197
    
    
    
    134,706Property and equipment
    
    
    72,703
    
    
    
    63,026Accumulated depreciation and amortization
    
    
    (44,594
    )
    
    
    (38,342
    )Property and equipment, net
    
    
    28,109
    
    
    
    24,684Accounts receivable, net of allowance for doubtful accounts of $435 and $504
    
    
    1,807
    
    
    
    1,132Deferred compensation plan assets
    
    
    3,489
    
    
    
    2,569Investment in unconsolidated businesses
    
    
    662
    
    
    
    158Deferred tax assets
    
    
    1,880
    
    
    
    2,064Other assets
    
    
    1,604
    
    
    
    1,539Total Assets
    
    $
    193,748
    
    
    $
    166,852Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    4,267
    
    
    $
    3,800Accrued liabilities and other
    
    
    10,359
    
    
    
    8,910Debt maturing in one year
    
    
    2,456
    
    
    
    2,122Total current liabilities
    
    
    17,082
    
    
    
    14,832Capital lease obligations
    
    
    2,081
    
    
    
    1,434Deferred compensation liability
    
    
    3,601
    
    
    
    2,569Insurance reserve
    
    
    6,020
    
    
    
    3,840Minority equity interest
    
    
    42
    
    
    
    41Stockholders investmentCommon stock ($0.001 par value; 24,783,597 and 24,368,992 shares and
20,786,303 and 20,768,198 shares issued and outstanding, respectively)
    
    
    25
    
    
    
    24Contributed capital
    
    
    159,069
    
    
    
    145,262Common stock in treasury, at cost (3,997,294 shares and 3,600,794 shares)
    
    
    (34,494
    )
    
    
    (17,671
    )Retained earnings
    
    
    40,244
    
    
    
    16,514Accumulated other comprehensive income
    
    
    78
    
    
    
    7Total stockholders investment
    
    
    164,922
    
    
    
    144,136Total Liabilities and Stockholders Investment
    
    $
    193,748
    
    
    $
    166,852
  3




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##### Table of Contents



LCA-Vision Inc.
 
 Condensed Consolidated Statements of Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues  Laser refractive surgery
    
    $
    59,302
    
    
    $
    47,031
    
    
    $
    198,152
    
    
    $
    145,612Operating costs and expensesMedical professional and license fees
    
    
    10,026
    
    
    
    8,629
    
    
    
    34,916
    
    
    
    26,893Direct costs of services
    
    
    18,840
    
    
    
    13,049
    
    
    
    58,014
    
    
    
    39,973General and administrative expenses
    
    
    5,457
    
    
    
    3,307
    
    
    
    15,698
    
    
    
    9,870Marketing and advertising
    
    
    12,896
    
    
    
    7,995
    
    
    
    35,663
    
    
    
    22,797Depreciation
    
    
    2,150
    
    
    
    2,023
    
    
    
    6,193
    
    
    
    5,779Operating income
    
    
    9,933
    
    
    
    12,028
    
    
    
    47,668
    
    
    
    40,300Equity in earnings from unconsolidated businesses
    
    
    181
    
    
    
    222
    
    
    
    504
    
    
    
    245Minority equity interest
    
    
    (4
    )
    
    
    (4
    )
    
    
    (20
    )
    
    
    (415
    )Net investment income
    
    
    1,523
    
    
    
    1,094
    
    
    
    4,380
    
    
    
    2,377Income before taxes on income
    
    
    11,633
    
    
    
    13,340
    
    
    
    52,532
    
    
    
    42,507Income tax expense
    
    
    4,388
    
    
    
    5,394
    
    
    
    21,318
    
    
    
    17,423Net income
    
    $
    7,245
    
    
    $
    7,946
    
    
    $
    31,214
    
    
    $
    25,084Income per common shareBasic
    
    $
    0.35
    
    
    $
    0.39
    
    
    $
    1.50
    
    
    $
    1.23Diluted
    
    $
    0.34
    
    
    $
    0.37
    
    
    $
    1.46
    
    
    $
    1.17Dividends declared per share
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.36
    
    
    $
    0.24Weighted average shares outstandingBasic
    
    
    20,827
    
    
    
    20,611
    
    
    
    20,805
    
    
    
    20,426Diluted
    
    
    21,279
    
    
    
    21,576
    
    
    
    21,405
    
    
    
    21,453
  4




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LCA-Vision Inc.
 
 Condensed Consolidated Statements of Cash Flow
  Nine Months EndedSeptember 30,2006
    
    
    2005Cash flow from operating activities:Net income
    
    $
    31,214
    
    
    $
    25,084Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    6,193
    
    
    
    5,779(Reduction in) provision for loss on doubtful accounts
    
    
    (290
    )
    
    
    782Deferred income taxes
    
    
    213
    
    
    
    2,946Tax benefit on disqualified disposition of stock options
    
    
    4,352
    
    
    
    Stock-based compensation
    
    
    4,383
    
    
    
    Deferred compensation
    
    
    1,032
    
    
    
    939Insurance reserve
    
    
    2,180
    
    
    
    1,279Equity in earnings of unconsolidated affiliates
    
    
    (504
    )
    
    
    (245
    )Changes in working capital:Accounts receivable
    
    
    (2,099
    )
    
    
    (4,185
    )Receivables from vendors
    
    
    (128
    )
    
    
    (1,074
    )Prepaid expenses, inventory and other
    
    
    (885
    )
    
    
    (230
    )Prepaid income taxes
    
    
    703
    
    
    
    Accounts payable
    
    
    467
    
    
    
    (1,787
    )Income taxes payable
    
    
    
    
    
    
    1,546Accrued liabilities and other
    
    
    1,470
    
    
    
    1,720Net cash provided by operations
    
    
    48,301
    
    
    
    32,554Cash flow from investing activities:Purchase of property and equipment
    
    
    (6,449
    )
    
    
    (6,796
    )Purchase of investment securities
    
    
    (215,235
    )
    
    
    Proceeds from sale of investment securities
    
    
    138,868
    
    
    
    Distribution from Minority Equity Investees
    
    
    
    
    
    
    186Deferred compensation plan
    
    
    (920
    )
    
    
    (967
    )Increase in investment of unconsolidated affiliate
    
    
    
    
    
    
    (883
    )Other, net
    
    
    6
    
    
    
    149Net cash used in investing activities
    
    
    (83,730
    )
    
    
    (8,311
    )Cash flow from financing activities:Principal payments of long-term notes, debt and capital lease obligations
    
    
    (2,187
    )
    
    
    (714
    )Shares repurchased for treasury stock
    
    
    (16,823
    )
    
    
    (2,209
    )Exercise of stock options
    
    
    5,073
    
    
    
    6,626Distribution paid to minority equity investers
    
    
    (19
    )
    
    
    Dividends paid to stockholders
    
    
    (7,484
    )
    
    
    (4,911
    )Net cash used in financing activities
    
    
    (21,440
    )
    
    
    (1,208
    )(Decrease) increase in cash and cash equivalents
    
    
    (56,869
    )
    
    
    23,035Cash and cash equivalents at beginning of period
    
    
    110,531
    
    
    
    86,088Cash and cash equivalents at end of period
    
    $
    53,662
    
    
    $
    109,123
  5




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LCA-Vision Inc.
 
 Notes to Condensed Consolidated Financial Statements
 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.
 6




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Equity Method
 
  Use of Estimates
  
    
    Allowance for doubtful accounts  patient financing
 
    
    Loss reserves  insurance captive
 Reclassification
  Short-term Investments
   EstimatedGross
    
    
    Gross
    
    
    Fair ValueUnrealized
    
    
    Unrealized
    
    
    (Net CarryingAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Value)Corporate bonds
    
    $
    17,795
    
    
    $
    
    
    
    $
    
    
    
    $
    17,795US Government securities
    
    
    11,449
    
    
    
    25
    
    
    
    
    
    
    
    11,474Municipal bonds
    
    
    47,104
    
    
    
    14
    
    
    
    (10
    )
    
    
    47,108Total short term investments
    
    $
    76,348
    
    
    $
    39
    
    
    $
    (10
    )
    
    $
    76,377
   7




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##### Table of Contents



Amortized Cost
    
    
    Estimated Fair ValueDue in one year or less
    
    $
    29,609
    
    
    $
    29,611Due after one year through three years
    
    
    14,751
    
    
    
    14,774Due after three years
    
    
    31,988
    
    
    
    31,992Total debt securities
    
    $
    76,348
    
    
    $
    76,377
 Allowance for Doubtful Accounts
  Captive Insurance Company Reserves
  Income Taxes
   Per Share Data
  8




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Earnings per ShareNet income
    
    $
    7,245
    
    
    $
    7,946
    
    
    $
    31,214
    
    
    $
    25,084Weighted average shares outstanding
    
    
    20,827
    
    
    
    20,611
    
    
    
    20,805
    
    
    
    20,426Basic earnings per share
    
    $
    0.35
    
    
    $
    0.39
    
    
    $
    1.50
    
    
    $
    1.23Diluted Earnings per ShareNet income
    
    $
    7,245
    
    
    $
    7,946
    
    
    $
    31,214
    
    
    $
    25,084Weighted average shares outstanding
    
    
    20,827
    
    
    
    20,611
    
    
    
    20,805
    
    
    
    20,426Effect of dilutive securitiesStock options and restricted stock
    
    
    452
    
    
    
    965
    
    
    
    600
    
    
    
    1,027Weighted average common shares and potential dilutive shares
    
    
    21,279
    
    
    
    21,576
    
    
    
    21,405
    
    
    
    21,453Diluted earnings per share
    
    $
    0.34
    
    
    $
    0.37
    
    
    $
    1.46
    
    
    $
    1.17
 Stock-Based Compensation
     9




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Period EndedSeptember 30, 2006Three Months
    
    
    Nine MonthsDecrease in income before income taxes
    
    $
    1,531
    
    
    $
    4,383Decrease in net income
    
    $
    1,202
    
    
    $
    3,489Decrease in earnings per shareBasic
    
    $
    0.06
    
    
    $
    0.17Diluted
    
    $
    0.06
    
    
    $
    0.16
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    7,946
    
    
    $
    25,084Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of tax
    
    
    703
    
    
    
    1,888Pro forma net income
    
    $
    7,243
    
    
    $
    23,196Earnings per share:Basic  as reported
    
    $
    0.39
    
    
    $
    1.23Basic  pro forma
    
    $
    0.35
    
    
    $
    1.14Diluted  as reported
    
    $
    0.37
    
    
    $
    1.17Diluted  pro forma
    
    $
    0.34
    
    
    $
    1.08
 Stock Incentive Plans
    10




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##### Table of Contents



Stock Options
    Dividend yield
    
    
    1.2Expected volatility
    
    
    78 - 79
    %Risk-free interest rate
    
    
    3.75 - 3.99
    %Expected lives (in years)
    
    
    3
     11




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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
    
    
    (411,754
    )
    
    
    12.33Cancelled/forfeited
    
    
    (29,945
    )
    
    
    25.21Outstanding at 9/30/06
    
    
    1,052,941
    
    
    
    18.08
    
    
    
    6.97
    
    
    
    24.5Exercisable at 9/30/06
    
    
    476,105
    
    
    
    14.91
    
    
    
    6.13
    
    
    
    12.6
 Restricted Stock
     WeightedNumber of
    
    
    AverageShare Unit
    
    
    Grant DateAwards
    
    
    Fair ValueOutstanding at 1/1/06
    
    
    -0-Granted
    
    
    146,122Released
    
    
    (2,851
    )Forfeited
    
    
    (6,250
    )Outstanding at 9/30/06
    
    
    137,021
    
    
    $
    42.45
 Segment Information
  Commitments and Contingencies
  12




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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
 13




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##### Table of Contents




    
    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
    
    
    47,308
    
    
    
    36,010Q3
    
    
    42,539
    
    
    
    34,187Q4
    
    
    
    
    
    
    34,225Year
    
    
    
    
    
    
    142,000
  Results of Operations for the Three Months Ended September 30, 2006 and 2005
   Medical professional and license fees
 Direct costs of services
 14




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##### Table of Contents



General and administrative
 Marketing and advertising expenses
 Depreciation expense
 Non-operating income and expenses
 Income Taxes
 Q3 2006
    
    
    Q3 2005Federal income taxes
    
    $
    4,109
    
    
    $
    4,596State income taxes, net of federal benefit
    
    
    279
    
    
    
    798Income tax provision
    
    $
    4,388
    
    
    $
    5,394
  Results of Operations for the Nine Months Ended September 30, 2006 and 2005
  Medical professional and license fees
 Direct costs of services
 15




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General and administrative
 Marketing and advertising expenses
 Depreciation and amortization
 Non-operating income and expenses
 Income Taxes
 For the Nine Months EndedSeptember 30,2006
    
    
    2005Federal income taxes
    
    $
    17,922
    
    
    $
    14,508State income taxes, net of federal benefit
    
    
    3,396
    
    
    
    2,419Foreign income taxes
    
    
    
    
    
    
    496Income tax provision
    
    $
    21,318
    
    
    $
    17,423
 Liquidity and Capital Resources
    16




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New Accounting Pronouncements
  Critical Accounting Estimates
  17




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##### Table of Contents



Accounts Receivable and Allowance for Doubtful Accounts
   Captive Insurance Company Reserves
   
 Item 3. Quantitative and Qualitative Disclosure About Market Risk.
   
 Item 4. Controls and Procedures.
 (a)
    
    Evaluation of Disclosure Controls and Procedures
Under 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 September 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.
 18




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##### Table of Contents



(b)
    
    Changes in Internal Control over Financial Reporting
Under 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
September 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 (c) Total Number of
    
    
    (d) Maximum NumberShares Purchased as
    
    
    of Shares that MayPart of Publicly
    
    
    Yet be Purchased(a) Total Number of
    
    
    (b) Average Price
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Shares Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    Program07/01/06  07/31/06
    
    
    50,000
    
    
    $
    42.31
    
    
    
    50,000
    
    
    
    753,50008/01/06  08/31/06
    
    
    200,000
    
    
    $
    42.30
    
    
    
    200,000
    
    
    
    553,50009/01/06  09/30/06
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    553,500Total
    
    
    250,000
    
    
    $
    42.30
    
    
    
    250,000
    
    
    
    553,500
 
 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
 19




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Signatures
  LCA-VISION INC.
 Date:
    
    October
30, 2006
    
    
    
    /s/ Craig P. R. JoffeCraig P. R. Joffe
Interim Chief Executive Officer, Chief Operating
Officer and General CounselDate:
    
    October
30, 2006
    
    
    
    /s/ Alan H. BuckeyAlan Buckey
Executive Vice President/Finance
and Chief Financial Officer
 20