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U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 Form 10-Q (Mark One)þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934.For the quarterly period ended March 31, 2005.o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE 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
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 7840 Montgomery Road, Cincinnati, Ohio 45236 
  (513) 792-9292 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 20,345,706 shares as of April 28, 2005.




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LCA-Vision Inc.
INDEX Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2005
and December 31, 2004
    
    
    3Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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
    
    
    12Item 4. Controls and Procedures
    
    
    13Part II. Other InformationItem 6. Exhibits
    
    
    13Signatures
    
    
    13EX-31.1EX-31.2EX-32
 2




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Part I. Financial Information 
 Item 1. Financial Statements LCA-Vision Inc. 
   March 31, 2005
    
    
    December 31, 2004AssetsCurrent assetsCash and cash equivalents
    
    $
    100,140
    
    
    $
    86,588Accounts receivable, net of allowance for doubtful accounts of $2,473 and
$2,260
    
    
    9,257
    
    
    
    8,662Receivables from vendors
    
    
    1,520
    
    
    
    1,077Prepaid expenses and other
    
    
    1,601
    
    
    
    2,420Deferred tax assets
    
    
    2,524
    
    
    
    6,015Total current assets
    
    
    115,042
    
    
    
    104,762Property and equipment
    
    
    51,921
    
    
    
    50,374Accumulated depreciation and amortization
    
    
    (33,480
    )
    
    
    (31,743
    )Property and equipment, net
    
    
    18,441
    
    
    
    18,631Accounts receivable, net of allowance for doubtful accounts of $710 and $605
    
    
    1,393
    
    
    
    1,171Goodwill
    
    
    275
    
    
    
    275Deferred compensation plan assets
    
    
    1,347
    
    
    
    1,187Investment in unconsolidated businesses
    
    
    96
    
    
    
    168Deferred tax assets
    
    
    2,371
    
    
    
    2,593Other assets
    
    
    770
    
    
    
    790Total Assets
    
    $
    139,735
    
    
    $
    129,577Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    2,412
    
    
    $
    4,964Accrued liabilities and other
    
    
    10,714
    
    
    
    7,574Debt maturing in one year
    
    
    714
    
    
    
    542Total current liabilities
    
    
    13,840
    
    
    
    13,080Capital lease obligations
    
    
    321
    
    
    
    376Deferred compensation liability
    
    
    1,478
    
    
    
    1,215Insurance reserve
    
    
    3,262
    
    
    
    2,568Minority equity interest
    
    
    674
    
    
    
    501Stockholders investmentCommon stock ($0.001 par value; 23,843,228 and 23,767,353 shares and
20,292,434 and 20,216,559 shares issued and outstanding, respectively)
    
    
    24
    
    
    
    24Contributed capital
    
    
    135,371
    
    
    
    134,708Common stock in treasury, at cost (3,550,794 shares and 3,550,794 shares)
    
    
    (15,462
    )
    
    
    (15,462
    )Accumulated deficit
    
    
    (42
    )
    
    
    (7,732
    )Accumulated other comprehensive income
    
    
    269
    
    
    
    299Total stockholders investment
    
    
    120,160
    
    
    
    111,837Total Liabilities and Stockholders Investment
    
    $
    139,735
    
    
    $
    129,577
 The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 3




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LCA-Vision Inc. 
   Three months ended March 31,2005
    
    
    2004Revenues  Laser refractive surgery
    
    $
    50,190
    
    
    $
    31,650Operating costs and expensesMedical professional and license fees
    
    
    9,520
    
    
    
    6,465Direct costs of services
    
    
    13,347
    
    
    
    9,630General and administrative expenses
    
    
    3,453
    
    
    
    2,289Marketing and advertising
    
    
    6,772
    
    
    
    4,789Depreciation
    
    
    1,750
    
    
    
    1,716Operating income
    
    
    15,348
    
    
    
    6,761Equity in earnings from unconsolidated businesses
    
    
    24
    
    
    
    72Minority equity interest
    
    
    (173
    )
    
    
    (124
    )Interest expense
    
    
    (13
    )
    
    
    Interest and dividend income
    
    
    530
    
    
    
    367Income before taxes on income
    
    
    15,716
    
    
    
    7,076Income tax expense (benefit)
    
    
    6,405
    
    
    
    (5,653
    )Net income
    
    $
    9,311
    
    
    $
    12,729Income per common shareBasic
    
    $
    0.46
    
    
    $
    0.64Diluted
    
    $
    0.44
    
    
    $
    0.62Dividends declared per share
    
    $
    0.08
    
    
    $
    Weighted average shares outstandingBasic
    
    
    20,236
    
    
    
    19,980Diluted
    
    
    21,200
    
    
    
    20,627
 The notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 4




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LCA-Vision Inc. 
   Three Months Ended March 31,2005
    
    
    2004Cash flow from operating activities:Net income
    
    $
    9,311
    
    
    $
    12,729Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation
    
    
    1,750
    
    
    
    1,716Provision for loss on doubtful accounts
    
    
    318
    
    
    
    288Deferred income taxes
    
    
    3,713
    
    
    
    (5,900
    )Deferred compensation
    
    
    264
    
    
    
    140Insurance reserve
    
    
    694
    
    
    
    279Equity in earnings of unconsolidated affiliates
    
    
    (24
    )
    
    
    (72
    )Changes in working capital:Accounts receivable
    
    
    (1,135
    )
    
    
    (2,098
    )Receivables from vendors
    
    
    (443
    )
    
    
    89Prepaid expenses and other
    
    
    819
    
    
    
    (432
    )Accounts payable
    
    
    (2,552
    )
    
    
    (1,124
    )Accrued liabilities and other
    
    
    3,139
    
    
    
    1,312Net cash provided by operations
    
    
    15,854
    
    
    
    6,927Cash flow from investing activities:Purchase of property and equipment
    
    
    (1,354
    )
    
    
    (646
    )Deferred compensation plan
    
    
    (161
    )
    
    
    (137
    )Other, net
    
    
    176
    
    
    
    118Net cash used in investing activities
    
    
    (1,339
    )
    
    
    (665
    )Cash flow from financing activities:Principal payments of long-term notes, debt and capital lease obligations
    
    
    (100
    )
    
    
    Dividends paid to Stockholders
    
    
    (1,621
    )
    
    
    Exercise of stock options
    
    
    663
    
    
    
    836Distribution from minority equity investees
    
    
    95
    
    
    
    50Net cash (used) provided by financing activities
    
    
    (963
    )
    
    
    886Increase in cash and cash equivalents
    
    
    13,552
    
    
    
    7,148Cash and cash equivalents at beginning of period
    
    
    86,588
    
    
    
    64,908Cash and cash equivalents at end of period
    
    $
    100,140
    
    
    $
    72,056
 The notes to the Consolidated Condensed Financial Statements are an integral part of this statement. 5




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LCA-Vision Inc. 
  Summary of Significant Accounting Policies This filing includes condensed consolidated Balance Sheets as of March 31, 2005 and December 31,
2004; condensed consolidated Statements of Income for the three months ended March 31, 2005 and
2004; and condensed consolidated Statements of Cash Flow for the three months ended March 31, 2005
and 2004. In the opinion of management, these condensed consolidated financial statements contain
all adjustments (which include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for the interim periods reported. We
suggest that these financial statements be read together with the financial statements and notes in
our 2004 annual report on Form 10-K. About Our Company We are a leading provider of fixed-site laser vision correction services at our LasikPlusvision
centers. Our vision centers provide the staff, facilities, equipment and support services for
performing laser vision correction that employs advanced laser technologies to help correct
nearsightedness, farsightedness and astigmatism. We currently utilize fixed-site excimer lasers,
and our vision centers are supported primarily by credentialed board-certified ophthalmologists,
optometrists and other health care professionals. The ophthalmologists perform the laser vision
correction procedures in our vision centers, and either ophthalmologists or optometrists generally
carry out the pre-procedure evaluations and post-procedure follow-ups in-center. We have performed
over 450,000 laser vision correction procedures in our vision centers in the United States and
Canada since 1991. We currently operate 44 laser vision correction centers, including 41 wholly-owned vision centers
located in large metropolitan markets throughout the United States, and three centers in a joint
venture in Canada. Internet The Companys websites are www.lca-vision.comand www.lasikplus.com. We make available free of
charge through a link provided at our websites our Forms 10-K, 10-Q and 8-K, as well as any
amendments thereto. These reports are available as soon as reasonably practicable after they are
filed or furnished to the Securities and Exchange Commission. To obtain a copy of Form 10-K by
mail, please send a request to Investor Relations at LCA-Vision Inc., 7840 Montgomery Road,
Cincinnati, Ohio 45236. Consolidation Policy We use the consolidation method to report our investment in our subsidiaries and other companies
when we own a majority of the voting stock of the subsidiary. In addition, we consolidate the
results of operations of professional corporations with which we contract to provide the services
of ophthalmologists or optometrists at our vision centers, in accordance with EITF 97-2,
Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and
Certain Other Entities with Contractual Management Agreements, and FASB FIN 46 Consolidation of
Variable Interest Entities, An Interpretation of ARB No. 51. Use of Estimates Management makes estimates and assumptions when preparing financial statements under generally
accepted accounting principles. Certain estimates are particularly sensitive due to their
significance to the financial statements and the possibility that future events may differ
significantly from managements expectations. These estimates and assumptions affect various
matters including:  
    Allowance for doubtful accounts  patient financing
    Loss reserves  insurance captive 6




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Allowance for Doubtful Accounts We provide patient financing to some of our customers, including those who could not otherwise
obtain third-party financing. The terms of the financing require the patient to pay an up-front
fee which is intended to cover some or all of our variable costs, with the remainder due from the
patient over a period of 12 to 36 months. We began our patient financing program in May 2002.
Based upon our own experience with patient financing and based upon our knowledge of the credit
experience of others who provide financing to customers similar to ours, we have established bad
debt reserves as of March 31, 2005 of $3,183,000. Captive Insurance Company Reserves Effective as of December 18, 2002, we established a captive insurance company to provide
professional liability insurance coverage for claims brought against us after December 17, 2002. In
addition, our captive insurance companys charter allows it to provide professional liability
insurance for our doctors, some of whom are currently insured by the captive. Our captive insurance
company is managed by an independent insurance consulting and management firm and is capitalized
and funded by us based on actuarial studies performed by an affiliate of the consulting and
management firm. A number of claims are now pending with our captive insurance company. The payment
of significant claims by our captive insurance company could negatively affect our profitability
and our financial condition. Income Tax Benefit The Company recorded an income tax benefit of approximately $8,587,000 for the three months ended
March 31, 2004, as a result of a partial reversal of our deferred tax asset valuation allowance of
$5,900,000 and a reduction of the deferred tax valuation allowance of $2,687,000 relating to the
usage of net operating loss carryforwards in the first quarter of 2004. The reversal of the
valuation allowance on deferred tax assets was made because of continued profitability in 2004 and
expected future profitability. The computation of our deferred tax asset and valuation allowance
is based on taxable income we expect to earn over future periods, which will include the
utilization of previously accumulated net operating tax losses. Per Share Data Basic per share data is income applicable to common shares divided by the weighted average common
shares outstanding. Diluted per share data is income applicable to common shares divided by the
weighted average common shares outstanding plus the potential issuance of common shares if
in-the-money stock options are exercised. Following is a reconciliation of basic and diluted earnings per share for the months ended March
31, 2005 and 2004 (in thousands, except per share amounts): Three Months EndedMarch 31,2005
    
    
    2004Basic earnings:Net income
    
    $
    9,311
    
    
    $
    12,729Weighted average shares outstanding
    
    
    20,236
    
    
    
    19,980Basic earnings per share
    
    $
    0.46
    
    
    $
    0.64Diluted earnings:Net income
    
    $
    9,311
    
    
    $
    12,729Weighted average shares outstanding
    
    
    20,236
    
    
    
    19,980Effect of
dilutive securitiesStock options
    
    
    964
    
    
    
    647Weighted average common shares and potential
dilutive shares
    
    
    21,200
    
    
    
    20,627Diluted earnings per share
    
    $
    0.44
    
    
    $
    0.62
 7




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Stock-Based Compensation In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation, was issued. SFAS
No. 148 provides alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and requires more prominent and more
frequent disclosures in the financial statements of the effects of stock-based compensation. The
provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. We apply APB No. 25 and related interpretations utilizing the intrinsic value method in accounting
for our stock option plans. We have adopted the disclosure-only provisions of SFAS No. 123. We
recognize no compensation expense for our stock options granted to employees or directors. If we
had elected to recognize compensation expense based on the fair value at the grant dates consistent
with the provisions of SFAS No. 123, net income and net income per share would have been changed to
the pro forma amounts indicated below (dollars in thousands, except per share amounts): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    As reported
    
    $
    9,311
    
    
    $
    12,729Pro forma
    
    
    8,816
    
    
    
    12,242Basic per share income
    
    As reported
    
    $
    0.46
    
    
    $
    0.64Pro forma
    
    
    0.44
    
    
    
    0.61Diluted per share income
    
    As reported
    
    $
    0.44
    
    
    $
    0.62Pro forma
    
    
    0.42
    
    
    
    0.59
 On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123®,
Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
No. 123® requires all share-based payments to employees, including grants of employee stock
options, to be valued at fair value on the date of grant, and to be expensed over the applicable
vesting period. Pro forma disclosure of the income statement effects of share-based payments is no
longer an alternative. SFAS No. 123® is effective for all stock-based awards granted on or after
January 1, 2006. In addition, companies must recognize compensation expense related to any awards
that are not fully vested as of the effective date. Compensation expense for the unvested awards
will be measured based on the fair value of the awards previously calculated in developing the pro
forma disclosures in accordance with the provisions of SFAS No. 123. We are currently assessing
the impact of adopting SFAS No. 123® on our consolidated results of operations. Segment Information We operate in one segment: laser refractive surgery. Commitments and Contingencies In the opinion of management, there are currently no commitments or contingencies that will have a
material adverse effect on our financial position or results of operations. 8




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations. This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements contained herein, including statements regarding our belief that revenues and earnings will exhibit healthy year-over-year growth for
fiscal 2005, among others, are based on information available to us as of the date hereof. Actual results could differ materially from those
stated or implied in such forward-looking statements due to risks and uncertainties associated with our business, including, without limitation,
those concerning global and local economic, political and sociological conditions; market acceptance of our services; the successful execution of
marketing strategies; competition in the laser vision correction industry; an inability to attract new patients; the possibility of long-term side
effects and adverse publicity regarding laser vision correction; adverse financial consequences in connection with the expensing of stock options
or other equity-based compensation; regulatory action against us or others in the laser vision correction industry; and the relatively high fixed
cost structure of our business. Except to the extent required under the federal securities laws and the rules and regulations promulgated by the
Securities and Exchange Commission, we assume no obligation to update the information included herein, whether as a result of new information,
future events, or circumstances, or otherwise. In addition to the information given herein, please refer to Item 1. Business 
Risk Factors in our 2004 annual report on Form 10-K for a discussion of important factors that could affect our results. Overview We are a leading provider of fixed-site laser vision correction services at our LasikPlusvision
centers. Our vision centers provide the facilities, equipment and support services for performing
laser vision correction that employs advanced laser technologies to help correct nearsightedness,
farsightedness and astigmatism. Substantially all of our revenues currently are derived from laser vision correction procedures
performed in our U.S. vision centers. During the first three months of 2005, we opened one vision
center in Sacramento, California. Our operating costs and expenses include:  
    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
    General and administrative costs, including headquarters staff expense and other overhead costs
    Marketing and advertising costs
    Depreciation of equipment  Our vision centers have a relatively high degree of operating leverage due to the fact that many of
our costs are fixed in nature. As a result, our level of procedure volume can have a significant
impact on our level of profitability.We derive substantially all of our revenues from the delivery of laser vision correction services.
Our revenues in any period are primarily a function of the number of laser vision correction
procedures performed and the pricing for those services.Our revenues are impacted by a number of factors, including the following:  
    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 9




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
    The continued growth and increased acceptance of laser vision correction
    The effect of competition and discounting practices in our industry The following table details the number of laser vision correction procedures performed at our
consolidated vision centers. 2005
    
    
    2004Procedures
    
    
    ProceduresQ1
    
    
    37,578
    
    
    
    24,270Q2
    
    
    
    
    
    
    24,093Q3
    
    
    
    
    
    
    23,248Q4
    
    
    
    
    
    
    24,224Year
    
    
    37,578
    
    
    
    95,835
 Our strongest quarter in terms of procedures performed historically has been the first quarter of
the year. We believe this seasonality is caused primarily because of the use of employer sponsored
medical flexible spending programs which commonly use the calendar year as the plan year. Results of Operations for the Three Months Ended March 31, 2005 and 2004 In the first quarter of 2005, revenues increased to $50,190,000, up 58.6% from $31,650,000 in the
first quarter of 2004, primarily as a result of higher procedure volume and increased pricing per
procedure. For vision centers open at least 12 months, revenues increased by 47% in the first
quarter of 2005 compared to the first quarter of 2004. Procedure volume of 37,578 increased 55%
from 24,270 in the first quarter of 2004. Revenue per procedure of $1,336 increased about 2% from
$1,304 in the first quarter of 2004. We believe that continued improvement in marketing and advertising effectiveness and continued
growth and increased acceptance of laser vision correction, together with patient financing
options, among other factors, helped to grow procedure volume in the first quarter of 2005 over the
first quarter of 2004. Medical professional and license fees Medical professional expenses
increased by $2,127,000, or 57.3%, in the first quarter of 2005 from
the first quarter of 2004. This increase was due to costs and fees associated with higher
revenues. License fees increased by $928,000, up 33.7%, from the first quarter of 2004, primarily
as a result of higher procedure volume. Direct costs of services Direct costs of services include the staffing, equipment, medical supplies, and facility costs of
operating laser vision correction centers. These direct costs increased in the first quarter of
2005 by $3,717,000, or 38.6%, over the first quarter of 2004, primarily as a result of increased
salaries, employee incentives, fringe benefits, rent and utilities, financing fees, laser
maintenance and surgical supplies in connection with an increase in the number of vision centers
and our higher procedure volumes. General and administrative General and administrative expenses increased by $1,164,000, or 50.8%, in the first quarter of 2005
from the first quarter of 2004, primarily due to increases in salaries, employee incentives,
equipment expense and professional services. Marketing and advertising expenses Marketing and advertising expenses increased by $1,983,000, or 41.4%, in the first quarter of 2005
from the first quarter of 2004, primarily as a result of our efforts to support new markets and
help grow volume in existing markets. Depreciation and amortization Depreciation and amortization increased by $34,000 in the first quarter of 2005 from the first
quarter of 2004. 10




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Non-operating income and expenses Interest income in the first quarter of 2005 increased $163,000 due both to income on patient
financing and to higher levels of invested cash. Income Taxes The following table summarizes the components of income tax provision for 2005 and income tax
benefit for 2004: Q1 2005
    
    
    Q1 2004Federal income taxes
    
    $
    5,374
    
    
    $
    2,383State income taxes, net of federal benefit
    
    
    820
    
    
    
    403Foreign income taxes
    
    
    211
    
    
    
    148Change in valuation allowance
    
    
    
    
    
    
    (8,587
    )Income tax provision (benefit)
    
    $
    6,405
    
    
    $
    (5,653
    )
 Included in the first quarter of 2004 was an income tax benefit of approximately $5,900,000 to
reverse a portion of the valuation allowance on the Companys deferred tax assets. Liquidity and Capital Resources Net cash provided by operating activities in the first three months of 2005 was $15,854,000, of
which $3,713,000 resulted from the utilization of a portion of the Companys deferred tax assets.
Proceeds from the exercise of stock options totaled $663,000. Cash provided by operations more
than offset the combined cash used in investing and financing activities. This caused an increase
in cash and cash equivalents to $100,140,000 as of March 31, 2005, an increase of 16% from
$86,588,000 as of December 31, 2004. In the first quarter of 2005, the board of directors declared a dividend to common stock of $0.08
per share, which resulted in a cash payment of $1,621,000. As of March 31, 2005, we had approximately $10,650,000 in accounts receivable, net of allowance for
doubtful accounts, which was an increase of approximately $817,000 since December 31, 2004. Our consolidated cash and cash equivalents includes $500,000 of cash maintained by our consolidated
captive insurance company pursuant to statutory requirements as of March 31, 2005. These funds are
not available for general corporate purposes. Our costs associated with the opening of a new vision center primarily consist of capital
expenditures, including the purchase or lease of lasers, diagnostic equipment, office equipment,
leases and leasehold improvements. In addition, we typically incur other startup expenses and
pre-opening advertising expenses. Generally, we estimate the costs associated with opening a new
vision center to be between $1,000,000 and $1,500,000. Actual costs will vary from vision center
to vision center based upon the market, the number of lasers purchased or leased for the vision
center, the site of the vision center and the level of leasehold improvements required, among other
variables. Our capital expenditures consist primarily of investments incurred in connection with
the opening of new vision centers and equipment purchases or upgrades at existing facilities. Year-to-date, we have opened one new vision center in Sacramento, California. Capital expenditures
year-to-date in 2005 are $1,354,000. We currently have additional facilities under development. The ability to fund our marketing and advertising program, planned capital expenditures and new
vision center rollouts depends on our future performance, which, to a certain extent, is subject to
general economic, competitive, legislative, regulatory and other factors, some of which are beyond
our control. Based upon our current level of operations and anticipated revenue growth, we
currently believe that cash flow from operations and available cash and short-term investments
should provide sufficient cash reserves and liquidity to fund our working capital needs and our
capital expenditures. 11




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Critical Accounting Estimates Significant accounting policies are disclosed in the Notes to Condensed Consolidated Financial
Statements. Critical accounting estimates are discussed in the following paragraphs. Accounts Receivable and Allowance for Doubtful Accounts We provide patient financing to some of our customers, including those who could not otherwise
obtain third-party financing. The terms of the financing require the patient to pay an up-front
fee which is intended to cover some or all of our variable costs, with the remainder due from the
patient over a period of 12 to 36 months. We began our patient financing program in May 2002.
Accounts receivable for patients that we finance for a period of 12 months or less are recorded at
the undiscounted total expected payments less an estimated allowance for doubtful accounts. For
patients we finance with an initial term over 12 months, we record the present value of expected
payments discounted at a rate of 17.5% per year. The discount rate assumption is based upon
current market rates charged by some other providers of unsecured credit to similar customers.
Interest income is recorded over the term of the payment program. As of March 31, 2005, the
discount in receivables with an initial term over 12 months was $445,000. Based upon our own experience with patient financing and based upon the credit experience of some
others who provide financing to customers similar to ours, we have established bad debt reserves as
of March 31, 2005 of $3,183,000 against accounts receivable of $13,833,000. To the extent that our
actual bad debt write-offs are greater than our estimated bad debt reserve, it would adversely
impact our results of operations and cash flows. To the extent that our actual bad debt write-offs
are less than our estimated bad debt reserve, it would favorably impact our results of operations
and cash flows. Captive Insurance Company Reserves Effective December 18, 2002, we established a captive insurance company to provide professional
liability insurance coverage for claims brought against us after December 17, 2002. In addition,
our captive insurance companys charter allows it to provide professional liability insurance for
our doctors, some of whom are currently insured by the captive. Our captive insurance company is
managed by an independent insurance consulting and management firm, and it is capitalized and
funded by us based on actuarial studies performed by an affiliate of the consulting and management
firm. The financial statements of the captive insurance company are consolidated with our financial
statements since it is a wholly-owned enterprise. As of March 31, 2005, we recorded an insurance
reserve amount of $3,262,000, which represents an estimate of costs to settle claims. To
the extent that our actual claim experience is greater than our estimated insurance reserve, it
would adversely impact our results of operations and cash flows. To the extent that our actual
claim experience is less than our estimated insurance reserve, it would favorably impact our
results of operations and cash flows. Income Taxes The Company recorded an income tax benefit of approximately $8,587,000 for the three months ended
March 31, 2004, as a result of a partial reversal of our deferred tax asset valuation allowance of
$5,900,000 and a reduction of the deferred tax valuation allowance of $2,687,000 relating to the
usage of net operating loss carryforwards in the first quarter of 2004. The reversal of the
valuation allowance on deferred tax assets was made because of continued profitability in 2004 and
expected future profitability. The computation of our deferred tax asset and valuation allowance
is based on taxable income we expect to earn over future periods, which will include the
utilization of previously accumulated net operating tax losses. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk. The carrying values of financial instruments, including cash and cash equivalents, accounts
receivable and accounts payable, approximate fair value because of the short maturity of these
instruments. We have historically had low exposure to changes in foreign currency exchange rates and, as such,
have not used derivative financial instruments to manage foreign currency fluctuation risk. 12




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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, 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 ReportingThere 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 likely to
materially affect, the Companys internal control over financial reporting. 
 Part II. Other Information. 
 Item 6. Exhibits ExhibitsNumber
    
    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
 
 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LCA-VISION INC. Date: May 9, 2005
    
    /s/ Stephen N. JoffeStephen N. Joffe
Chairman and Chief Executive OfficerDate: May 9, 2005
    
    /s/ Alan BuckeyAlan BuckeyChief Financial Officer
 13