##### Table of Contents



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




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Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flow for the Nine Months
Ended September 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 6. Exhibits
    
    
    15Signatures
    
    
    16EX-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
  September 30,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    $
    109,623
    
    
    $
    86,588Accounts
receivable, net of allowance for doubtful accounts of $3,057 and $2,260
    
    
    11,930
    
    
    
    8,662Receivables from vendors
    
    
    2,151
    
    
    
    1,077Prepaid expenses and other
    
    
    2,650
    
    
    
    2,420Deferred tax assets
    
    
    3,369
    
    
    
    6,015Total current assets
    
    
    129,723
    
    
    
    104,762Property and equipment
    
    
    57,277
    
    
    
    50,374Accumulated depreciation and amortization
    
    
    (37,192
    )
    
    
    (31,743
    )Property and equipment, net
    
    
    20,085
    
    
    
    18,631Accounts receivable, net of allowance for doubtful accounts of $590 and $605
    
    
    1,306
    
    
    
    1,171Goodwill
    
    
    275
    
    
    
    275Deferred compensation plan assets
    
    
    2,154
    
    
    
    1,187Investment in unconsolidated businesses
    
    
    1,104
    
    
    
    168Deferred tax assets
    
    
    2,293
    
    
    
    2,593Other assets
    
    
    735
    
    
    
    790Total Assets
    
    $
    157,675
    
    
    $
    129,577Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    3,177
    
    
    $
    4,964Accrued liabilities and other
    
    
    9,199
    
    
    
    7,474Income taxes payable
    
    
    1,646
    
    
    
    100Debt maturing in one year
    
    
    1,150
    
    
    
    542Total current liabilities
    
    
    15,172
    
    
    
    13,080Capital lease obligations
    
    
    357
    
    
    
    376Deferred compensation liability
    
    
    2,154
    
    
    
    1,215Insurance reserve
    
    
    3,847
    
    
    
    2,568Minority equity interest
    
    
    39
    
    
    
    501Stockholders investmentCommon stock ($0.001 par value; 24,254,526 and 23,767,353 shares and
20,653,732 and 20,216,559 shares issued and outstanding, respectively)
    
    
    24
    
    
    
    24Contributed capital
    
    
    141,334
    
    
    
    134,708Common stock in treasury, at cost (3,600,794 shares and 3,550,794 shares)
    
    
    (17,671
    )
    
    
    (15,462
    )Accumulated earnings (deficit)
    
    
    12,441
    
    
    
    (7,732
    )Accumulated other comprehensive (loss) income
    
    
    (22
    )
    
    
    299Total stockholders investment
    
    
    136,106
    
    
    
    111,837Total Liabilities and Stockholders Investment
    
    $
    157,675
    
    
    $
    129,577
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Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues  Laser refractive surgery
    
    $
    47,031
    
    
    $
    31,203
    
    
    $
    145,612
    
    
    $
    94,406Operating costs and expensesMedical professional and license fees
    
    
    8,629
    
    
    
    5,733
    
    
    
    26,893
    
    
    
    18,090Direct costs of services
    
    
    13,049
    
    
    
    10,526
    
    
    
    39,973
    
    
    
    30,506General and administrative expenses
    
    
    3,307
    
    
    
    2,232
    
    
    
    9,870
    
    
    
    6,827Marketing and advertising
    
    
    7,995
    
    
    
    5,400
    
    
    
    22,797
    
    
    
    15,180Depreciation and amortization
    
    
    2,023
    
    
    
    1,775
    
    
    
    5,779
    
    
    
    5,233Operating income
    
    
    12,028
    
    
    
    5,537
    
    
    
    40,300
    
    
    
    18,570Equity in earnings from unconsolidated businesses
    
    
    222
    
    
    
    99
    
    
    
    245
    
    
    
    284Minority equity interest
    
    
    (4
    )
    
    
    (150
    )
    
    
    (415
    )
    
    
    (455
    )Net interest
income
    
    
    1,049
    
    
    
    627
    
    
    
    2,289
    
    
    
    1,491Other income
    
    
    45
    
    
    
    17
    
    
    
    88
    
    
    
    25Income before taxes on income
    
    
    13,340
    
    
    
    6,130
    
    
    
    42,507
    
    
    
    19,915Income tax expense (benefit)
    
    
    5,394
    
    
    
    2,535
    
    
    
    17,423
    
    
    
    (7,258
    )Net income
    
    $
    7,946
    
    
    $
    3,595
    
    
    $
    25,084
    
    
    $
    27,173Income per common shareBasic
    
    $
    0.39
    
    
    $
    0.18
    
    
    $
    1.23
    
    
    $
    1.35Diluted
    
    $
    0.37
    
    
    $
    0.17
    
    
    $
    1.17
    
    
    $
    1.31Dividends declared per share
    
    $
    0.08
    
    
    $
    0.05
    
    
    $
    0.24
    
    
    $
    0.05Weighted average shares outstandingBasic
    
    
    20,611
    
    
    
    20,148
    
    
    
    20,426
    
    
    
    20,069Diluted
    
    
    21,576
    
    
    
    20,802
    
    
    
    21,453
    
    
    
    20,748
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LCA-Vision Inc.
 
 Condensed Consolidated Statements of Cash Flow
  Nine Months Ended September 30,2005
    
    
    2004Cash flow from operating activities:Net income
    
    $
    25,084
    
    
    $
    27,173Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    5,779
    
    
    
    5,233Provision for loss on doubtful accounts
    
    
    782
    
    
    
    946Deferred income taxes
    
    
    2,946
    
    
    
    (9,101
    )Deferred compensation
    
    
    939
    
    
    
    506Insurance reserve
    
    
    1,279
    
    
    
    1,111Equity in earnings of unconsolidated affiliates
    
    
    (245
    )
    
    
    (284
    )Distribution from minority equity investees
    
    
    186
    
    
    
    150Changes in working capital:Accounts receivable
    
    
    (4,185
    )
    
    
    (4,861
    )Receivables from vendors
    
    
    (1,074
    )
    
    
    (32
    )Prepaid expenses, inventory and other
    
    
    (230
    )
    
    
    515Accounts payable
    
    
    (1,787
    )
    
    
    (2,920
    )Income taxes payable
    
    
    1,546
    
    
    
    9Accrued liabilities and other
    
    
    1,720
    
    
    
    2,348Net cash provided by operations
    
    $
    32,740
    
    
    $
    20,793Cash flow from investing activities:Purchase of property and equipment
    
    
    (6,796
    )
    
    
    (3,745
    )Deferred compensation plan
    
    
    (967
    )
    
    
    (508
    )Increase in investment of unconsolidated affiliate
    
    
    (883
    )
    
    
    Other, net
    
    
    149
    
    
    
    187Net cash used in investing activities
    
    $
    (8,497
    )
    
    $
    (4,066
    )Cash flow from financing activities:Principal payments on capital lease obligations
    
    
    (714
    )
    
    
    Shares repurchased for treasury stock
    
    
    (2,209
    )
    
    
    Exercise of stock options
    
    
    6,626
    
    
    
    2,261Dividends paid to stockholders
    
    
    (4,911
    )
    
    
    (1,075
    )Net cash
(used in) provided by financing activities
    
    
    (1,208
    )
    
    
    1,186Increase in cash and cash equivalents
    
    
    23,035
    
    
    
    17,913Cash and cash equivalents at beginning of period
    
    
    86,588
    
    
    
    64,908Cash and cash equivalents at end of period
    
    $
    109,623
    
    
    $
    82,821
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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
  Income Tax Benefit
  Per Share Data
  7




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Basic Earnings:Net income
    
    $
    7,946
    
    
    $
    3,595
    
    
    $
    25,084
    
    
    $
    27,173Weighted average shares outstanding
    
    
    20,611
    
    
    
    20,148
    
    
    
    20,426
    
    
    
    20,069Basic earnings per share
    
    $
    0.39
    
    
    $
    0.18
    
    
    $
    1.23
    
    
    $
    1.35Diluted earnings:Net income
    
    $
    7,946
    
    
    $
    3,595
    
    
    $
    25,084
    
    
    $
    27,173Weighted average shares outstanding
    
    
    20,611
    
    
    
    20,148
    
    
    
    20,426
    
    
    
    20,069Effect of dilutive securities
    
    
    965
    
    
    
    654
    
    
    
    1,027
    
    
    
    679Weighted average common shares and potential dilutive shares
    
    
    21,576
    
    
    
    20,802
    
    
    
    21,453
    
    
    
    20,748Diluted earnings per share
    
    $
    0.37
    
    
    $
    0.17
    
    
    $
    1.17
    
    
    $
    1.31
 Stock-Based Compensation
 Accounting for Stock-Based Compensation  Transition and
Disclosure Accounting for Stock-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    As reported
    
    $
    7,946
    
    
    $
    3,595
    
    
    $
    25,084
    
    
    $
    27,173Pro forma
    
    $
    7,243
    
    
    $
    3,262
    
    
    $
    23,196
    
    
    
    26,244Basic per share income
    
    As reported
    
    $
    0.39
    
    
    $
    0.18
    
    
    $
    1.23
    
    
    $
    1.35Pro forma
    
    $
    0.35
    
    
    
    0.16
    
    
    $
    1.14
    
    
    
    1.31Diluted per share
income
    
    As reported
    
    $
    0.37
    
    
    $
    0.17
    
    
    $
    1.17
    
    
    $
    1.31Pro forma
    
    $
    0.34
    
    
    
    0.16
    
    
    $
    1.08
    
    
    $
    1.26
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(R) Share-Based Payment (R) (R) (R)
 Segment Information
  Commitments and Contingencies
  
 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
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
    
    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
    
    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
    
    
    34,187
    
    
    
    23,248Q4
    
    
    
    
    
    
    24,224Year
    
    
    107,775
    
    
    
    95,835
  Results of Operations for the Three Months Ended September 30, 2005 and 2004
   10




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Medical professional and license fees
  Direct costs of services
  General and administrative
  Marketing and advertising expenses
  Depreciation and amortization
  Non-operating income and expenses
  Income Taxes
  Q3 2005
    
    
    Q3 2004Federal income taxes
    
    $
    4,596
    
    
    $
    2,059State income taxes, net of federal benefit
    
    
    798
    
    
    
    294Foreign income taxes
    
    
    
    
    
    
    182Income tax provision (benefit)
    
    $
    5,394
    
    
    $
    2,535
 Results of Operations for the Nine Months Ended September 30, 2005 and 2004
   Medical
professional and license fees
  11




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Direct costs of services
  General and administrative
  Marketing and advertising expenses
  Depreciation and amortization
  Non-operating income and expenses
  Income Taxes
  For the Nine Months EndedSeptember 30,2005
    
    
    2004Federal income taxes
    
    $
    14,508
    
    
    $
    6,868State income taxes, net of federal benefit
    
    
    2,419
    
    
    
    1,037Foreign income taxes
    
    
    496
    
    
    
    518Change in valuation allowance
    
    
    
    
    
    
    (15,681
    )Income tax provision (benefit)
    
    $
    17,423
    
    
    $
    (7,258
    )
  Liquidity and Capital Resources
     12




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




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Income Taxes
  
 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
September 30, 2005. Based on this evaluation, 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 ReportingBased on an evaluation by the Companys management, including the CEO and CFO, pursuant to
Rule 13a-15d, the CEO and CFO concluded that there were no changes in the Companys internal
control over financial reporting that occurred during the quarter ended September 30, 2005
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
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Part II. Other Information.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 (c)
    
    The following table provides information regarding the Companys
purchases of its common stock during the quarter ended September
30, 2005:
 ISSUER PURCHASES OF EQUITY SECURITIES
 (d) Maximum(c) Total Number
    
    
    Numberof Shares Purchased
    
    
    of Sharesas Part
    
    
    that May Yet(b) Average
    
    
    of Publicly
    
    
    Be Purchased Under(a) Total Number
    
    
    Price Paid
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    of Shares Purchased
    
    

per
Share
    
    
    or Programs
    
    
    Program07/01/0507/31/05
    
    
    
    
    
    $
    0
    
    
    
    
    
    
    
    1,000,00008/01/0508/31/05
    
    
    50,000
    
    
    $
    44.19
    
    
    
    50,000
    
    
    
    950,00009/01/0509/30/05
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    950,000Total
    
    
    50,000
    
    
    $
    44.19
    
    
    
    50,000
    
    
    
    950,000
 
 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: November 8, 2005
    
    /s/ Stephen N. JoffeStephen N. JoffeChairman and Chief Executive OfficerDate: November 8, 2005
    
    /s/ Alan H. BuckeyAlan BuckeyChief Financial Officer
 16