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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004 o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period
From
                  to Commission file number 0-27610 LCA-Vision Inc.  Delaware
    
    11-2882328(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)7840 Montgomery Road, Cincinnati, OH
    
    45236(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (513) 792-9292 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the act: Common Stock, $.001 par value 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act).
Yes þNo o The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June
30, 2004, the last business day of the registrants most recently completed second quarter, was
approximately $304,754,000. The number of shares
outstanding of the registrants Common Stock as of March 11, 2005 was
20,261,956.   DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive Proxy Statement for its Annual Meeting of Stockholders to
be held May 16, 2005 are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of
this Report.




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LCA-VISION INC. FISCAL YEAR 2004 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PagePart I.Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    14Item 3.
    
    Legal Proceedings
    
    
    14Item 4.
    
    Submission of Matters to a Vote of Security
Holders
    
    
    15Part II.Item 5.
    
    Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    15Item 6.
    
    Selected Financial Data
    
    
    16Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 7A.
    
    Quantitative and Qualitative Disclosures About Market
Risk
    
    
    22Item 8.
    
    Financial Statements and Supplementary Data
    
    
    22Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    40Item 9A.
    
    Controls and Procedures
    
    
    40Item 9B.
    
    Other Information
    
    
    40Part III.Item 10.
    
    Directors and Executive Officers of the
Registrant
    
    
    40Item 11.
    
    Executive Compensation
    
    
    40Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder
Matters
    
    
    41Item 13.
    
    Certain Relationships and Related
Transactions
    
    
    41Item 14.
    
    Principal Accountant Fees and
Services
    
    
    41Part IV.Item 15.
    
    Exhibits and Financial Statement
Schedules
    
    
    41Signatures
    
    
    44
 EX-3(B)EX-21EX-23EX-31.1EX-31.2EX-32
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PART I SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this Annual Report on Form 10-K, including information with respect
to our future business plans, constitute 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. For this
purpose, any statements that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words believes, may, will,
estimates, continues, anticipates, intends, plans, expects and similar expressions are
intended to identify forward-looking statements. There are a number of important factors that could
cause our results to differ materially from those indicated by our forward-looking statements.
These factors include those set forth in Item 1. Business  Risk Factors 
 Item 1. Business. Background and History of Company LCA-Vision Inc. (the Company or LCA-Vision) is a leading developer and operator of fixed-site
laser vision correction centers under the brand name LasikPlus. 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 use several suppliers, including Bausch & Lomb, VISX and Alcon, for our
excimer lasers and diagnostic equipment in the United States. Our vision centers are supported
mainly by independent full-time credentialed board-certified ophthalmologists and optometrists, as
well as other health care professionals. The ophthalmologists perform the laser vision correction
procedures in our vision centers, and either ophthalmologists or optometrists conduct pre-procedure
evaluations and post-procedure follow-ups in-center. We have performed over 400,000 laser vision
correction procedures in our vision centers in the United States and Canada since 1991. Most of
our patients currently receive a procedure called LASIK, which we began performing in the United
States in 1997. 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, all of which are consolidated in our financial statements. During 2004, we sold
our minority interest in a vision center in Helsinki, Finland. LCA-Vision Inc., a Delaware corporation, is the successor to two businesses which were founded and
controlled by Stephen N. Joffe: Laser Centers of America, Inc. and Toronto Laservision Centre, Inc.
Laser Centers of America was founded in 1985 to assist hospitals in establishing and managing
laser surgery centers, and Toronto Laservision was one of the earliest laser vision surgery centers
in Canada, which approved refractive laser surgery several years prior to its introduction in the
United States in 1995. On August 18, 1997, we acquired all of the outstanding shares of Refractive Centers International,
Inc., an operator of laser vision correction centers and a majority-owned subsidiary of the
refractive laser manufacturer Summit Technology, Inc., in exchange for 6,339,591 newly issued
shares of LCA-Vision common stock. In 1998, we raised a total of $9,463,000 of equity capital through the issuance of a new class of
convertible preferred stock to fund the continued growth of our business, and in July 1999 we
raised an additional $37,300,000 of equity capital, after expenses, through a public offering of
1,875,000 shares of our common stock. In 1996, our common stock began trading on the Nasdaq SmallCap Market, and following our public
offering in 1999, it began trading on the Nasdaq National Market. On November 12, 2002, stockholders of LCA-Vision Inc. approved a 1-for-4 stock split. All share
and per share amounts have been restated for the stock split. In December 2002, the Company incorporated Lasik Insurance Company, Ltd. in Georgetown, Grand
Cayman to insure for medical professional liability. In December 2003, we raised a total of $36,727,000 of equity capital, after expenses, through a
public offering of 3,600,000 shares of our common stock. On November 16, 2004, the Board of Directors approved a 3-for-2 stock split payable on December 15,
2004 to shareholders of record as of December 6, 2004. All share and per-share amounts have been
restated for the stock split. 3




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The Company derives all of its revenues from laser refractive surgery, our only reported segment.
Financial information concerning revenues, profit and loss and total assets are contained in Item
8. Financial Statements and Supplementary Data under Consolidated Balance Sheets and
Consolidated Statements of Operations. 4




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Laser Vision Correction Procedures Laser vision correction procedures are designed to reshape the outer layers of the cornea to help
correct refractive vision disorders by changing its curvature with an excimer laser, which may
reduce the need for corrective lenses. Prior to the procedure, an assessment is made of the
patients candidacy for the procedure and the correction required to program the excimer laser. The
software of the excimer laser then calculates the number of pulses needed to achieve the intended
correction using a specially developed algorithm. A speculum is inserted to prevent blinking and
topical anesthetic eye drops are applied. The patient reclines in a chair, eyes focused on a fixed
target, while the ophthalmologist positions the patients cornea for the procedure. The excimer
laser emits energy in a series of pulses with each pulse typically lasting only a fraction of a
second. High-energy ultraviolet light produced by the excimer laser creates a ''non-thermal
process known as ablation, which removes tissue and reshapes the cornea. The amount of tissue
removed depends upon the degree of the vision disorder being corrected. Following the procedure,
the front surface of the eye is flatter when corrected for nearsightedness and steeper when
corrected for farsightedness. In effect, the change made in the middle or periphery of the cornea
is translated to the front surface of the cornea which results in helping correct vision. A series
of patient follow-up visits is scheduled with an optometrist or ophthalmologist to monitor the
corneal healing process, to check that there are no complications and to test the correction
achieved by the laser vision correction procedure. The typical procedure takes 15 to 30 minutes
from set-up to completion. PRK.PRK has been approved by the U.S. Food and Drug Administration for commercial use in the
United States since 1995. In PRK procedures, the ophthalmologist removes the thin layer of cells
covering the outer surface of the cornea (the epithelium) in order to apply the excimer laser
pulses to the surface of the cornea. Following the PRK procedure, a contact lens bandage is placed
on the eye to protect it. The patient typically experiences discomfort and blurred vision until the
epithelium heals. An ophthalmologist generally will prescribe certain topical pharmaceuticals for
use by the patient post-procedure to assist in alleviating discomfort and to promote corneal
healing. Although a patient generally experiences substantial improvement in clarity of vision
within a few days following the procedure, it can take one to three months for the full benefits of
the PRK procedure to be realized. Some patients elect to have one eye treated in one visit and the
second eye treated at a later visit. LASIK.We began performing LASIK, which now accounts for the vast majority of the procedures
performed in our vision centers, in the United States in 1997. In LASIK procedures, an automated
microsurgical instrument called a microkeratome is typically used to create a thin flap, which
remains hinged to the eye. The corneal flap is then laid back and excimer laser pulses are applied
to the exposed surface of the cornea to treat the eye according to the patients prescription. The
corneal flap is then folded back to its original position and inspected to ensure that it remains
secured in position by the natural suction of the cornea. Since the surface layer of the cornea
remains intact with LASIK, a bandage contact lens is normally not required and the patient
typically experiences little discomfort. LASIK often has the advantage of more rapid recovery than
PRK, with most patients seeing well enough to drive a car the next day and enjoying shorter
recovery periods. The LASIK procedure allows an ophthalmologist to treat both eyes of a patient
during the same visit and produces prompt results, frequently enabling patients to see well
postoperatively almost immediately. The Laser Vision Correction Market More than 150 million Americans, or approximately 50% of the U.S. population, require eyeglasses or
contact lenses to correct common vision problems. Most people seeking vision correction suffer from
one or more refractive vision disorders, which often result from improper curvature of the cornea
as related to the size and shape of the eye. If the corneas curvature is not precisely correct, it
cannot properly focus the light passing through it onto the retina, and the viewer will see a
blurred image. Three common refractive vision disorders are:  
    Myopia (nearsightedness)images are focused in front of the retina, resulting in the
blurred perception of distant objects
    Hyperopia (farsightedness)images are focused behind the retina, resulting in the blurred perception of near objects
    Astigmatismimages are not focused on any point due to the varying curvature of the eye along different axes. Since the FDA approved the first laser to perform laser vision correction procedures in the United
States in 1995, industry sources estimate that over 4 million patients have been treated. Laser
vision correction is currently one of the most widely performed elective surgical procedures in the
United States, with over 1.3 million laser vision correction procedures performed in 2004.It is
estimated that there are approximately 110 million potential eyes for laser vision correction
procedures in the United States, according to recent industry reports on the U.S. refractive
market. 5




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Laser vision correction is typically an elective, private pay procedure performed on an outpatient
basis. The current demand for laser vision correction procedures performed in the United States is
widely believed to be attributable to many factors, including:  
    Broader market acceptance  as the number of procedures performed increases, so does
the number of patients able to attest to the perceived benefits of laser vision
correction
    Improved technology  compared to earlier laser vision correction procedures, the
LASIK procedure typically results in less patient discomfort and a shorter recovery
period, and
    Expanded applications  FDA approval for the excimer laser used in LASIK laser vision
correction procedures has been extended to the treatment of three of the most common
types of refractive vision disorders: nearsightedness, farsightedness and astigmatism. Number of Laser Vision Correction Procedures in United States (BAR CHART) (e) Source: Market Scope, October 2004 Our Business Strategy Our business strategy is to provide quality laser vision correction services at an affordable
price. In July 1999, we began converting our vision centers to closed-access facilities from
open-access facilities in order to obtain increased control over the quality of care we provide to
our patients and greater operational and financial control of our business. Under the open-access
model, we allowed qualified independent ophthalmologists to use our equipment and facilities in
return for a facilities fee. Under our closed-access model, in contrast, we are responsible for
marketing and patient acquisition and contract with independent ophthalmologists for their
services. By the first quarter of 2000, we changed the names of the majority of our vision centers
to LasikPlusand began trying to build consumer awareness of the brand name through media campaigns
that generally include newsprint, radio and direct mailings. We intend to grow our business through increased penetration in our current markets and expansion
into new markets. Key elements of our business strategy include:  
    Recruiting and retaining independent, highly credentialed ophthalmologists and optometrists
    Providing patients with a Continuum of Care
    Opening and operating new laser vision correction centers
    Providing attractive patient financing alternatives
    Establishing relationships with leading managed care providers in the United States to source additional patients
    Developing and implementing innovative direct marketing campaigns Recruiting and retaining highly credentialed ophthalmologists and optometrists.We generally focus
our recruiting efforts on leading independent ophthalmologists and optometrists with a reputation
for providing quality eye care within their respective markets and who are experienced in laser
vision correction procedures. Our ophthalmologists generally have completed extensive FDA-mandated
training and also have met our qualification criteria, including a review of state licensure, board
certification, malpractice insurance, historical procedure experience and clinical outcomes. 6




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Providing patients with a Continuum of Care.We strive to achieve high patient satisfaction and
have established a ''Continuum of Care program, the goal of which is to achieve the level of
visual correction agreed to by the patient and physician. This program begins with our initial
contact with the prospective patient. Our call center personnel are trained to answer questions
regarding procedures and generally have access to both an independent ophthalmologist to address more difficult inquiries
and past patients to relate procedure experience. Once in the vision center, potential patients can
receive a free eye evaluation with the local vision center independent ophthalmologist or
optometrist to determine their candidacy for laser vision correction as well as a consultation
focused on educating the patient on vision correction procedures, how the procedure may help
correct the patients specific refractive vision disorder and what results the patient may expect
after the procedure. Additionally, our vision centers are designed to create a patient-friendly
environment and reduce any anxiety associated with getting laser vision correction. We schedule
post-surgical follow-ups with patients who have received the procedure to monitor procedure results
and evaluate potentially providing enhancements to those patients who do not receive the desired
correction in the initial procedure. The vast majority of patients who respond to our customer
satisfaction surveys indicate that they are satisfied with the care they received in our vision
centers. Opening and operating new laser vision correction centers.We plan to expand our business
primarily through the development of new vision centers in desirable markets and within existing
markets. In evaluating new and current markets for opening a laser vision correction center, we
consider a number of factors, including population demographics, and attempt to determine the
number of existing excimer lasers currently in that market. We also typically interview local
ophthalmologists and optometrists. We target markets with potential to generate break-even
procedure volume within the first six months of opening, including the necessary independent
ophthalmologist and optometrist staffing to support such levels. We have developed what we believe
to be cost-efficient standardized vision center plans and designs to be used in building each new
vision center to efficiently manage patient flow and physician and staff productivity. Providing attractive patient financing alternatives.Because laser vision correction procedures
are elective and generally not reimbursable by third party payors including governmental programs
such as Medicare and Medicaid, we currently offer patients several financing alternatives. We have
entered into an arrangement with an unaffiliated finance company, pursuant to which the finance
company makes multiple payment plans available to qualifying customers. These payment plans
typically provide for payments over a 12-month to 48-month period. We generally bear no credit risk
for loans made under this program. For patients not qualifying for these plans, we also currently
offer our own direct financing to customers under which we charge an up-front fee and the remaining
balance is paid by the customer in equal installments over a period of 12 to 36 months. We can also
provide information to customers regarding other financing options, such as installment plans, home
equity loans and payment through employer flexible benefit plans. Establishing relationships with leading managed care providers in the United States to source
additional patients.With an increasing number of employers adding vision services to their
employee benefit packages, we hope to further increase our U.S. footprint and market share by
developing and growing relationships with managed care organizations, through which we offer
discounted rates to plan participants. The plan participant, and not the managed care organization,
is responsible for the payment of our fees under these arrangements. Developing and implementing innovative direct marketing campaigns.Our marketing programs seek to
reinforce the LasikPlusbrand name in addition to raising awareness concerning laser vision
correction and promoting our vision centers. In each market, we target a specific demographic group
of potential patients through the use of print media, radio and direct mail campaigns, among other
strategies. In most advertisements, prospective patients are provided our web site address,
www.lasikplus.com, and a toll-free number, such as 1-800-243-EYES, 1-888-529-2020 or
1-800-LASIKPLUS. Our call center representatives screen prospective patients, record patient names
and information into our centralized computer system and attempt to schedule eye evaluation
appointments with the local vision center to determine whether the prospective patient is a
candidate for laser vision correction. We generally keep a prospective patients name on file if
the patient elects not to proceed with a laser vision procedure following an initial evaluation. We
continuously evaluate the effectiveness of our marketing programs and our marketing costs. Competition Laser vision correction, whether performed at one of our vision centers or elsewhere, competes with
several surgical and non-surgical treatments to correct refractive vision disorders, including
eyeglasses, contact lenses, other types of refractive surgery, intraocular lenses and corneal
implants. In addition, other technologies may ultimately prove to be more attractive and effective
to consumers than current laser vision correction technology. We also face competition from other providers of laser vision correction. Eye care services in the
United States are delivered through a fragmented system of local providers, including individual or
small groups of opticians, optometrists and ophthalmologists and chains of retail optical stores
and multi-site eye care vision centers. Industry sources estimate that such local providers
represent over 50% of the laser vision correction market. Laser vision correction corporate
providers such as ourselves are a specialized type of provider, operating multi-site eye care
centers that primarily provide laser vision correction. Among the laser vision correction center 7




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providers, we believe we are one of the largest providers in terms of number of procedures
performed in fixed-site vision centers in the United States. The market for providing laser vision correction service is highly competitive and fragmented. In
most, if not all, of our markets, we compete with other laser vision correction center chains,
including TLC Vision Corporation, which also is a public company, as well as with hospitals,
surgical clinics, national and local operators of vision centers and ophthalmology practices, among
others, that have purchased or rent their own lasers. The market may become increasingly more competitive as it
matures and laser vision correction penetration increases. In the past, certain competitors have utilized deeply-discounted pricing in an effort to generate
procedural volume. This practice has caused periods of intense price competition in our industry.
As a result, we have lowered our prices in the past in order to remain competitive. We currently
face competitors offering discounted prices, including a large chain of laser vision correction
centers, in some geographic markets where we conduct business. It is possible that our business
could be materially adversely affected in the future by discounting practices of competitors,
including from both a price and volume perspective. Employees As of February 28, 2005, we had 364 employees, 313 of whom were full-time. None of our employees
are subject to a collective bargaining agreement nor have we experienced any work stoppages. We
believe our relations with our employees are good. Trademarks Not all of the names we use for our products and services have been registered with the United
States Patent and Trademark Office. Where we use the TM (trademark) symbol, it is our intention
to claim trademark rights on those names under common law. The duration of such trademarks under
common law is the length of time we continue to use them. Suppliers of Laser Equipment We are not directly involved in the research, development or manufacture of ophthalmic laser
systems, diagnostic equipment, microkeratomes or microkeratome blades. There are several companies
- including Bausch & Lomb, VISX, Alcon and Nidek  whose excimer laser systems have been approved
by the FDA for commercial sale in the United States. We currently use several suppliers, including
Bausch & Lomb, VISX and Alcon, for our excimer lasers and diagnostic equipment in the United
States. We currently rely primarily on Bausch & Lomb to provide us with microkeratomes,
microkeratome blades and other disposable items required in LASIK procedures. Government Regulation Our operations are subject to extensive federal, state and local laws, rules and regulations
affecting the healthcare industry and the delivery of healthcare. Some of these include laws and
regulations, which vary significantly from state to state, prohibiting unlawful rebates and
division of fees, and limiting the manner in which prospective patients may be solicited.
Furthermore, contractual arrangements with hospitals, surgery centers, ophthalmologists and
optometrists, among others, are extensively regulated by state and federal laws, some of which may
be applicable to our business operations. Failure to comply with applicable FDA requirements could subject excimer laser manufacturers and us
to enforcement action, including product seizures, recalls, withdrawal of approvals and civil and
criminal penalties, any one or more of which could have a material adverse effect on our business,
financial condition and results of operations. In addition, clearance or approvals could be
withdrawn in some circumstances. Failure by us or our principal suppliers to comply with regulatory
requirements, or any adverse regulatory action, could result in us being named as a party in
ensuing litigation or a limitation on or prohibition of our use of excimer lasers, which in turn
would have a material adverse effect on our business, financial condition or results of operations.
Discovery of problems, violations of current laws or future legislative or administrative action in
the United States or elsewhere may adversely affect the manufacturers ability to obtain regulatory
approval of laser equipment. Furthermore, the failure of VISX, Bausch & Lomb and Alcon or any other
manufacturers that supply or may supply excimer lasers to us to comply with applicable federal,
state, or foreign regulatory requirements, or any adverse regulatory action against such
manufacturers, could limit the supply of lasers or limit our ability to use the lasers. The following is a more detailed description of certain laws and regulations that affect our
operations. Restrictions on medical devices In the United States, the FDA regulates the uses, manufacturing, labeling, distribution and
marketing of medical devices, including excimer lasers, microkeratomes and certain equipment we use
in laser vision correction surgery. 8




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Once FDA approval is obtained, medical device manufacturers are subject to continuing FDA
obligations. For example, the FDA requires that medical devices be manufactured in accordance with
its Quality System Regulations. In essence, this means that medical devices must be manufactured
and records must be maintained in a prescribed manner with respect to production, testing and
control activities. In addition, the FDA sometimes imposes restrictions and requirements regarding the
labeling and promotion of medical devices, with which users such as us, as well as manufacturers,
must comply. Non-compliance with FDA requirements could subject manufacturers to enforcement action, including:  
    Product seizures
    Recalls
    Withdrawal of approvals
    Civil and criminal penalties Non-compliance by us could subject us to civil and criminal penalties. Any such enforcement action
could have a material adverse effect on our business, financial condition and results of
operations. The use of an excimer laser to treat both eyes on the same day (bilateral treatment) has not been
approved by the FDA. The FDA has stated that it considers the use of the excimer laser for
bilateral treatment to be a practice of medicine decision, which the FDA is not authorized to
regulate. Ophthalmologists, including those practicing in our vision centers, widely perform
bilateral treatment in an exercise of professional judgment in connection with the practice of
medicine. There can be no assurance that the FDA will not seek to challenge this practice in the
future. Should the FDA choose to regulate this aspect of the use of excimer lasers in the future,
any potential resulting inconvenience to patients could discourage potential patients from having
laser vision correction and cause the total number of procedures we perform to decrease. To authorize new uses of medical devices, manufacturers are required to obtain a supplemental FDA
authorization. Obtaining these authorizations is time consuming and expensive, and we cannot be
sure that manufacturers of the devices we use will be able to obtain any such additional FDA
authorizations. Further, later discovery of problems with the medical devices we use may result in
restrictions on use of the devices or enforcement action against the manufacturers, including
withdrawal of devices from the market. Changes in legislation or regulation could affect whether
and how we can use the devices. These and other regulatory actions could limit the supply of
devices we use or our ability to use them, which could have a material adverse effect on our
business, financial condition and results of operations. Some states have enacted statutes, similar to the federal anti-kickback statute, that are
applicable to all referrals of patients. Although we have endeavored to structure our business
operations to be in material compliance with such laws, authorities could determine that our
business practices are in violation of such laws. This could have a material adverse effect on our
business, financial condition and results of operations. Federal and state laws on kickbacks and physician referrals Because laser vision correction procedures currently are not reimbursable by Medicare, Medicaid or
other governmental health programs, we do not believe numerous federal health care laws that
frequently have a material adverse effect upon health care providers business operations (such as
the federal Anti-Kickback and Stark Physician Self-Referral statutes) are currently applicable to
us. Any changes in the reimbursement and coverage rules for these governmental health programs may
cause our services to be subject to such federal laws. Although we do not anticipate such changes
in the near future, we cannot predict this with any degree of certainty. Some states have enacted
statutes, similar to the federal Anti-Kickback and Stark statutes, that are applicable to our
operations because they cover all referrals of patients regardless of the payer or type of health
care service provided. These state laws vary significantly in their scope and penalties for
violations. Although we have endeavored to structure our business operations to be in material
compliance with such state laws, authorities in those states could determine that our business
practices are in violation of such laws. This could have a material adverse effect on our
business, financial condition and results of operations. Advertising restrictions Our business is heavily dependent on advertising, which is subject to regulation by the Federal
Trade Commission. In 2002 the FTC conducted an extensive review of our advertising practices.
Following this review, the FTC concluded that certain of our past 9




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advertisements contained claims that were not properly substantiated. We elected to voluntarily settle with the FTC rather than
incur the significant expense and distraction from our business that would have resulted from
prolonged litigation. On July 18, 2003, the FTC formally entered a Complaint and an Agreement Containing Consent Order in which we agreed,
among other things, that we would not represent in our advertising that our LASIK surgery services
eliminate the need for glasses and contacts for life, pose significantly less risk to patients eye
health than wearing glasses or contacts or eliminate the risk of glare and haloing, unless, at the
time made, we possess and rely upon competent and reliable scientific evidence that substantiates
the representation. No monetary penalties were imposed on us. We cannot be certain that this order, to which we agreed, will not substantially
limit the nature and scope of our future marketing and advertising practices, which is an important
part of our strategy to generate demand for our laser vision correction services. Fee-splitting Many states prohibit professionals (including ophthalmologists and optometrists) from paying a
portion of a professional fee to another individual unless that individual is an employee or
partner in the same professional practice. Violation of a states fee-splitting prohibition may
result in civil or criminal fines, as well as loss of licensing privileges of the physician
participating in such arrangements. Many states do not offer clear guidance on what relationships
constitute fee-splitting, particularly in the context of providing management services for doctors.
Although we have endeavored to structure our business operations in material compliance with these
laws, state authorities could find that fee-splitting prohibitions apply to our business practices
in their states. This could have a material adverse effect on our business, financial condition and
results of operations. Corporate practice of medicine and optometry The laws of many states prohibit business corporations, such as us, from practicing medicine and
employing or engaging physicians to practice medicine. Some states prohibit business corporations
from practicing optometry or employing or engaging optometrists to practice optometry. Such laws
preclude companies that are not owned entirely by eye care professionals from:  
    Employing eye care professionals
    Controlling clinical decision making
    Engaging in other activities that are deemed to constitute the practice of optometry or ophthalmology This prohibition is generally referred to as the prohibition against the corporate practice of
medicine or optometry. Violation of this prohibition may result in civil or criminal fines, as well
as sanctions imposed against the professional through licensing proceedings. Although we have
endeavored to structure our contractual relationships to be in material compliance with these laws,
if any aspect of our operations were found to violate state corporate practice of medicine or optometry
prohibitions, this could have a material adverse effect on our business, financial condition and
results of operations. Facility licensure and certificates of need State Departments of Health may require us to obtain licenses in the various states in which we
have or acquire laser vision correction centers or other business operations. We believe that we
have obtained the necessary material licensure in states where licensure is required and that we
are not required to obtain licenses in other states. However, not all of the regulations governing
the need for licensure are clear and there is little guidance available regarding certain
interpretative issues. Therefore, it is possible that a state regulatory authority could determine
that we are improperly conducting business operations without a license in that state. This could
subject us to significant fines or penalties, result in our being required to cease operations in
that state and otherwise have a material adverse effect on our business, financial condition and
results of operations. While we currently have no reason to believe that we will be unable to
obtain necessary licenses without unreasonable expense or delay, there can be no assurance that we
will be able to obtain any required licensure. Some states require permission by the State Department of Health in the form of a Certificate of
Need (CON) prior to the construction or modification of an ambulatory care facility or the purchase
of certain medical equipment in excess of a certain amount. We believe that we have obtained the
necessary CONs in states where a CON is required. However, not all of the regulations governing the
need for CONs are clear and there is little guidance to cover certain interpretive issues.
Therefore, it is possible that a state regulatory authority could determine that we are improperly
conducting business operations without a CON in that state. This could have a material adverse
effect on our business, financial condition and results of operations, and there can be no
assurance that we will be able to acquire a CON in all states where it is required. Healthcare reform Healthcare reform is considered by many in the United States to be a national priority. Several
states are also currently considering healthcare proposals. We cannot predict what additional
action, if any, the federal government or any state may ultimately take with 10




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respect to healthcare reform. Healthcare reform may bring significant changes in the financing and regulation of the
healthcare industry, which could have a material adverse effect on our business, financial
condition and results of operations. Risk Factors We have experienced operating losses in the past. We commenced operations in 1991 and posted net losses in every year prior to 2003 other than 1999.
Our accumulated deficit as of December 31, 2004 was $7,732,000. Our ability to remain profitable
depends on, among other factors:  
    Continued market acceptance for laser vision correction services
    Our ability to execute our planned business strategy
    Our ability to manage equipment and operating costs Our quarterly and annual operating results are subject to significant fluctuations. Our revenue and operating results have fluctuated and may continue to fluctuate significantly from
quarter to quarter and from year to year depending on many factors, including but not limited to:  
    Market acceptance of laser vision correction services
    The number of laser vision correction procedures performed
    The timing of new advancements by our suppliers and the purchase of such advancements
or upgrades of equipment by us or our competitors
    The impact of competitors, including those who compete by deeply discounting the
price of laser vision correction services, in the geographic areas in which we operate
    Declining economic conditions in the geographic areas in which we operate, which can
result in decreased demand for our laser vision correction services
    The opening, closing or expansion of vision centers
    Regulatory matters
    Litigation
    Acquisitions and other transactions. In addition, our revenue and operating results are subject to seasonal factors. In terms of number
of procedures performed, our strongest quarter historically has been the first quarter of the year,
and our weakest the fourth quarter. We believe these fluctuations are due to several factors,
including:  
    The availability to potential patients of funds under typical corporate medical
flexible spending plans
    Time constraints imposed by the holiday season and a desire by some individuals not
to schedule procedures at that time of year Quarter-to-quarter comparisons of our operating results are not necessarily meaningful and should
not be relied upon as indications of likely future performance or annual operating results.
Reductions in revenues or net income between quarters or our failure to achieve expected quarterly
earnings per share could result in a decrease in the market price of our common stock. Changes in general economic conditions may cause fluctuations in our revenues and profitability. The cost of laser vision correction procedures is typically not reimbursed by third-party payors
such as health care insurance companies or government programs. Accordingly, as we have experienced
in prior fiscal periods, our operating results may vary based upon the impact of changes in
economic conditions on the disposable income of consumers interested in laser vision correction. A
significant decrease in consumer disposable income in a weakening economy may result in a decrease
in the number of laser vision procedures performed and a decline in our revenues and profitability.
In addition, weak economic conditions may cause some of our customers to experience financial
distress or declare bankruptcy, which may negatively impact our accounts receivable collection
experience and adversely affect our results of operations and cash flow. We derive substantially all of our revenue from laser vision correction services and a decrease in
the provision of these services could result in a significant decrease in our revenues and
profitability. We derive substantially all of our revenues from laser vision correction services. If we are not
able to provide those services or the number of laser vision correction procedures we perform
significantly decreases, our revenues and profitability would decrease significantly. We do not
have other diversified revenue sources to offset a significant decrease in revenues from our
provision of laser vision correction services. 11




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If we are unable to attract and retain qualified independent ophthalmologists, our ability to
attract patients could be negatively affected. Our revenues are generated by independent ophthalmologists who work with us to perform surgeries.
In certain states where the corporate practice of medicine is prohibited, we may contract with
professional corporations for ophthalmologists to perform surgeries at our vision centers. The
retention of independent qualified ophthalmologists is a critical factor in the success of our
vision centers. However, it is sometimes difficult for us to hire or retain qualified
ophthalmologists. If we are unable to consistently attract, hire and retain qualified
ophthalmologists, our ability to attract patients could be negatively affected. If technological improvements occur which render our equipment or services obsolete, we may need to
make significant capital expenditures and might not have the financial resources to do so. Newer technologies, techniques or products for the treatment of refractive vision disorders could
be developed with better performance than the excimer laser technology we currently use. If new and
better ophthalmic laser technology or other surgical or non-surgical methods for correcting
refractive vision disorders is introduced that we would like to use in our vision centers, we may
be unable to acquire such new technologies or may have to make significant capital expenditures to
do so. If we do not have access to sufficient funds to acquire such new technologies, our ability
to attract patients could be negatively affected. If a better-financed or lower-cost provider of laser vision correction or a competing vision
treatment forces us to lower our laser surgery prices in a particular geographic area, our revenues
and profitability could decline. Laser eye surgery competes with other surgical and non-surgical treatments for refractive vision
disorders, including eyeglasses, contact lenses, other types of refractive surgery, corneal
implants and other technologies currently under development. Among providers of laser vision
correction, competition comes from firms similar to us and from hospitals, hospital-affiliated
group entities, physician group practices and private ophthalmologists, among others, that, in
order to offer laser vision correction to patients, purchase or rent excimer lasers. Suppliers of
conventional eyeglasses and contact lenses, such as optometry chains, also may compete with us by
purchasing laser systems and offering laser vision correction to their customers. Some of our current competitors or companies that may choose to enter the industry in the future,
including laser manufacturers themselves, may have substantially greater financial, technical,
managerial, marketing or other resources and experience than we do and compete more effectively.
Competition in the market for laser vision correction could increase as excimer laser surgery
becomes more common and the number of ophthalmologists performing the procedure increases.
Additional competition may develop, particularly as the price to purchase or rent excimer laser
systems decreases. Our management, operations, strategy and marketing plans may not be successful
in meeting this competition. If more competitors offer laser vision correction or other competitive types of vision treatments
in a given geographic market, we might find it necessary to reduce the prices we charge,
particularly if competitors offer the procedures at lower prices than we do. If that were to
happen, we may not be able to make up for the reduced profit margin by increasing the number of
procedures we perform, and our revenues and profitability could decrease, as we have experienced in
prior fiscal periods. Our business has been adversely affected in the past by deeply-discounted pricing by some
competitors, and it is possible that such competitive practices may adversely affect our business
in the future. In the past, certain competitors have utilized deeply-discounted pricing in an effort to generate
procedure volume. This practice has caused periods of intense price competition in our industry. As
a result, we have lowered our prices in the past in order to remain competitive. We currently face
competitors offering discounted prices, including a large chain of laser vision correction centers,
in some geographic markets where we conduct business. It is possible that, in the future, our
revenues and profitability could decrease as a result of the discounting practices of competitors. We have expanded our direct financing program and as a result may incur increased credit risk which
could negatively affect our cash flow and results of operations. We provide certain of our patients, including patients who could not otherwise obtain third-party
financing, with the ability to pay for our procedures with direct financing. The terms of our
direct financing typically require the customer to pay a set fee up front, and the remaining
balance is paid by the customer in up to 36 equal monthly installments. As of December 31, 2004,
we had $12.7 million in accounts receivable, compared to $5.9 million as of December 31, 2003. We
are now exposed to significantly increased 12




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credit risk, particularly given patients who participate
in our direct financing program generally have not been deemed creditworthy by third-party
financing companies with more experience in credit issues than we have. If the uncollectible
amounts exceed the amounts we have reserved, we could be required to write down our accounts
receivable, and our cash flow and results of operations would be adversely affected. If laser vision correction does not gain broader market acceptance, our profitability and growth
will be severely limited. We derive substantially all of our revenues from laser vision correction. As a result, we believe
that our profitability and expansion depend to a large extent on the acceptance of laser vision
correction as a safe and effective treatment. There can be no assurance that laser vision
correction will be accepted more widely by ophthalmologists, optometrists or the general population
as an alternative to existing methods of treating refractive vision disorders. Wider acceptance of
laser vision correction may be affected adversely by:  
    Concerns about the safety and effectiveness of laser vision correction procedures,
including procedures using new technologies or techniques such as custom ablation
    General resistance to surgery of any type, and eye surgery in particular
    Cost, particularly since laser vision correction is not typically covered by government or private insurers
    The effectiveness of alternate methods of correcting refractive vision disorders
    The lack of long-term follow-up data and the possibility of unknown side effects
    Regulatory developments
    Reported adverse events or other unfavorable publicity involving patient outcomes from laser vision correction Concerns about potential side effects and long-term results may negatively impact market acceptance
of laser vision correction, result in potential liability for us and prevent us from growing our
business. Concerns have been raised with respect to the predictability and stability of results and potential
complications or side effects of laser vision correction. Laser vision correction has been provided
in the U.S. only since 1995. Any long-term complications or side effects of laser vision
correction may call into question its safety and effectiveness, which in turn may negatively affect
market acceptance of laser vision correction. Complications or side effects of laser vision
correction could lead to professional liability, malpractice, product liability or other claims
against us. Some of the possible side effects of laser vision correction may include:  
    Foreign body sensation
    Pain or discomfort
    Sensitivity to bright lights
    Blurred vision or haze
    Dryness or tearing
    Fluctuation in vision
    Night glare
    Poor or reduced visual quality
    Overcorrection or under correction
    Regression
    Corneal flap or corneal healing complications Laser vision correction may also involve the removal of ''Bowmans membrane, an intermediate
layer between the outer corneal layer and the middle corneal layer of the eye. The effect of the
removal of Bowmans membrane on patients is currently not clear. We depend on limited sources for the excimer lasers, diagnostic equipment, microkeratomes and
disposable blades we use, and shortages of these items could hinder our ability to increase our
procedure volume. We currently use several suppliers, including Bausch & Lomb, VISX and Alcon, for our excimer lasers
and diagnostic equipment in the United States. If all three of these companies become unwilling or
unable to supply us with excimer lasers and diagnostic equipment to repair or replace parts or to
provide services, our ability to open new vision centers or increase our capacity to perform laser
vision correction services could be restricted. We currently rely primarily on Bausch & Lomb to provide us with microkeratomes, the devices used to
create the corneal flap in the LASIK procedure, as well as with microkeratome blades and other
disposable items required for LASIK. There are a limited number of manufacturers of microkeratomes
and microkeratome blades, and, if alternate or additional suppliers were needed, there can be no
assurance that microkeratomes and microkeratome blades would be available in the quantities or
within the time frames we require. 13




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Any shortages in our supplies of this equipment could limit our
ability to maintain or increase the volume of procedures that we perform, which could result in a
decrease in our revenues and profitability. Our business may be impaired due to government regulations which could restrict our equipment,
services and relationships with ophthalmologists, optometrists and other healthcare providers. As described under Government Regulation and below, excimer laser manufacturers and our other
business partners, including managed care companies and third-party patient financing companies,
among others, are subject to extensive federal, state and foreign laws, rules and regulations,
including:  
    Federal restrictions on the approval, distribution and use of medical devices
    Anti-kickback statutes in some states
    Fee-splitting laws in some states
    Corporate practice of medicine restrictions in some states
    Physician self-referral laws in some states
    Anti-fraud provisions in some states
    Facility license requirements and certificates of need in some states
    Conflict of interest regulations in some states
    Rules and regulations regarding advertising and marketing practices in some states Some of these laws and regulations are vague or ambiguous, and courts and regulatory authorities
have not always provided clarification. Moreover, state and local laws, including but not limited
to those on sales and use taxes, vary from jurisdiction to jurisdiction. As a result, some of our
activities could be challenged, the success of which cannot be predicted. The failure of our suppliers to obtain regulatory approvals for any additional uses of excimer
lasers or otherwise comply with regulatory requirements could limit the number of excimer lasers we
have available for use and, therefore, limit the number of procedures we can perform. Failure of the laser manufacturers to comply with applicable FDA requirements could subject us, the
independent ophthalmologists who practice in our vision centers or those manufacturers to
enforcement actions, including product seizure, recalls, withdrawal of approvals and civil and
criminal penalties. Further, failure to comply with regulatory requirements, or any adverse
regulatory action, could result in limitations or prohibitions on our use of excimer lasers. Any
such actions or proceedings could result in negative publicity, which in turn could result in
decreased demand for our services and in a decrease in our capacity to perform laser vision
correction services. Our business is heavily dependent on advertising, which is subject to regulation by the Federal
Trade Commission. In 2002 the FTC conducted an extensive review of our advertising practices.
Following this review, the FTC concluded that certain of our past advertisements contained claims
that were not properly substantiated. We elected to voluntarily settle with the FTC rather than
incur the significant expense and distraction from our business that would have resulted from
prolonged litigation. On July 18, 2003, the FTC formally entered a Complaint and an Agreement
Containing Consent Order in which we agreed, among other things, that we would not represent in our
advertising that our LASIK surgery services eliminate the need for glasses and contacts for life,
pose significantly less risk to patients eye health than wearing glasses or contacts or eliminate
the risk of glare and haloing, unless, at the time made, we possess and rely upon competent and
reliable scientific evidence that substantiates the representation. No monetary penalties were
imposed on us. We cannot be certain that this order, to which we agreed, will not substantially
limit the nature and scope of our future marketing and advertising practices, which is an important
part of our strategy to generate demand for our laser vision correction services. We are subject to lawsuits for patient injuries, which could subject us to significant judgments
and damage our reputation. The laser vision correction procedures performed in our vision centers involve the risk of injury
to patients. Such risk could result in professional liability, malpractice, product liability, or
other claims brought against us or our independent ophthalmologists and optometrists based upon
injuries or alleged injuries associated with a defect in a products performance or malpractice by
an ophthalmologist, optometrist, technician or other health care professional. Some injuries or
defects may not become evident for a number of years. The operation of any excimer laser,
diagnostic equipment, microkeratome or other equipment may result in substantial claims against us
by patients who allege they were injured as a result of vision correction procedures. Significant
lawsuits against us could subject us to significant judgments and damage our reputation. In
addition, a partially or completely uninsured claim against us could have a material adverse effect
on our business, financial condition and results of operations. We primarily rely and intend to
continue to rely on the independent ophthalmologists professional liability insurance policies and
manufacturers insurance 14




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policies for product liability coverage, although we have limited umbrella
product and professional liability insurance. We generally require the independent ophthalmologists
who use our vision centers to maintain certain levels of professional liability insurance, although
there can be no guarantee that the ophthalmologists will be successful in obtaining or maintaining
such insurance coverage, particularly in the current insurance market. The availability of professional liability insurance has decreased and its cost has increased
significantly for a variety of reasons, including reasons outside our control. A future increase in
cost could result in the reduced profitability of our business, and a future lack of availability
of coverage for us or our independent ophthalmologists and optometrists could result in increased
exposure to liability. We established a captive insurance company, and if significant claims are paid, it could affect our
profitability and our financial condition. 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. For the 12 months ending December 17, 2003, our captive insurance company
purchased excess liability coverage for 80% of our losses in the year in excess of $1,000,000 per
occurrence, up to $11,000,000. Under that arrangement, the coverage providers obligation arises
only after our captive pays the first $1,000,000 of any loss and the coverage providers are only
obligated to pay an aggregate of $8,000,000 for that year. Beginning December 18, 2003, the
Company elected to use the captive insurance company for both the primary insurance and the excess
liability coverage. 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. Disputes with respect to intellectual property could result in a decrease in revenues and
profitability. There has been substantial litigation in the United States, Canada and elsewhere regarding the
patents on ophthalmic lasers. If the use of an excimer laser or other procedure performed at any
our vision centers is deemed to infringe a patent or other proprietary right, we may be named as a
defendant in ensuing litigation, prohibited from using the equipment or performing the procedure
that is the subject of the patent dispute, or required to obtain a royalty-bearing license, which
may involve substantial costs including ongoing royalty payments. If a license is not available on
acceptable terms, we may be required to seek the use of products that do not infringe the patent.
The unavailability of alternate products could cause us to cease operations in the United States or
Canada or delay our future expansion. If we are prohibited from performing laser vision correction
at any of our vision centers, our revenues and profitability would decrease. We are dependent on a small number of senior managers. Our success depends, to a significant extent, upon the efforts and abilities of our Chairman and
Chief Executive Officer, Stephen N. Joffe, and other members of senior management. We currently do
not have employment agreements with senior key employees, other than short-term employment
agreements with Kevin M. Hassey, our President, and Alan H. Buckey, our Executive Vice
President/Finance and Chief Financial Officer. We do not carry key man insurance on any of these
key employees. The loss of the services of one or more of these key employees could have a material
adverse effect on our business. Internet The Companys website is www.lasikplus.com. The Company makes available free of charge through a
link provided at the website its 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, free of charge, please
send a request to Investor Relations at LCA-Vision Inc., 7840 Montgomery Road, Cincinnati, Ohio
45236. 
 Item 2. Properties. Our corporate headquarters and one of our laser vision correction centers are located in a 32,547
sq. ft. office building that we own in Cincinnati, Ohio. Our other laser vision correction centers
are in leased locations. The typical location is in a professional office building and includes a
laser surgery room, private examination rooms, and patient waiting areas. The leased space ranges
in size from approximately 2,400 to 5,648 square feet with expiration dates ranging from June 30,
2005 to June 30, 2013. 15




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Item 3. Legal Proceedings. Our business results in a number of medical malpractice lawsuits. Claims reported to us prior to
December 18, 2002 were generally covered by external insurance policies and to date have not had a
material financial impact on our business other than the cost of insurance and our deductibles
under those policies. Due to substantial increases in insurance premiums, effective as of December
18, 2002, we established a captive insurance company to provide coverage for claims brought against
us after December 17, 2002. Our captive insurance company is managed by an independent insurance
consulting and management firm and is capitalized by us based on actuarial studies performed by an
affiliate of the consulting and management firm. Since December 18, 2003, the Company has used the captive insurance company for both primary
insurance and excess liability coverage. A number of claims are now pending with our captive
insurance company. Over the first two years of operation, the losses paid by the captive
insurance company have not been material. We also are subject to other litigation from time to time, none of which we currently consider to
be material. We believe that none of the legal proceedings to which we are currently subject will have a
material adverse effect on our business, financial position or results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 
 PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. Our common stock is quoted on the Nasdaq National Market under the symbol LCAV. There were
approximately 23,900 beneficial owners of our Common Stock as of January 26, 2005. The following table sets forth the range of high and low bid prices of the common stock as reported
by the Nasdaq National Market for the specific periods. All prices are adjusted for a 3-for-2
stock split on December 15, 2004. 2004
    
    
    2003High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    $
    18.13
    
    
    $
    12.00
    
    
    $
    2.49
    
    
    $
    1.50Second Quarter
    
    
    20.87
    
    
    
    15.13
    
    
    
    6.50
    
    
    
    2.21Third Quarter
    
    
    19.75
    
    
    
    13.28
    
    
    
    13.00
    
    
    
    5.71Fourth Quarter
    
    
    24.29
    
    
    
    15.67
    
    
    
    14.79
    
    
    
    8.91
 The Company initiated a quarterly cash dividend of $0.08 per share in the third quarter of 2004.
After the 3-for-2 stock split, the Company paid a quarterly cash dividend of $0.08 per share, in
effect raising the payout by 50% over the amount paid in the third quarter of 2004. The Company has not sold any unregistered securities within the past three years and did not make
any purchases of LCA-Vision common stock on behalf of itself or any affiliates during the fourth
quarter of 2004. 16




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Item 6. Selected Financial Data. The data set forth below should be read in conjunction with the Consolidated Financial Statements
and related notes and Managements Discussion and Analysis of Financial Condition and Results of
Operations. Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(amounts in thousands, except per share data)Consolidated Statements of Operations Data:Revenues:Laser refractive surgery
    
    $
    127,122
    
    
    $
    81,423
    
    
    $
    61,838
    
    
    $
    68,096
    
    
    $
    63,450Operating costs and expenses:Medical professional and license fees
    
    
    24,275
    
    
    
    15,779
    
    
    
    12,270
    
    
    
    13,626
    
    
    
    15,542Direct costs of services
    
    
    40,842
    
    
    
    31,507
    
    
    
    28,796
    
    
    
    33,616
    
    
    
    27,218General and administrative expenses
    
    
    10,292
    
    
    
    8,043
    
    
    
    8,327
    
    
    
    8,727
    
    
    
    9,394Marketing and advertising
    
    
    20,468
    
    
    
    12,566
    
    
    
    12,823
    
    
    
    12,732
    
    
    
    14,565Depreciation and amortization
    
    
    7,045
    
    
    
    6,377
    
    
    
    5,997
    
    
    
    5,625
    
    
    
    3,839Special (benefit) charges
    
    
    
    
    
    
    
    
    
    
    (174
    )
    
    
    1,774
    
    
    
    Total expenses
    
    
    102,922
    
    
    
    74,272
    
    
    
    68,039
    
    
    
    76,100
    
    
    
    70,558Operating income (loss)
    
    
    24,200
    
    
    
    7,151
    
    
    
    (6,201
    )
    
    
    (8,004
    )
    
    
    (7,108
    )Equity in earnings from unconsolidated businesses
    
    
    369
    
    
    
    317
    
    
    
    241
    
    
    
    372
    
    
    
    49Interest expense
    
    
    (24
    )
    
    
    (18
    )
    
    
    (4
    )
    
    
    (17
    )
    
    
    (58
    )Interest and dividend income
    
    
    2,161
    
    
    
    540
    
    
    
    225
    
    
    
    924
    
    
    
    2,713Litigation settlement
    
    
    
    
    
    
    
    
    
    
    2,282
    
    
    
    
    
    
    
    Other (expense) income
    
    
    (306
    )
    
    
    (130
    )
    
    
    (195
    )
    
    
    (61
    )
    
    
    604Income (loss) before taxes on income
    
    
    26,400
    
    
    
    7,860
    
    
    
    (3,652
    )
    
    
    (6,786
    )
    
    
    (3,800
    )Income tax (benefit) expense
    
    
    (5,629
    )
    
    
    591
    
    
    
    174
    
    
    
    16,589
    
    
    
    (1,434
    )Income (loss) available to common shareholders
    
    $
    32,029
    
    
    $
    7,269
    
    
    $
    (3,826
    )
    
    $
    (23,375
    )
    
    $
    (2,366
    )Income (loss) per common shareBasic
    
    $
    1.59
    
    
    $
    0.44
    
    
    $
    (0.24
    )
    
    $
    (1.34
    )
    
    $
    (0.12
    )Diluted
    
    
    1.54
    
    
    
    0.44
    
    
    
    (0.24
    )
    
    
    (1.34
    )
    
    
    (0.12
    )Cash dividends
    
    $
    0.13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares used in computationBasic
    
    
    20,099
    
    
    
    16,391
    
    
    
    16,191
    
    
    
    17,465
    
    
    
    19,112Diluted
    
    
    20,814
    
    
    
    16,616
    
    
    
    16,191
    
    
    
    17,465
    
    
    
    19,112Selected Operating DataLaser vision correction procedures
    
    
    95,835
    
    
    
    65,485
    
    
    
    57,104
    
    
    
    72,032
    
    
    
    59,144
 At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance Sheet DataCash and cash equivalents
    
    $
    86,588
    
    
    $
    64,908
    
    
    $
    18,298
    
    
    $
    16,609
    
    
    $
    19,692Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,626Working capital
    
    
    91,682
    
    
    
    60,986
    
    
    
    13,020
    
    
    
    14,378
    
    
    
    24,063Total assets
    
    
    129,577
    
    
    
    90,037
    
    
    
    39,996
    
    
    
    43,188
    
    
    
    75,597Debt maturing in one year
    
    
    542
    
    
    
    
    
    
    
    10
    
    
    
    26
    
    
    
    178Total debt, excluding current portion
    
    
    376
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    48Accumulated deficit
    
    
    (7,732
    )
    
    
    (37,069
    )
    
    
    (44,338
    )
    
    
    (40,512
    )
    
    
    (17,136
    )Total stockholders investment
    
    
    111,837
    
    
    
    78,802
    
    
    
    32,112
    
    
    
    38,202
    
    
    
    65,045
 17




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis in conjunction with ''Item 6. Selected
Financial Data above and with the financial statements and related notes included in Item 8.
Financial Statements and Supplemental Data of this Form 10-K. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ
materially from those discussed here. Factors that could contribute to such differences include,
but are not limited to, those discussed in Item 1. Business, under Government Regulation and
Risk Factors Overview We are a leading developer and operator of fixed-site laser vision correction centers under the
brand name LasikPlus. 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. We currently use several suppliers, including
Bausch & Lomb, VISX and Alcon, for our excimer lasers and diagnostic equipment in the United
States. Our vision centers are supported mainly by independent credentialed board-certified
ophthalmologists and optometrists, as well as other health care professionals. The
ophthalmologists perform the laser vision correction procedures in our vision centers, and either
ophthalmologists or optometrists conduct pre-procedure evaluations and post-procedure follow-ups
in-center. The majority of our revenues currently are derived from LASIK procedures performed in our U.S.
vision centers. Our operating costs and expenses include:  
    Medical professional and license fees, including per procedure fees for the
ophthalmologists performing laser vision correction and the license fees per procedure
paid to equipment suppliers VISX, Bausch & Lomb and Alcon
    Direct costs of services, including vision 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. Results of Operations Revenues We derived the majority of our revenues for the last three years from the delivery of LASIK 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 these 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
    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 LASIK
    The effect of competition and discounting practices in our industry Certain states prohibit us from practicing medicine, employing ophthalmologists to practice
medicine on our behalf or employing optometrists to render optometry services on our behalf. In
those states, we may contract with professional corporations to provide these services. Beginning
in September 2002, we started a process to amend our management agreements with professional
corporations. The new management agreements provide us with financial and operational control of
the professional corporations. Therefore, we now consolidate the financial results for those
professional corporations under the new management agreements 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.This change did not have a material
impact on our operating income (loss), as the increase in revenue resulting from consolidation of
these professional corporations is offset by a corresponding increase in medical professional fees. 18




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##### Table of Contents



The following table details the number of laser vision correction procedures performed at our
consolidated vision centers. 2004
    
    
    2003
    
    
    2002First Quarter
    
    
    24,270
    
    
    
    17,028
    
    
    
    17,592Second Quarter
    
    
    24,093
    
    
    
    16,432
    
    
    
    14,797Third Quarter
    
    
    23,248
    
    
    
    15,965
    
    
    
    12,511Fourth Quarter
    
    
    24,224
    
    
    
    16,060
    
    
    
    12,204Year
    
    
    95,835
    
    
    
    65,485
    
    
    
    57,104
 In 2004, revenues increased by $45,699,000, or $56.1%, to $127,122,000 from $81,423,000 in 2003.
Approximately $37,737,000 of this increase in revenues in 2004 was a result of higher procedure
volumes and approximately $7,962,000 was a result of improved pricing. Continued improvement in
marketing and advertising effectiveness and continued growth and increased patient acceptance of
laser vision correction, together with third-party financing and our own patient financing plan,
among other factors, helped to grow procedure volume in 2004 over 2003. In 2003, revenues increased by $19,585,000, or 32.7%, to $81,423,000 from $61,838,000 in 2002.
Approximately $10,509,000 of this increase in revenues in 2003 was a result of improved pricing,
and approximately $9,076,000 was due to higher procedure volumes. As in 2004, we believe that
improved marketing and advertising effectiveness, together with third-party patient financing and
our own patient financing plan, helped to grow procedure volume in 2003 over 2002. Although the market for laser vision correction remains highly competitive, we have raised our
average price per procedure over the last sixteen quarters. Our average price per procedure has
increased from $877 in the fourth quarter of 2000 to $1,351 in the quarter ended December 31, 2004.
In the third quarter of 2003, we introduced custom laser vision correction technology from Alcon
in five of our markets, and we later upgraded our VISX lasers in all our markets to perform custom
procedures. Our strongest quarter in terms of number of procedures performed historically has been the first
quarter of the year. We believe this is related to a number of factors, including the availability
of funds under typical corporate medical flexible spending programs and the general effect of the
New Year season. This seasonality was substantially offset in 2004 by opening vision centers
throughout the year. Operating Costs and Expenses 2004 Compared to 2003 The following table shows the increase in components of operating expenses from 2003 to 2004 in
dollars and as a percent of revenues for each period (dollars in thousands): Increase
    
    
    % of Revenue2004
    
    
    2003
    
    
    (Decrease)
    
    
    2004
    
    
    2003Medical professional and license fees
    
    $
    24,275
    
    
    $
    15,779
    
    
    $
    8,496
    
    
    
    19.1
    %
    
    
    19.4
    %Direct costs of services
    
    
    40,842
    
    
    
    31,507
    
    
    
    9,335
    
    
    
    32.1
    
    
    
    38.7General and administrative expenses
    
    
    10,292
    
    
    
    8,043
    
    
    
    2,249
    
    
    
    8.1
    
    
    
    9.9Marketing and advertising
    
    
    20,468
    
    
    
    12,566
    
    
    
    7,902
    
    
    
    16.1
    
    
    
    15.4Depreciation and amortization
    
    
    7,045
    
    
    
    6,377
    
    
    
    668
    
    
    
    5.5
    
    
    
    7.8
 Medical professional expenses increased by approximately $5,522,000 in 2004 from 2003 as a result
of increased revenues from higher procedure volumes. License fees increased by $2,974,000,
primarily as a result of higher procedure volume. Direct costs of services include the salary component of physician compensation for certain
physicians employed by us, staffing, equipment, medical supplies, and facility costs of operating
laser vision correction centers. These direct costs increased in 2004 by $9,335,000 compared to
2003. This increase was largely due to salaries and benefits, financing fees related to
third-party patient financing, rent and utilities expense and surgical supplies. General and administrative expenses increased by $2,249,000 in 2004 as compared to 2003, primarily
as a result of salaries and benefits, professional services, and state and local taxes. 19




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Marketing and advertising expenses increased by $7,902,000 in 2004 from 2003, primarily as a result
of our efforts to support new markets and help to grow volume in existing markets. Depreciation and amortization expense increased by $668,000 in 2004 from 2003, primarily as a
result of opening seven new vision centers in 2004. Interest and dividend income increased by $1,621,000 in 2004 from 2003, due to income on long-term
receivables, higher levels of invested cash and higher interest rates. Income tax benefit of $5,629,000 was recorded in 2004. U.S. income tax was accrued for the amount
of $1,046,000. The current year income tax provision of our Canadian facilities was $621,000. 2003 Compared to 2002 The following table shows the increase (decrease) in components of operating expenses from 2002 to
2003 in dollars and as a percent of revenues for each period (dollars in thousands): Increase
    
    
    % of Revenue2003
    
    
    2002
    
    
    (Decrease)
    
    
    2003
    
    
    2002Medical professional and license fees
    
    $
    15,779
    
    
    $
    12,270
    
    
    $
    3,509
    
    
    
    19.4
    %
    
    
    19.8
    %Direct costs of services
    
    
    31,507
    
    
    
    28,796
    
    
    
    2,711
    
    
    
    38.7
    
    
    
    46.6General and administrative expenses
    
    
    8,043
    
    
    
    8,327
    
    
    
    (284
    )
    
    
    9.9
    
    
    
    13.5Marketing and advertising
    
    
    12,566
    
    
    
    12,823
    
    
    
    (257
    )
    
    
    15.4
    
    
    
    20.7Depreciation and amortization
    
    
    6,377
    
    
    
    5,997
    
    
    
    380
    
    
    
    7.8
    
    
    
    9.7
 Medical professional expenses increased by approximately $3,534,000 in 2003 from 2002.
Approximately $1,931,000 of this increase was due to higher revenues and approximately $1,603,000
was due to the consolidation in 2003 for the first time of some professional corporations with
which we contract to provide medical services in those states where we cannot practice medicine.
License fees decreased by $25,000. Purchasing rebates from suppliers were almost entirely offset by
an increase in license fees due primarily to higher procedure volumes. Direct costs of services include the salary component of physician compensation for certain
physicians, staffing, equipment, medical supplies, and facility costs of operating laser vision
correction centers. These direct costs increased in 2003 by $2,711,000 compared to 2002, largely
because of an increase in provision for bad debt on patient financing due to higher levels of
accounts receivable, financing fees related to third-party patient financing, rent and utilities
expense and salaries and benefits. These increases in expenses were partially offset by a decrease
in insurance. General and administrative expenses decreased by $284,000 in 2003 as compared to 2002, primarily as
a result of the absence of warrant compensation expense, a decrease in expenditures on professional
services in 2003 and a decrease in insurance expenses. Warrant amortization relating to certain
warrants granted to a former joint venture partner in our managed care business was completed in
2002. These decreases were partially offset by an increase in salaries and benefits. Marketing and advertising expenses decreased by $257,000 in 2003 from 2002, primarily as a result
of more cost-effective media buying. Depreciation and amortization expense increased by $380,000 in 2003 from 2002, primarily as a
result of laser upgrades and the acquisition of diagnostic equipment to support custom LASIK. Interest income increased by $315,000 in 2003 from 2002, due both to income on patient financing
and to higher levels of invested cash. Income tax expense of $591,000 was recorded in 2003. U.S. income tax was accrued for the amount of
$244,000. The current year income tax provision of our Canadian facilities was $347,000. Liquidity and Capital Resources Net cash provided by operating activities in 2004 was $29,807,000, significantly exceeding
expenditures in investing activities during the period to open new facilities. As a result, cash
and cash equivalents increased to $86,588,000 (including $0.5 million of cash maintained by our
captive insurance company pursuant to statutory requirements) as of December 31, 2004, compared to 20




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$64,908,000 as of December 31, 2003. The major use of cash in 2004 was capital expenditures in
connection with opening new vision centers and the payment of cash dividends. In July 2004, we allowed our $10,000,000 revolving credit facility with The Provident Bank to
expire. We had no outstanding borrowings under the credit facility and currently do not anticipate
a need for a credit facility. Our contractual obligations for future cash payments as of December 31, 2004 are summarized in the
following table. Payments due by PeriodContractual Obligations
    
    
    Total
    
    
    
    Less than 1 year
    
    
    
    1 - 3 years
    
    
    
    3 - 5 years
    
    
    
    More than 5 yearsCapital Leases
    
    
    
    960,000
    
    
    
    
    576,000
    
    
    
    
    384,000
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    
    10,688,000
    
    
    
    
    3,461,000
    
    
    
    
    4,139,000
    
    
    
    
    2,560,000
    
    
    
    
    528,000Deferred Compensation
    
    
    
    1,215,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,215,000Total
    
    
    
    12,863,000
    
    
    
    
    4,037,000
    
    
    
    
    4,523,000
    
    
    
    
    2,560,000
    
    
    
    
    1,743,000
 As of December 31, 2004,
we had net operating loss carryforwards for federal income tax
purposes of approximately $15,000,000. These expire in varying amounts from 2017 until 2022. In December 2002, we purchased medical equipment that was being previously leased for $672,000.
This resulted in a reduction in leased equipment expense of $734,000 and an increase in
depreciation expense of $224,000 in 2003 as compared to 2002. Our costs associated with the opening of a new vision center generally consist of capital
expenditures such as the purchase or lease of lasers, diagnostic equipment, office equipment 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 $1.0 million and $1.5 million. Actual costs vary from vision center to vision center
based upon the location of the market, the number of lasers purchased or leased for the vision
center, the site of the vision center, the cost of grand opening marketing and the level of
leasehold improvements required. 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. The following is a list of the new vision centers we opened in the last two fiscal years 2004
    

2003Orlando, FL
    
    Cleveland, OHToronto, Canada
    
    Indianapolis, INSan Antonio, TX
    
    Las Vegas, NVJacksonville, FL
    
    Houston, TXKansas City, KSSt. Louis, MOSalt Lake City, UT
 In the third quarter of 2003, we updated our VISX lasers and diagnostic equipment to enable us to
offer custom ablation in all our markets. In addition, in the fourth quarter of 2003, we upgraded
our Bausch & Lomb lasers to offer their recently approved Zyoptix TM
custom technology. The cost of our laser and equipment upgrades and vision center expansion
plans resulted in capital expenditures of $5,231,000 in 2003 and $8,307,000 in 2004, which were
funded by cash flow from operations in both years. We have expanded the use of our own sponsored patient financing. As of December 31, 2004, we had
$9.8 million in accounts receivable, net of allowance for doubtful accounts, which is an increase
of $5.8 million since December 31, 2003. Our consolidated cash and cash equivalents includes $0.5 million of cash maintained by our
consolidated captive insurance company pursuant to statutory requirements as of December 31, 2004.
These funds are not available for general corporate purposes. We expect cash reserves in our
captive insurance company to grow over time. We believe that cash flow from operations, available cash and short-term investments provide
sufficient cash reserves and liquidity to fund our working capital needs, capital expenditures and
debt service requirements. 21




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Critical Accounting Policies and Estimates Accounts Receivable 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
and the remainder is deducted over a period of 12 to 36 months. 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 percent per year. The discount rate assumption is based upon current market rates charged
by other providers of unsecured credit to similar customers. Interest income is recorded over the
term of the payment program. As of December 31, 2004, the discount in receivables with an initial term over 12 months was
$525,000. Allowance for Doubtful Accounts As a result of an expansion of the amount of patient financing provided in 2004, we are exposed to
more credit risk than we have experienced in the past. Based upon our own experience with patient
financing and based upon the credit experience of lenders that provide financing to customers
similar to ours, we have established bad debt reserves as of December 31, 2004 of $2,865,000
against accounts receivable of $12,698,000. To the extent that our actual bad debt writeoffs are
greater than our estimated bad debt reserve, it would adversely impact our results of operations
and cash flows and 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. Beginning December 18, 2003, the Company elected to use the captive insurance company for
both the primary insurance and the excess liability coverage. A number of claims are now pending
with our captive insurance company. The financial statements of the captive insurance company are
consolidated with our financial statements since it is a wholly-owned enterprise. As of December
31, 2004, we recorded an insurance reserve amount of $2,568,000 which primarily represents an
actuarially determined estimate of claims incurred but not yet reported. 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 and 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 $10,489,000 in the first six months of 2004 as a
result of a reversal of the valuation allowance on deferred tax assets. A benefit of $5,900,000 was
recorded in the first quarter of 2004, and the balance of $4,589,000 was recorded in the second
quarter of 2004. The reversal of the valuation allowance on deferred tax assets was made because
of continued profitability of the Company in 2004 and our expected future profitability. As a
result, we currently believe it is more likely than not that the deferred tax asset relating
primarily to our U.S. net operating loss carryforwards will be realized to the extent of the tax
benefit recorded. 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. We acquired approximately
$19,000,000 of net operating loss carryforwards in 1997 $ when we purchased
Refractive Centers International, Inc. The use of these acquired net
operating losses was subject
to annual IRC 382 limitation of $2,500,000. During 2003 and 2004, we used all of the net operating loss
carryforwards acquired from Refractive Centers International. At December 31, 2004, we have approximately $15,000,000 of net operating loss carryforwards that
can be used to reduce future taxable income. A portion of these net operating loss carryforwards,
$8,500,000, is subject to annual IRC Section 382 limitation of $3,250,000. 22




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Consolidation We use the consolidation method to report our investment in entities in which we own a majority of
the voting stock. 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 Arrangements. Prior to September 2002, our contractual management arrangements did not
permit consolidation of our relationships with professional corporations pursuant to EITF 97-2
because we did not maintain a controlling financial interest in the professional corporations.
Beginning in September 2002, we began a process of renewing our agreements with the professional
corporations and opening new vision centers with agreements that meet the controlling financial
interest criteria of EITF 97-2. As a result of the FASBs issuance of FIN 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51,in January 2003, we evaluated the contractual management arrangements
entered into with professional corporations after January 1, 2003 and have determined that
consolidation of these entities was appropriate under the FIN 46 guidance. With respect to the
three remaining professional corporations with which we had a contractual management arrangement
prior to January 1, 2003, we began consolidating these entities as of July 1, 2003, which did not
have a material impact on our consolidated financial statements. If modifications are made to
existing management agreements, or if new agreements are made under different terms than existing
management agreements, then the financial statements of those professional corporations may not be
consolidated in the future. The professional corporations do not have any material assets or debt
obligations and do not materially increase our exposure to risk of loss. Recent Accounting Pronouncements On December 16, 2004,
the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R),
Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
No. 123(R) 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(R) is effective for all stock-based awards granted on or after
July 1, 2005. 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 123(R) on our consolidated results of operations. 
 Item 7A. Quantitative and Qualitative Disclosures 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 a very low exposure to changes in foreign currency exchange rates and, as such, have not
used derivative financial instruments to manage foreign currency fluctuation risk. 
 Item 8. Financial Statements and Supplementary Data. Index to Financial Statements PageReport of Management
    
    
    
    24Report of Independent Registered Public Accounting Firm on Financial Statements
    
    
    
    25Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
    
    
    
    26Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    
    27Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    
    
    
    28Consolidated Statements of Cash Flows for the three years ended December 31, 2004, 2003 and 2002
    
    
    
    29Consolidated Statements of Stockholders Investment for the three years ended December 31, 2004, 2003 and 2002
    
    
    
    30Notes
to Consolidated Financial Statements
    
    
    
    31
 23




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REPORT OF MANAGEMENT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING We, the management of LCA-Vision Inc., are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act Rules 13a-15(f), the consolidated financial statements, and the information contained in this report, including its accuracy. We prepared the accompanying consolidated financial statements in accordance
 with generally accepted accounting principles. In addition to selecting
 appropriate accounting principles, we are responsible for the way information
is presented and its reliability. To report financial results we must often make
estimates based on currently available information and judgments of current conditions and circumstances. We assessed the effectiveness of the Companys internal control over
financial reporting as of December 31, 2004.  In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
 Internal Control - Integrated Framework.  As a result of this assessment management believes
 that, as of December 31, 2004, the Companys internal control over financial reporting is
 effective based on the criteria described above.  No matter
 how well designed, all internal control systems have inherent limitations and even those
 systems determined to be effective provide only reasonable assurance with respect to
 financial statement preparation and presentation. Our assessment of the effectiveness of the Companys internal
control over financial reporting as of December 31, 2004 has been
audited by Ernst &  Young LLP,
an independent registered public accounting firm, as stated in their attestation report which is
included herein. /s/ Stephen N. Joffe
    
    /s/ Alan H. BuckeyStephen N. Joffe
    
    Alan H. BuckeyChairman of the Board, Chief Executive Officer
    
    Executive Vice President/Finance, Chief Financial Officer(Principal Executive Officer)
    
    (Principal Financial and Accounting Officer)
 24




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of LCA-Vision, Inc. We have audited the accompanying consolidated balance sheets of LCA-Vision, Inc. as of December 31,
2004 and 2003, and the related consolidated statements of operations, shareholders investment, and
cash flows for each of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedule listed in the index at Item 15(a)(2).These financial
statements and schedule are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of LCA-Vision, Inc. at December 31, 2004 and 2003,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule for each of the three years ended
December 31, 2004, when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of LCA-Vision, Inc.s internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 8, 2005 expressed an unqualified opinion thereon. Ernst & Young
Cincinnati, Ohio
March 8, 2005 25




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Report of Independent Registered Public Accounting Firm on Managements Assessment of
Internal Control Over Financial Reporting The Board of Directors and Shareholders of LCA-Vision, Inc. We have audited managements assessment, included in Managements Report on Internal Control
over Financial Reporting in the accompanying Report of Management, which is located under Item
8 on page 24, that LCA-Vision, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). LCA-Vision, Inc.s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the companys internal control over financial
reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that LCA-Vision, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, LCA-Vision, Inc. maintained, in
all material respects, effective internal control over financial reporting as of December 31,
2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of LCA-Vision, Inc. as of
December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders
investment, and cash flows for each of the three years in the period ended December 31, 2004 of
LCA-Vision, Inc. and our report dated March 8, 2005 expressed an unqualified opinion thereon. Ernst & Young LLP
Cincinnati, Ohio
March 8, 2005 26




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##### Table of Contents



LCA-VISION INC.CONSOLIDATED BALANCE SHEETSAt December 31,2004
    
    
    2003(Dollars in thousands,except par value)AssetsCurrent assetsCash and cash equivalents
    
    $
    86,588
    
    
    $
    64,908Accounts receivable, net of allowance for doubtful accounts of $2,260 and $1,480
    
    
    8,662
    
    
    
    3,255Receivables from vendors
    
    
    1,077
    
    
    
    802Prepaid expenses, inventory and other
    
    
    2,420
    
    
    
    1,422Deferred tax assets
    
    
    6,015
    
    
    
    Total current assets
    
    
    104,762
    
    
    
    70,387Property and equipment
    
    
    50,374
    
    
    
    41,967Accumulated depreciation and amortization
    
    
    (31,743
    )
    
    
    (24,622
    )Property and equipment, net
    
    
    18,631
    
    
    
    17,345Accounts receivable, net of allowance for doubtful accounts of $605 and $416
    
    
    1,171
    
    
    
    749Goodwill
    
    
    275
    
    
    
    275Deferred compensation plan assets
    
    
    1,187
    
    
    
    461Investment in unconsolidated businesses
    
    
    168
    
    
    
    385Deferred tax assets
    
    
    2,593
    
    
    
    Other assets
    
    
    790
    
    
    
    435Total assets
    
    $
    129,577
    
    
    $
    90,037Liabilities and Stockholders InvestmentCurrent liabilitiesAccounts payable
    
    $
    4,964
    
    
    $
    4,883Accrued liabilities and other
    
    
    7,574
    
    
    
    4,518Debt maturing in one year
    
    
    542
    
    
    
    Total current liabilities
    
    
    13,080
    
    
    
    9,401Capital lease obligations
    
    
    376
    
    
    
    Deferred compensation liability
    
    
    1,215
    
    
    
    457Insurance reserve
    
    
    2,568
    
    
    
    963Minority equity interest
    
    
    501
    
    
    
    414Stockholders investmentCommon stock ($.001 par value; 23,767,353 and 23,465,342 shares and
20,216,559 and 19,914,548 shares issued and outstanding, respectively)
    
    
    24
    
    
    
    16Contributed capital
    
    
    134,708
    
    
    
    131,203Common stock in treasury, at cost (3,550,794 shares and 3,550,794 shares)
    
    
    (15,462
    )
    
    
    (15,462
    )Accumulated deficit
    
    
    (7,732
    )
    
    
    (37,069
    )Accumulated other comprehensive income
    
    
    299
    
    
    
    114Total stockholders investment
    
    
    111,837
    
    
    
    78,802Total Liabilities and Stockholders Investment
    
    $
    129,577
    
    
    $
    90,037
 See Notes to Consolidated Financial Statements 27




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LCA-VISION INC.CONSOLIDATED STATEMENTS OF OPERATIONSYears Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in thousands, except per share amounts)Revenues   Laser refractive surgery
    
    $
    127,122
    
    
    $
    81,423
    
    
    $
    61,838Operating costs and expensesMedical professional and license fees
    
    
    24,275
    
    
    
    15,779
    
    
    
    12,270Direct costs of services
    
    
    40,842
    
    
    
    31,507
    
    
    
    28,796General and administrative expenses
    
    
    10,292
    
    
    
    8,043
    
    
    
    8,327Marketing and advertising
    
    
    20,468
    
    
    
    12,566
    
    
    
    12,823Depreciation and amortization
    
    
    7,045
    
    
    
    6,377
    
    
    
    5,997Special charges (benefit)
    
    
    
    
    
    
    
    
    
    
    (174
    )Operating income (loss)
    
    
    24,200
    
    
    
    7,151
    
    
    
    (6,201
    )Equity in earnings from unconsolidated businesses
    
    
    369
    
    
    
    317
    
    
    
    241Minority equity interest
    
    
    (544
    )
    
    
    (372
    )
    
    
    (189
    )Interest expense
    
    
    (24
    )
    
    
    (18
    )
    
    
    (4
    )Interest and dividend income
    
    
    2,161
    
    
    
    540
    
    
    
    225Other income (expense), net
    
    
    238
    
    
    
    242
    
    
    
    (6
    )Litigation settlement
    
    
    
    
    
    
    
    
    
    
    2,282Income (loss) before taxes on income
    
    
    26,400
    
    
    
    7,860
    
    
    
    (3,652
    )Income tax (benefit) expense
    
    
    (5,629
    )
    
    
    591
    
    
    
    174Net income (loss)
    
    $
    32,029
    
    
    $
    7,269
    
    
    $
    (3,826
    )Income (loss) per common shareBasic
    
    $
    1.59
    
    
    $
    0.44
    
    
    $
    (0.24
    )Diluted
    
    $
    1.54
    
    
    $
    0.44
    
    
    $
    (0.24
    )Weighted average shares outstandingBasic
    
    
    20,099
    
    
    
    16,391
    
    
    
    16,191Diluted
    
    
    20,814
    
    
    
    16,616
    
    
    
    16,191
 See Notes to Consolidated Financial Statements 28




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LCA-VISION INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in thousands)Cash flow from operating activitiesNet income (loss)
    
    $
    32,029
    
    
    $
    7,269
    
    
    $
    (3,826
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    7,045
    
    
    
    6,377
    
    
    
    5,997Warrant amortization
    
    
    
    
    
    
    
    
    
    
    510Provision for loss on doubtful accounts
    
    
    969
    
    
    
    1,781
    
    
    
    Gain on disposal of assets
    
    
    
    
    
    
    (190
    )
    
    
    Deferred income taxes
    
    
    (8,608
    )
    
    
    
    
    
    
    Deferred tax benefit or disqualified stock options
    
    
    1,311
    
    
    
    
    
    
    
    Deferred compensation
    
    
    758
    
    
    
    328
    
    
    
    129Insurance reserve
    
    
    1,605
    
    
    
    908
    
    
    
    Restructuring/impairment provision
    
    
    
    
    
    
    
    
    
    
    (174
    )Equity in earnings from unconsolidated businesses
    
    
    (369
    )
    
    
    (317
    )
    
    
    (241
    )Other, net
    
    
    
    
    
    
    
    
    
    
    6Changes in assets and liabilities:Accounts receivables
    
    
    (6,798
    )
    
    
    (5,191
    )
    
    
    124Receivables from vendors
    
    
    (275
    )
    
    
    (465
    )
    
    
    (103
    )Prepaid expenses, inventory and other
    
    
    (998
    )
    
    
    40
    
    
    
    497Accounts payable
    
    
    81
    
    
    
    1,028
    
    
    
    1,210Accrued liabilities and other
    
    
    3,057
    
    
    
    912
    
    
    
    1,564Net cash provided by operating activities
    
    
    29,807
    
    
    
    12,480
    
    
    
    5,693Cash flows from investing activitiesPurchase of property and equipment
    
    
    (7,213
    )
    
    
    (5,231
    )
    
    
    (1,789
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    225
    
    
    
    8Deferred Compensation Plan
    
    
    (726
    )
    
    
    (334
    )
    
    
    (127
    )Other, net
    
    
    (108
    )
    
    
    204
    
    
    
    (83
    )Net cash (used in) investing activities
    
    
    (8,047
    )
    
    
    (5,136
    )
    
    
    (1,991
    )Cash flows from financing activitiesPrincipal payments of long-term debt and capital lease obligations
    
    
    (176
    )
    
    
    (10
    )
    
    
    (20
    )Loan payments made by shareholders
    
    
    
    
    
    
    1,353
    
    
    
    Loans to shareholders
    
    
    
    
    
    
    (22
    )
    
    
    (44
    )Shares repurchased for treasury stock
    
    
    
    
    
    
    
    
    
    
    (2,449
    )Stock offering
    
    
    
    
    
    
    36,727
    
    
    
    Dividends paid to stockholders
    
    
    (2,692
    )
    
    
    
    
    
    
    Exercise of stock options and warrants
    
    
    2,202
    
    
    
    1,023
    
    
    
    232Distribution from minority equity investees
    
    
    586
    
    
    
    195
    
    
    
    268Net cash (used in) provided by financing activities
    
    
    (80
    )
    
    
    39,266
    
    
    
    (2,013
    )Increase in cash and cash equivalents
    
    
    21,680
    
    
    
    46,610
    
    
    
    1,689Cash and cash equivalents at beginning of year
    
    
    64,908
    
    
    
    18,298
    
    
    
    16,609Cash and cash equivalents at end of year
    
    $
    86,588
    
    
    $
    64,908
    
    
    $
    18,298
 See Notes to Consolidated Financial Statements 29




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##### Table of Contents



LCA-VISION INC.CONSOLIDATED
STATEMENTS OF STOCKHOLDERS INVESTMENTYears Ended December 31,2004
    
    
    2003
    
    
    2002Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount(dollars in thousands)Common StockBalance at beginning of year
    
    
    23,465,342
    
    
    $
    16
    
    
    
    19,665,459
    
    
    $
    13
    
    
    
    19,596,084
    
    
    $
    52Employee plans
    
    
    304,169
    
    
    
    
    
    
    
    199,883
    
    
    
    
    
    
    
    69,375
    
    
    
    Stock offering
    
    
    
    
    
    
    
    
    
    
    3,600,000
    
    
    
    3
    
    
    
    
    
    
    
    Stock split  par value effect
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )Partial shares
    
    
    (2,158
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of Year
    
    
    23,767,353
    
    
    
    24
    
    
    
    23,465,342
    
    
    
    16
    
    
    
    19,665,459
    
    
    
    13WarrantsBalance at beginning of year
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    1,982
    
    
    
    191,601
    
    
    
    2,105Expired warrants
    
    
    
    
    
    
    
    
    
    
    (150,000
    )
    
    
    (1,982
    )
    
    
    (41,601
    )
    
    
    (123
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    1,982Notes Receivable from ShareholdersBalance at beginning of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,532
    )
    
    
    
    
    
    
    (1,488
    )Decrease in notes outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,554
    
    
    
    
    
    
    
    Increase in notes outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    (44
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,532
    )Treasury StockBalance at beginning of year
    
    
    (3,550,794
    )
    
    
    (15,462
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )
    
    
    (2,326,134
    )
    
    
    (13,013
    )Shares repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,224,660
    )
    
    
    (2,449
    )Balance at end of year
    
    
    (3,550,794
    )
    
    
    (15,462
    )
    
    
    3,550,794
    
    
    
    (15,462
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )Contributed CapitalBalance at beginning of year
    
    
    
    
    
    
    131,203
    
    
    
    
    
    
    
    91,474
    
    
    
    
    
    
    
    91,080Stock split  par value effect
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39Employee plans
    
    
    
    
    
    
    2,250
    
    
    
    
    
    
    
    1,022
    
    
    
    
    
    
    
    235Stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,725
    
    
    
    
    
    
    
    Stock split fractional shares
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Expired warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,982
    
    
    
    
    
    
    
    123Deferred tax benefit of
disqualified stock options
    
    
    
    
    
    
    1,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    
    
    
    
    
    134,708
    
    
    
    
    
    
    
    131,203
    
    
    
    
    
    
    
    91,474Accumulated deficitBalance at beginning of year
    
    
    
    
    
    
    (37,069
    )
    
    
    
    
    
    
    (44,338
    )
    
    
    
    
    
    
    (40,512
    )Net Income (loss)
    
    
    
    
    
    
    32,029
    
    
    
    
    
    
    
    7,269
    
    
    
    
    
    
    
    (3,826
    )Dividends paid ($0.13 per share)
    
    
    
    
    
    
    (2,692
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    
    
    
    
    
    (7,732
    )
    
    
    
    
    
    
    (37,069
    )
    
    
    
    
    
    
    (44,338
    )Accumulated Other Comprehensive
Loss (Income)Balance at beginning of year
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (22
    )Translation adjustments
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    (3
    )Unrealized investment gain
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    
    
    
    
    
    299
    
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    (25
    )Total Stockholders Investment
    
    
    
    
    
    $
    111,837
    
    
    
    
    
    
    $
    78,802
    
    
    
    
    
    
    $
    32,112
 See Notes to Consolidated Financial Statements 30




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description Of Business And Summary Of Significant Accounting Policies Business We are a leading developer and operator of fixed-site laser vision correction centers under the
brand name LasikPlus. 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 use several suppliers,
including Bausch & Lomb, VISX and Alcon, for our excimer lasers and diagnostic equipment in the
United States. Our vision centers are supported mainly by independent full-time credentialed
board-certified ophthalmologists and optometrists as well as other health care professionals. The
ophthalmologists perform the laser vision correction procedures in our vision centers, and either
ophthalmologists or optometrists conduct pre-procedure evaluations and post-procedure follow-ups
in-center. We have performed over 400,000 laser vision correction procedures in our vision
centers, in the United States and Canada since 1991. Most of our patients receive a procedure
called LASIK, which we began performing in the United States in 1997. 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. Consolidation Policy We use two different methods to report our investments in our subsidiaries and other companies 
consolidation and the equity method. Consolidation We use the consolidation method to report our investment in entities in which we own a majority of
the voting stock. 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.Prior to September 2002, our contractual management arrangements did not
permit consolidation of our relationships with professional corporations pursuant to EITF 97-2
because we did not maintain a controlling financial interest in the professional corporations.
Beginning in September 2002, we began a process of renewing our agreements with the professional
corporations and opening new vision centers with agreements that meet the controlling financial
interest criteria of EITF 97-2. As a result of the FASBs issuance of Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51, in January 2003, we evaluated the contractual
management arrangements entered into with professional corporations after January 1, 2003 and
determined that consolidation of these entities was appropriate under the FIN 46 guidance. With
respect to the three remaining professional corporations with which we had a contractual management
arrangement prior to January 1, 2003, we began consolidating these entities as of July 1, 2003,
which did not have a material impact on our consolidated financial statement. Equity Method We use the equity method to report investments in businesses where we hold a 20% to 50% voting
interest, giving us the ability to exercise significant influence, but not control, over operating
and financial policies. Under the equity method, we report:  
    Our interest in the entity as an investment in our Consolidated Balance Sheets, and
    Our percentage share of the earnings (losses) in our Consolidated Statements of Operations. We disposed of our 43% interest of Silmalaseri Oy, a joint venture in Europe, in 2004. We own 50%
of Eyemed/LCAVision, LLC. We report these investments under the equity method. Use of Estimates Management makes estimates and assumptions when preparing financial statements under accounting
principles generally accepted in the United States. 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 31




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##### Table of Contents



Cash and Cash EquivalentsFor the purpose of reporting our cash flows, we consider highly liquid investments with an original
maturity of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value.Trade ReceivablesTrade receivables are comprised primarily of amounts owed to the Company from patients and from
professional corporations  $12,698,000 at December 31, 2004 and $5,900,000 at December 31, 2003.
Trade receivables are presented net of allowances for doubtful accounts of $2,865,000 and
$1,896,000 at December 31, 2004 and 2003, respectively. For patients that we finance with an
initial term over 12 months, we recognize revenues based upon the present values of the expected
payments discounted at a rate of 17.5% per year.Allowance for Doubtful AccountsWe 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, and the remainder is deducted
automatically from the patients checking account over a period of 12 to 36 months. We began our
patient financing program in May 2002. As a result of a recent expansion of this program, we are
currently exposed to more credit risk than we have experienced in the past. Based upon our own
experience with patient financing and based upon the credit experience of centers that provide
financing to customers similar to ours, we have established bad debt reserves as of December 31,
2004 of $2,865,000 against accounts receivable of $12,698,000. To the extent that our actual bad
debt writeoffs are greater than our estimated bad debt reserve, it would adversely impact our
results of operations and cash flows and 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.Property and Equipment, Goodwill, and Depreciation and AmortizationProperty and EquipmentWe show our property and equipment at its original cost, net of accumulated depreciation. At the
time property or equipment is retired, sold, or otherwise disposed of, the related cost and
accumulated depreciation or amortization are deducted from the amounts reported in the Consolidated
Balance Sheets and any gains or losses on disposition are recognized in the Consolidated Statements
of Operations. We expense repair and maintenance costs as incurred.Goodwill and Other Intangible AssetsGoodwill is the excess of the acquisition cost of the business over the fair value of the
identifiable net assets acquired. Through December 31, 2001, we amortized goodwill using the
straight-line method over the estimated useful life. The Company adopted Financial Accounting
Standards (SFAS) No. 142, Goodwill and other Intangible Assets, effective January 1, 2002. SFAS
No. 142 discontinued the amortization of goodwill and requires companies to perform an annual
impairment test of goodwill. Application of the non-amortization provision of the SFAS No. 142
resulted in a decrease in annual operating expenses of $76,000 in 2002. Based on the impairment
tests of goodwill as of December 31, 2004, the Company believes there was no goodwill impairment.Depreciation and AmortizationWe compute depreciation using the straight-line method which recognizes the cost of the asset over
its estimated useful life. We use the following estimated useful lives for computing the annual
depreciation expense: building and building improvements, 5 to 39 years; furniture and fixtures, 3
to 7 years; medical equipment, 3 to 5 years; other equipment, 3 to 5 years. Amortization of
leasehold improvements is recorded in the Consolidated Statements of Operations using the
straight-line method based on the lesser of the useful life of the improvement or the lease term
which is typically five years or less.We assess the impairment of property and equipment whenever events or circumstances indicate that
the carrying value might not be recoverable. Estimates of future cash flows are used to determine
if there is impairment; discounted cash flows are used to determine the amount of impairment.Depreciation ExpenseThe amount of depreciation expense recorded in the Consolidated Statements of Operations is as
follows (dollars in thousands): Year
    
    Depreciation2002
    
    $
    5,9972003
    
    
    6,3772004
    
    
    7,045
 32




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##### Table of Contents



Deferred Compensation Plan Assets The deferred compensation plan assets are invested in a variety of mutual funds including a money
market fund, a bond fund and several equity funds. Assets are reported at fair market value. Financial Instruments Concentration of Credit Risk Financial instruments that subject us to concentrations of credit risk consist primarily of
temporary cash investments. Our policy is to place our temporary cash investments in short-term
investment-grade, interest-bearing corporate securities or obligations of, or guaranteed by, the
U.S. government. Fair Values of Financial Instruments The cost basis of our cash and cash equivalents, trade receivables with an initial term within 12
months and accounts payable approximate their fair values due to their short term maturities. For
trade receivables with an initial term in excess of 12 months, we record the present value of the
expected payments discounted at a rate of 17.5 percent per year. 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. Beginning December 18, 2003, the Company elected to use the captive insurance company for
both the primary insurance and the excess liability coverage. A number of claims are now pending
with our captive insurance company. The financial statements of the captive insurance company are
consolidated with our financial statements since it is a wholly-owned enterprise. As of December
31, 2004, we recorded an insurance reserve amount of $2,568,000 which primarily represents an
actuarially determined estimate of claims incurred but not yet reported. 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 and 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 $10,489,000 in the first six months of 2004 as a
result of a reversal of the valuation allowance on deferred tax assets. A benefit of $5,900,000 was
recorded in the first quarter of 2004, and the balance of $4,589,000 was recorded in the second
quarter of 2004. The reversal of the valuation allowance on deferred tax assets was made because
of continued profitability of the Company in 2004 and our expected future profitability. As a
result, we currently believe it is more likely than not that the deferred tax asset relating
primarily to our U.S. net operating loss carryforwards will be realized to the extent of the tax
benefit recorded. 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. During the year ended December 31, 2004, we
applied approximately $24,727,000 of our net operating losses against our taxable income for the
period, which resulted in reduced federal income tax expenses and tax payments of approximately
$8,654,000. Net operating loss carryforwards at December 31,
2004 were approximately $15,000,000. We acquired approximately $19,000,000 of net operating loss carryforwards in 1997 when we purchased
Refractive Centers International, Inc. The use of these acquired net operating losses was subject
to annual IRC 382 limitation of $2,500,000. During 2003 and 2004, we used all of the net operating
loss carryforwards acquired from Refractive Centers International. At December 31, 2004, we have approximately $15,000,000 of net operating loss carryforwards that
can be used to reduce future taxable income. A portion of these net operating loss carryforwards,
$8,500,000, is subject to annual IRC Section 382 limitation of $3,250,000. Revenue Recognition Other than for patients for whom we provide financing with an initial term over 12 months, we
recognize revenues as services are performed. 33




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##### Table of Contents



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 (loss) and net income (loss) per share would have
been changed to the pro forma amounts indicated below (dollars in thousands, except per share
amounts): Years ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss)
    
    As reported
    
    $
    32,029
    
    
    $
    7,269
    
    
    $
    (3,826
    )Pro forma
    
    
    30,709
    
    
    
    6,231
    
    
    
    (5,676
    )Basic net income (loss) per share
    
    As reported
    
    $
    1.59
    
    
    $
    0.44
    
    
    $
    (0.24
    )Pro forma
    
    
    1.53
    
    
    
    0.38
    
    
    
    (0.35
    )Diluted net income (loss) per share
    
    As reported
    
    $
    1.54
    
    
    $
    0.44
    
    
    $
    (0.24
    )Pro forma
    
    
    1.48
    
    
    
    0.38
    
    
    
    (0.35
    )
 These results may not be representative of the effects on pro forma amounts for future years. We determined the pro forma amounts using the Black-Scholes option-pricing model based on the
following assumptions: 2004
    
    2003
    
    2002Dividend yield
    
    1.2%
    
    0%
    
    0%Expected volatility
    
    52  91%
    
    89  97%
    
    84  124%Risk free interest rate
    
    1.52  3.48%
    
    1.44  3.21%
    
    2.03  4.58%Expected lives (in years)
    
    2 to 5
    
    2 to 5
    
    1 to 5
 Additional information on options is included in Note 8. Marketing and Advertising Expenditures Marketing and advertising expenditures are expensed as incurred, except for the costs associated
with direct mail. Direct mail costs are expensed upon mailing. Per Share Data Basic per share data is earnings or loss applicable to common stockholders divided by weighted
average common shares outstanding. Diluted per share data is earnings or loss applicable to common
stockholders divided by weighted average common shares outstanding plus potential common shares
from dilutive securities such as options and convertible securities. The weighted average shares for the year ended December 31, 2002 diluted calculation does not
assume exercise of any stock options or conversion of other securities since they would have
resulted in a reduced loss per share. The total number of unexercised options and warrants as of
December 31, 2004, 2003 and 2002 was: 2004
    
    
    2003
    
    
    2002Options
    
    
    1,773,465
    
    
    
    1,663,877
    
    
    
    1,372,802Warrants
    
    
    
    
    
    
    
    
    
    
    150,0001,773,465
    
    
    
    1,663,877
    
    
    
    1,522,802
 34




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##### Table of Contents



Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R),
Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
No. 123(R) 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(R) is effective for all stock-based awards granted on or after
July 1, 2005. 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(R) on our consolidated results of operations. See Stock-Based
Compensation above for information had SFAS No. 123(R) been in effect at December 31, 2004. 2. Stockholders Investment Common Stock We are authorized to issue up to 27.5 million shares of common stock. At December 31, 2004, the
number of shares reserved for future issuance was 2,668,298 shares under stock option plans. Preferred stock At December 31, 2004, there were no shares of preferred stock issued and outstanding. Treasury stock At December 31, 2004, there were 3,550,794 shares of common stock held in treasury. Warrants During 1999, we issued warrants to purchase a total of 346,875 shares of common stock at prices
ranging from $5.33 to $32 per share. The warrants were issued to an investment banking firm and to
Cole National Corporation, a joint venture partner of ours at the time. Warrants to purchase 41,601 shares expired in 2002. Warrants to purchase 300,000 shares at $32
per share were issued during the third quarter of 1999 of which 150,000 expired as of June 30,
2003; remaining warrants were repurchased in the third quarter of 2000 for $310,000. 3. Special Charges (Benefit) During the first quarter 2002, the $174,000 remaining in a restructuring reserve established in
2001 was reversed, as the restructuring plan had been fully implemented. 4. Credit Arrangements The Companys revolving credit facility matured on July 31, 2004. Management does not anticipate
needing to utilize a credit facility at this time and chose to not seek renewal of the credit
facility. 35




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##### Table of Contents



5. Investment in Unconsolidated Businesses Our investment in unconsolidated businesses was $168,000 and $385,000 at December 31, 2004 and
2003, respectively. At December 31, 2004, we had an investment in Eyemed/LCA-Vision, LLC (50%). Combined summary financial information for these entities is as follows (dollars in thousands): December 31,2004
    
    
    2003Financial Position:Current assets
    
    $
    455
    
    
    $
    427Total assets
    
    
    455
    
    
    
    762Total liabilities
    
    
    72
    
    
    
    249Members equity
    
    
    383
    
    
    
    513Operating Results:Revenue
    
    $
    1,043
    
    
    $
    1,695Net income
    
    
    810
    
    
    
    626
 6. Income Taxes The components of income tax expense (benefit) for the three years ended December 31, 2004 are
presented in the following table (dollars in thousands): 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    487
    
    
    $
    193
    
    
    $
    State and local
    
    
    559
    
    
    
    51
    
    
    
    Foreign
    
    
    621
    
    
    
    347
    
    
    
    174Total
    
    
    1,667
    
    
    
    591
    
    
    
    174Deferred:Federal
    
    
    7,922
    
    
    
    1,864
    
    
    
    (880
    )State and local
    
    
    1,181
    
    
    
    190
    
    
    
    8Total
    
    
    9,103
    
    
    
    2,054
    
    
    
    (872
    )Income tax expense (benefit)
    
    
    10,770
    
    
    
    2,645
    
    
    
    (698
    )Valuation allowance (decrease)
increase
    
    
    (16,399
    )
    
    
    (2,054
    )
    
    
    872Net income tax (benefit) expense
    
    
    ($5,629
    )
    
    $
    591
    
    
    $
    174
 The Company reversed the valuation allowance on deferred tax assets in 2004 by recording an income
tax benefit of $10,489,000 in the first six months of 2004. A benefit of $5,900,000 was recorded
in the first quarter of 2004, and the balance of $4,589,000 was recorded in the second quarter of
2004. The reversal of the valuation allowance on deferred tax assets was made because of continued
profitability of the Company in 2004 and our expected future profitability. As a result, we
currently believe it is more likely than not that the deferred tax asset relating primarily to our
U.S. net operating loss carryforwards will be realized to the extent of the tax benefit recorded.
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. We are required to pay franchise taxes in most of the states in which we have operations due to our
net operating loss carryforwards. We have included the franchise taxes paid in general and
administrative expenses in our Consolidated Statements of Operations. The foreign tax provisions consist primarily of Canadian income taxes. We have made no provision
for U.S. income taxes on undistributed earnings from our international businesses because it is our
intention to reinvest those earnings in those operations. If those earnings are distributed in the
form of dividends, we may be subject to both foreign withholding taxes and U.S. income taxes net of
allowable foreign tax credits. 36




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##### Table of Contents



Pretax income (loss) for the last three years has been: 2004
    
    
    2003
    
    
    2002Domestic
    
    $
    25,286
    
    
    $
    6,761
    
    
    $
    (3,925
    )Foreign
    
    
    1,114
    
    
    
    1,099
    
    
    
    273Total
    
    $
    26,400
    
    
    $
    7,860
    
    
    $
    (3,652
    )
 Deferred taxes arise because of differences in the book and tax bases of certain assets and
liabilities. Significant components of our deferred tax assets are shown in the following table
(dollars in thousands): December 31,2004
    
    
    2003Current deferred tax assets:Net operating loss carryforward
    
    $
    3,835
    
    
    $
    15,324Accounts receivable
    
    
    1,156
    
    
    
    645Equity investments
    
    
    4
    
    
    
    84Captive insurance
    
    
    360
    
    
    
    215Alternate minimum tax
    
    
    678
    
    
    
    193Other
    
    
    18
    
    
    
    191Total current deferred tax assets
    
    
    6,051
    
    
    
    16,652Long-term
deferred tax assets:Net operating loss carryforwards
    
    
    2,103
    
    
    
    Deferred compensation
    
    
    490
    
    
    
    155Total long-term deferred tax assets
    
    
    2,593
    
    
    
    155Total deferred tax assets
    
    
    8,644
    
    
    
    16,807Valuation allowance
    
    
    
    
    
    
    (16,807
    )Deferred tax assets net of valuation allowance
    
    
    8,644
    
    
    
    Deferred tax liabilities  property and equipment
    
    
    (36
    )
    
    
    Net deferred tax assets
    
    $
    8,608
    
    
    $
    
 The following table reconciles the statutory federal income tax rate of 35% for 2005 and 34%
for 2003 and 2002, and the tax (benefit) provision shown in our Consolidated Statements of
Operations (dollars in thousands): 2004
    
    
    2003
    
    
    2002Tax at statutory federal rate
    
    $
    9,240
    
    
    $
    2,673
    
    
    $
    (1,242
    )State income taxes, net of federal benefit
    
    
    1,890
    
    
    
    159
    
    
    
    5Permanent differences
    
    
    22
    
    
    
    21
    
    
    
    201Foreign income tax
    
    
    46
    
    
    
    347
    
    
    
    174Change in valuation allowance
    
    
    (16,399
    )
    
    
    (2,054
    )
    
    
    872Change in effective tax rate
    
    
    (434
    )
    
    
    
    
    
    
    Other
    
    
    6
    
    
    
    (555
    )
    
    
    164Income tax (benefit) provision
    
    ($
    5,629
    )
    
    $
    591
    
    
    $
    174
 At December 31, 2004 and 2003 we had federal net operating loss carryforwards for income tax
purposes of approximately $15,000,000 and $39,725,000, respectively. These expire in varying
amounts from 2017 until 2022. We acquired approximately $19,000,000 of net operating loss carryforwards in 1997 when we purchased
Refractive Centers International, Inc. The use of these acquired net operating losses was subject
to annual IRC 382 limitation of $2,500,000. During 2003 and 2004, we used all of the net operating
loss carryforwards acquired from Refractive Centers International. 37




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##### Table of Contents



At December 31, 2004, we have approximately $15,000,000 of net operating loss carryforwards that
can be used to reduce future taxable income. A portion of these net operating loss carryforwards,
$8,500,000, is subject to annual IRC Section 382 limitation of $3,250,000. 7. Leasing Arrangements We lease office space for our vision centers. Capitalized leases were used to finance five lasers. The following table displays our aggregate minimal rental commitments under noncancellable leases
for the periods shown (dollars in thousands): December 31, 2004Capital
    
    
    OperatingLeases
    
    
    LeasesYear2005
    
    $
    576
    
    
    $
    3,4612006
    
    
    384
    
    
    
    2,4222007
    
    
    
    
    
    
    1,7172008
    
    
    
    
    
    
    1,4682009
    
    
    
    
    
    
    1,092Beyond 2009
    
    
    
    
    
    
    528Total minimum rental commitment
    
    
    960
    
    
    $
    10,688Less interest
    
    
    42Present value of minimum lease payments
    
    
    918Less current installments
    
    
    542Long-term obligations at December 31, 2004
    
    $
    376
 The net book value of assets under capitalized leases at December 31, 2004 was $984,000. Total rent expense under operating leases amounted to $5,538,000 in 2004; $4,428,000 in 2003; and
$4,352,000 in 2002. 8. Employee Benefits Savings Plan We sponsor a savings plan under Internal Revenue Code Section 401(k) to provide an opportunity for
eligible employees to save for retirement on a tax-deferred basis. Under this plan, we may make
discretionary contributions to the participants accounts. We made contributions of $41,000 in
2004; $0 in 2003; and $0 in 2002. Stock Option Plans We have three stock incentive plans, the 1995 Long Term-Stock Incentive Plan (1995 Plan), the
1998 Long Term-Stock Incentive Plan (1998 Plan) and the 2001 Long-Term Stock Incentive Plan
(2001 Plan). A maximum of 937,500 shares are reserved for the 1995 Plan, 1,875,000 shares are
reserved for the 1998 Plan and 937,500 shares are reserved for the 2001 Plan. The Compensation
Committee of the Board of Directors administers all of our stock incentive plans. The Plans permit us to issue incentive and/or nonqualified stock options to purchase shares of
common stock, stock appreciation rights, and other stock awards to employees and consultants. The
1998 Plan is used to grant stock options to our non-employee directors. Non-employee directors
receive an option to purchase 28,125 shares of our common stock upon initial election or
appointment and an automatic option grant of 4,688 shares upon reelection. Prior to our
stockholders approving the 1998 Plan, we granted our non-employee directors stock options under the
LCA-Vision Inc. Directors Nondiscretionary Stock Option Plan, which was discontinued in 1998. Stock options are granted with an exercise price not less than fair market value on the date of
grant. Stock options granted generally become exercisable over 3 to 5 years after their date of
grant; the maximum term is 10 years from the date of grant. 38




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##### Table of Contents



The following table summarizes the status of options granted under our 1995, 1998 and 2001 Plans: Stock Options
    
    
    Exercise PriceOutstanding at 12/31/01
    
    
    1,257,858
    
    
    $
    9.39Granted
    
    
    246,563
    
    
    
    3.50Exercised
    
    
    (69,375
    )
    
    
    3.39Cancelled/forfeited
    
    
    (176,619
    )
    
    
    9.65Outstanding at 12/31/02
    
    
    1,258,427
    
    
    
    8.53Granted
    
    
    898,313
    
    
    
    8.74Exercised
    
    
    (199,883
    )
    
    
    5.12Cancelled/forfeited
    
    
    (292,980
    )
    
    
    10.63Outstanding at 12/31/03
    
    
    1,663,877
    
    
    
    8.64Granted
    
    
    469,114
    
    
    
    16.57Exercised
    
    
    (304,169
    )
    
    
    7.40Cancelled/forfeited
    
    
    (55,357
    )
    
    
    11.71Outstanding at 12/31/04
    
    
    1,773,465
    
    
    
    10.83Options exercisable,December 31,2002
    
    
    753,609
    
    
    
    9.582003
    
    
    637,641
    
    
    
    9.182004
    
    
    708,210
    
    
    
    9.10
 The following table summarizes information about the stock options granted under the 1995, 1998 and
2001 Plans that were outstanding at December 31, 2004: Stock Options Outstanding
    
    
    
    
    
    
    Stock Options ExercisableWeighted-averageRange of
    
    # outstanding as
    
    
    remaining
    
    
    Weighted-average
    
    
    # Exercisable
    
    
    Weighted-averageexercise prices
    
    of 12/31/04
    
    
    contractual life
    
    
    exercise price
    
    
    as of 12/31/04
    
    
    exercise price$1.60 - 3.67
    
    
    187,237
    
    
    
    6.25
    
    
    $
    3.13
    
    
    $
    106,796
    
    
    
    3.28$3.71 - 5.75
    
    
    31,820
    
    
    
    4.20
    
    
    
    4.23
    
    
    
    21,414
    
    
    
    4.35$5.92 - 5.92
    
    
    187,715
    
    
    
    8.49
    
    
    
    5.92
    
    
    
    46,244
    
    
    
    5.92$5.99 - 7.33
    
    
    227,815
    
    
    
    7.85
    
    
    
    6.80
    
    
    
    140,315
    
    
    
    6.94$7.59 - 11.75
    
    
    186,904
    
    
    
    4.99
    
    
    
    9.61
    
    
    
    164,534
    
    
    
    9.47$11.84 - 11.84
    
    
    18,750
    
    
    
    8.96
    
    
    
    11.84
    
    
    
    3,750
    
    
    
    11.84$12.19 - 12.19
    
    
    361,009
    
    
    
    8.94
    
    
    
    12.19
    
    
    
    115,507
    
    
    
    12.19$12.50 - 14.93
    
    
    187,125
    
    
    
    6.52
    
    
    
    13.35
    
    
    
    82,500
    
    
    
    12.79$15.67 - 16.60
    
    
    279,340
    
    
    
    9.27
    
    
    
    16.53
    
    
    
    8,400
    
    
    
    15.70$17.27 - 29.67
    
    
    105,750
    
    
    
    8.79
    
    
    
    21.61
    
    
    
    18,750
    
    
    
    29.67$1.60 - $29.67
    
    
    1,773,465
    
    
    
    7.76
    
    
    $
    10.83
    
    
    
    708,210
    
    
    
    9.10
 At December 31, 2004 a total of 894,833 shares were available for awards under the 1995, 1998 and
2001 Plans. The weighted-average fair value of options granted was $16.57 per option during 2004; $8.74 per
option during 2003; and $3.50 per option during 2002. 39




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##### Table of Contents



9. 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. 10. Litigation Settlement In August 2002, a settlement of $2,282,000 was received from the Pillar Point Partners
class-action litigation. Pillar Point Partners  a joint entity formed in 1995 by laser
manufacturers VISX and Summit Technology Inc., now a subsidiary of Alcon Corporation  collected
per-use royalties from all laser vision correction providers using their equipment. The
manufacturers agreed to settle the various lawsuits for $37.8 million. Pillar Point was dissolved
in July 1998 after the Federal Trade Commission filed an administrative complaint challenging the
partnerships existence. 11. Additional Financial Information The tables below provide additional financial information related to our consolidated financial
statements (dollars in thousands): Balance Sheet Information At December 31,2004
    
    
    2003Property and EquipmentLand
    
    $
    354
    
    
    $
    354Building and improvements
    
    
    5,698
    
    
    
    5,660Leasehold improvements
    
    
    6,467
    
    
    
    5,589Furniture and fixtures
    
    
    3,331
    
    
    
    2,805Equipment
    
    
    31,166
    
    
    
    25,844Equipment under capital leases
    
    
    1,250
    
    
    
    14648,266
    
    
    
    40,398Accumulated depreciation
    
    
    (31,743
    )
    
    
    (24,622
    )Construction in progress
    
    
    2,108
    
    
    
    1,569$
    18,631
    
    
    $
    17,345
 Cash Flow Information For the Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash paid during the year forInterest
    
    $
    24
    
    
    $
    (18
    )
    
    $
    4Income taxes
    
    
    1,907
    
    
    
    608
    
    
    
    23Other comprehensive income (loss) informationComprehensive income (loss):Income (loss) applicable to common stock
    
    $
    32,029
    
    
    $
    7,269
    
    
    $
    (3,826
    )Unrealized gain on investment
    
    
    31
    
    
    
    0
    
    
    
    0Other comprehensive income (loss), net of
income tax/currency translation adjustments
    
    
    154
    
    
    
    139
    
    
    
    (3
    )Total comprehensive income (loss)
    
    $
    32,214
    
    
    $
    7,408
    
    
    $
    (3,829
    )
 40




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12. Quarterly Financial Data (unaudited)(1) Financial results for interim periods do not necessarily indicate trends for any 12-month period.
Quarterly results can be affected by the number of procedures performed and the timing of certain
expense items (dollars in thousands, except per share amounts): 2004 Quarters
    
    
    2003 QuartersFirst
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(2)Revenues
    
    $
    31,650
    
    
    $
    31,554
    
    
    $
    31,203
    
    
    $
    32,715
    
    
    $
    19,982
    
    
    $
    20,224
    
    
    $
    20,455
    
    
    $
    20,762Operating income
    
    
    6,761
    
    
    
    6,273
    
    
    
    5,537
    
    
    
    5,629
    
    
    
    1,639
    
    
    
    1,796
    
    
    
    1,468
    
    
    
    2,247Net Income
    
    
    12,729
    
    
    
    10,849
    
    
    
    3,595
    
    
    
    4,856
    
    
    
    1,757
    
    
    
    1,793
    
    
    
    1,517
    
    
    
    2,201Earnings per shareBasic(1)
    
    
    0.64
    
    
    
    0.54
    
    
    
    0.18
    
    
    
    0.24
    
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.09
    
    
    
    0.13Diluted(1)
    
    
    0.62
    
    
    
    0.52
    
    
    
    0.17
    
    
    
    0.23
    
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.09
    
    
    
    0.12
   (1)
    
    The quarterly amounts are not additive due to rounding.(2)
    
    In the fourth quarter of 2003, insurance reserves decreased by $421,000. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 
 Item 9A. Controls and Procedures. Disclosure controls and procedures Under the supervision 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. Based on this
evaluation, the CEO and CFO have concluded that the Companys disclosure controls and procedures
were effective as of December 31, 2004 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 rules
thereunder. In addition, no change in the
Companys internal control over financial reporting occurred during
the fourth quarter of our fiscal year ended December 31, 2004
that has materially affected, or is reasonably likely to materially
affect, LCA-Vision's internal control over financial reporting. The
Audit committee of the Board of Directors, which consists of our
independent Directors, meets periodically with management and Ernst
& Young LLP to review the activities of each in discharging their
responsibilities. Ernst & Young LLP has free access to the Audit
Committee and to all Company records and personnel in connection with
its audits. Managements report on internal control over financial reporting Information on the Companys internal control over financial reporting is contained in Item 8.
Financial Statements and Supplementary Data  Report of Management and Report of Independent
Registered Public Accounting Firm on Internal Control over Financial Reporting and is incorporated
herein by reference. 
 Item 9B. Other Information. Not applicable. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant. The information required by this Item 10 is incorporated by reference from Election of Directors,
Executive Officers and Board of Directors Meetings and Committees to be included in our
definitive Proxy Statement which will be filed with the Securities and Exchange Commission (SEC) in
connection with the 2005 Annual Meeting of Stockholders. 
 Item 11. Executive Compensation. The information required by this Item 11 is incorporated by reference from Executive Compensation
to be included in our definitive Proxy Statement which will be filed with the SEC in connection
with the 2005 Annual Meeting of Stockholders. 41




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters. The information called for by Item 403 of Regulation S-K and required by this Item 12 is
incorporated by reference from Security Ownership of Certain Beneficial Owners and Management to
be included in our definite Proxy Statement to be filed with the SEC in connection with the 2005
Annual Meeting of Stockholders. The information called for by Item 201(d) of Regulation S-K is presented below. Equity Compensation Plan Information Number of securitiesremaining availablefor futureissuance under equityWeighted-average
    
    
    
    compensation plansNumber of securities to
    
    
    
    exercise price of
    
    
    
    (excludingbe issued upon exercise
    
    
    
    outstanding options,
    
    
    
    securities reflectedof outstanding options,
    
    
    
    warrants and rights
    
    
    
    in columnPlan Category
    
    
    warrants and rights (a)
    
    
    
    (b)
    
    
    
    (a))Equity compensation
plans approved by
security holders
    
    
    
    1,773,465
    
    
    
    $
    10.83
    
    
    
    
    894,833Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    1,773,465
    
    
    
    $
    10.83
    
    
    
    
    894,833
 
 Item 13. Certain Relationships and Related Transactions. The information required by this Item 13 is incorporated by reference from Certain Transactions
to be included in our definitive Proxy Statement which will be filed with the SEC in connection
with the 2005 Annual Meeting of Stockholders. 
 Item 14. Principal Accountant Fees and Services. The information required by this Item 14 is incorporated from Independent Auditors to be included
in our definitive Proxy Statement which will be filed with the SEC in connection with our 2005
Annual Meeting of Stockholders. 
 PART IV 
 Item 15. Exhibits and Financial Statements Schedules (a)(1) List of Financial Statements The following are the consolidated financial statements of LCA-Vision Inc. and its subsidiaries appearing elsewhere herein: Report of Independent Registered Public Accounting Firm on Financial Statements Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Operations for the years ended December 31, 2004, 2003, and 2002 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002 Consolidated Statements of Stockholders Investment for years ended December 31, 2004, 2003, and 2002 (a)(2) List of Schedules Schedule IIValuation and Qualifying Accounts and Reserves All other financial statement schedules have been omitted because the required information is
either inapplicable or presented in the consolidated financial statements. 42




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##### Table of Contents



Schedule II Valuation and Qualifying Accounts and Reserves LCA-Vision Inc.
For the years ended December 31, 2004, 2003, and 2002
(in thousands) ChargesBalance at
    
    
    to Cost
    
    
    
    
    
    
    BalanceBeginning
    
    
    and
    
    
    
    
    
    
    at End ofDescription
    
    of Period
    
    
    Expenses
    
    
    Deductions
    
    
    PeriodYear ended December 31, 2004:Allowance for doubtful accounts
    
    $
    1,896
    
    
    $
    1,344
    
    
    $
    375
    
    
    $
    2,865Enhancement reserve
    
    
    361
    
    
    
    1,119
    
    
    
    982
    
    
    
    498Insurance reserve
    
    
    963
    
    
    
    1,859
    
    
    
    254
    
    
    
    2,568Year ended December 31, 2003:Allowance for doubtful accounts
    
    $
    231
    
    
    $
    1,807
    
    
    $
    142
    
    
    $
    1,896Enhancement reserve
    
    
    266
    
    
    
    802
    
    
    
    707
    
    
    
    361Insurance reserve
    
    
    55
    
    
    
    920
    
    
    
    12
    
    
    
    963Year ended December 31, 2002Allowance for doubtful accounts
    
    $
    77
    
    
    $
    332
    
    
    $
    178
    
    
    $
    231Enhancement reserve
    
    
    186
    
    
    
    893
    
    
    
    813
    
    
    
    266Insurance reserve
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    55
 43




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(a)(3)List of Exhibits Exhibit #
    
    Description of Exhibit*3(a)
    
    Restated Certificate of Incorporation, as amended, of Registrant (Exhibit 3(a) to Annual Report on Form 10-K for
the year ended December 31, 2003)3(b)
    
    Amended Bylaws of Registrant (corrected)*10(a)
    
    LCA-Vision Inc. 1995 Long-Term Stock Incentive Plan (Exhibit to Annual Report on Form 10-KSB for the year ended
December 31, 1995)*10(b)
    
    LCA-Vision Inc. 1998 Long-Term Stock Incentive Plan (Exhibit A to definitive Proxy Statement of LCA-Vision Inc. for
Special Meeting of Stockholders held October 16, 1998 on Schedule 14A filed on September 22, 1998)*10(c)
    
    LCA-Vision Inc. 2001 Long-Term Stock Incentive Plan (Exhibit B to definitive Proxy Statement of LCA-Vision Inc. for
Annual Meeting of Stockholders held May 7, 2001 on Schedule 14A filed on April 9, 2001)*10(d)
    
    Employment Agreement of Kevin M. Hassey (Exhibit 10.1 to the Registration Statement No.333-109034 on Form S-3/A as
filed on September 23, 2003)*10(e)
    
    Employment Agreement of Alan H. Buckey (Exhibit 10.2 to the Registration Statement No.333-109034 on Form S-3/A as
filed on September 23, 2003)*10(f)
    
    Executive Cash Bonus Plan (Exhibit 10.1 to Current Report on Form 8-K filed February 28, 2005)*10(g)
    
    Compensation Arrangements with named executive officers (Exhibit 10.2 to Current Report on Form 8-K filed February
28, 2005)*14
    
    Code of Business Conduct and Ethics (Exhibit 14 to Annual Report on Form 10-K for the year ended December 31, 2003)21
    
    Subsidiaries of the Registrant23
    
    Consent of Ernst & Young LLP24
    
    Powers of Attorney (contained on signature page)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32
    
    Section 1350 Certifications
   *
    
    Incorporated by reference. 44




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 14, 2005
    
    By: /s/ Stephen N. JoffeStephen N. Joffe, Chairman and Chief Executive Officer
 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Alan H. Buckey, his true and lawful attorney-in-fact and agent, with full
power of substitution, and with power to act alone, to sign and execute on behalf of the
undersigned any amendment or amendments to this annual report on Form 10-K for the fiscal year
ended December 31, 2004, and to perform any acts necessary to be done in order to file such
amendment or amendments, with exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission and each of the undersigned does hereby ratify and confirm all
that said attorney-in-fact and agent, or his substitutes, shall do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated below as
of the 14th day of March, 2005. /s/ Stephen N. Joffe
    
    Chairman of the Board, Chief Executive OfficerStephen N. Joffe
    
    (Principal Executive Officer)/s/ Alan H. Buckey
    
    Executive Vice President/Finance and
Chief Financial OfficerAlan H. Buckey
    
    (Principal Financial and Accounting Officer)/s/ William O. Coleman
    
    DirectorWilliam O. Coleman/s/ John H. Gutfreund
    
    DirectorJohn H. Gutfreund/s/ John C. Hassan
    
    DirectorJohn C. Hassan/s/ Craig P.R. Joffe
    
    DirectorCraig P.R. Joffe/s/ E. Anthony Woods
    
    DirectorE. Anthony Woods
 45