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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, 2005
 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)
 
  
  o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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##### 



LCA-VISION INC.
 FISCAL YEAR 2005 FORM 10-K ANNUAL REPORT
 TABLE OF CONTENTS
 PagePart I.Item 1.
    Business
    
    3Item 1A.
    Risk Factors
    
    10Item 1B.
Unresolved Staff Comments
    
    15Item 2.
    Properties
    
    15Item 3.
    Legal Proceedings
    
    15Item 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
    
    16Item 6.
    Selected Financial Data
    
    17Item 7.
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 7A.
    Quantitative and Qualitative Disclosures About Market Risk
    
    23Item 8.
    Financial Statements and Supplementary Data
    
    23Item 9.
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    41Item 9A.
    Controls and Procedures
    
    41Item 9B.
    Other Information
    
    41Part III.Item 10.
    Directors and Executive Officers of the Registrant
    
    41Item 11.
    Executive Compensation
    
    41Item 12.
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    42Item 13.
    Certain Relationships and Related Transactions
    
    42Item 14.
    Principal Accountant Fees and Services
    
    42Part IV.Item 15.
    Exhibits and Financial Statement Schedules
    
    44Signatures
    
    45Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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PART I
 SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
  
 Item 1. Business.
 Background and History of Company
 Plus
 Plus
           3




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Laser Vision Correction Procedures
   PRK and Surface Ablation .
 LASIK .
 The Laser Vision Correction Market
  
    
    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.
 4




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.
  
    
    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.
 Estimated Number of Laser Vision Correction Procedures in North America per Year
 
 
    
    
    Recruiting and retaining independent, board certified ophthalmologists and credentialed optometrists
    
    Providing patients with a Continuum of Care
    
    Opening and operating new laser vision correction centers
    
    Providing attractive patient financing alternatives
    
    Establishing and nurturing relationships with leading managed care providers in the
United States to source additional patients
    
    Developing and implementing innovative marketing campaigns
 Recruiting and retaining independent, board certified ophthalmologists and credentialed
optometrists.
 5




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Providing patients with a Continuum of Care.
 Opening and operating new laser vision correction centers.
 Providing attractive patient financing alternatives.
 Establishing and nurturing relationships with leading managed care providers in the United States
to source additional patients.
 Developing and implementing innovative direct marketing campaigns. Plus www.lasikplus.com
 Competition
   6




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Employees
  Trademarks
  Suppliers of Equipment and Financing Services
   Government Regulation
   7




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Restrictions on medical devices
    
    
    Product seizures
    
    Recalls
    
    Withdrawal of approvals
    
    Civil and criminal penalties
    Federal and state laws on kickbacks and physician referrals
  Advertising restrictions
  8




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Fee-splitting
  Corporate practice of medicine and optometry
  
    
    Employing eye care professionals
    
    Controlling clinical decision making
    
    Engaging in other activities that are deemed to constitute the practice of optometry or ophthalmology
  Facility licensure and certificates of need
   Healthcare reform
  9




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Item 1A. Risk Factors
 We have experienced operating losses in the past.
  
    
    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.
  
    
    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.
  
    
    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
  Changes in general economic conditions may cause fluctuations in our revenues and profitability.
  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.
  10




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If we are unable to attract and retain qualified independent ophthalmologists, our ability to open
new vision centers, to maintain operations at existing vision centers, or to attract patients could
be negatively affected.
  If technological changes occur which render our equipment or services obsolete, or increase our
cost structure, we may need to make significant capital expenditures or modify our business model,
which could cause our revenues or profitability to decline.
  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.
    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.
  11




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We have expanded the role and mix of financing as a percentage of our revenues. As a result, our
direct financing program has grown, increasing our credit risk. At the same time, our exclusive
reliance on an unaffiliated finance company for third-party financing has grown.
   If laser vision correction does not gain broader market acceptance, our profitability and growth
will be severely limited.
  
    
    Concerns about the safety and effectiveness of laser vision correction procedures,
including procedures using new technologies
    
    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,
including but not limited to various intraocular lens technologies
    
    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.
   
    
    Foreign body sensation
    
    Pain or discomfort
    
    Sensitivity to bright lights
    
    Blurred vision or haze
    
    Dryness or tearing
    
    Fluctuation in vision
    
    Night glare and halos
    
    Poor or reduced visual quality
    
    Overcorrection or under correction
    
    Regression
    
    Corneal flap or corneal healing complications
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
    
    Loss of best corrected visual acuity
    
    Inflammation or infection
    
    Need for corrective lenses or reading glasses post-operatively
    
    Need for further treatment
  We depend on limited sources for the excimer lasers, diagnostic equipment, microkeratomes and
disposable blades we use and for the third-party financing made available to our patients, and
shortages of these items or services could hinder our ability to increase our procedure volume.
    Our business may be impaired due to government regulations which could restrict our equipment,
services and relationships with ophthalmologists, optometrists and other healthcare providers.
  
    
    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
    13




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We are subject to lawsuits for patient injuries, which could subject us to significant judgments
and damage our reputation.
   We established a captive insurance company, and if significant claims are paid, it could affect our
profitability and our financial condition.
  Disputes with respect to intellectual property could result in a decrease in revenues and
profitability.
   14




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Dependence on and instability among a small number of senior managers.
  Internet
 www.lasikplus.com www.lca-vision.com
 
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
     
 Item 4. Submission of Matters to a Vote of Security Holders.
  15




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 .
  2005
    
    2004High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    34.46
    
    
    $
    22.02
    
    
    $
    18.13
    
    
    $
    12.00Second Quarter
    
    
    49.89
    
    
    
    32.00
    
    
    
    20.87
    
    
    
    15.13Third Quarter
    
    
    51.24
    
    
    
    33.87
    
    
    
    19.75
    
    
    
    13.28Fourth Quarter
    
    
    50.29
    
    
    
    33.43
    
    
    
    24.29
    
    
    
    15.67
  2005
    
    2004First Quarter
    
    $
    0.08Second Quarter
    
    
    0.08Third Quarter
    
    
    0.08
    
    
    $
    .05Fourth Quarter
    
    
    0.12
    
    
    $
    .08Total
    
    $
    0.36
    
    
    $
    0.13
  16




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Item 6. Selected Financial Data.
  Year Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(amounts in thousands, except per share data)Consolidated Statements of Operations Data:Revenues:Laser refractive surgery
    
    $
    192,397
    
    
    $
    127,122
    
    
    $
    81,423
    
    
    $
    61,838
    
    
    $
    68,096Operating costs and expenses:Medical professional and license fees
    
    
    35,051
    
    
    
    24,275
    
    
    
    15,779
    
    
    
    12,270
    
    
    
    13,626Direct costs of services
    
    
    54,952
    
    
    
    40,842
    
    
    
    31,507
    
    
    
    28,796
    
    
    
    33,616General and administrative expenses
    
    
    14,021
    
    
    
    10,292
    
    
    
    8,043
    
    
    
    8,327
    
    
    
    8,727Marketing and advertising
    
    
    31,813
    
    
    
    20,468
    
    
    
    12,566
    
    
    
    12,823
    
    
    
    12,732Depreciation and amortization
    
    
    7,636
    
    
    
    7,045
    
    
    
    6,377
    
    
    
    5,997
    
    
    
    5,625Special (benefit) charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174
    )
    
    
    1,774Total expenses
    
    
    143,473
    
    
    
    102,922
    
    
    
    74,272
    
    
    
    68,039
    
    
    
    76,100Operating income (loss)
    
    
    48,924
    
    
    
    24,200
    
    
    
    7,151
    
    
    
    (6,201
    )
    
    
    (8,004
    )Equity in earnings from unconsolidated
businesses
    
    
    328
    
    
    
    369
    
    
    
    317
    
    
    
    241
    
    
    
    372Interest expense
    
    
    (104
    )
    
    
    (24
    )
    
    
    (18
    )
    
    
    (4
    )
    
    
    (17
    )Interest and dividend income
    
    
    4,033
    
    
    
    2,161
    
    
    
    540
    
    
    
    225
    
    
    
    924Litigation settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,282
    
    
    
    Other (expense) income
    
    
    (397
    )
    
    
    (306
    )
    
    
    (130
    )
    
    
    (195
    )
    
    
    (61
    )Income (loss) before taxes on income
    
    
    52,784
    
    
    
    26,400
    
    
    
    7,860
    
    
    
    (3,652
    )
    
    
    (6,786
    )Income tax expense (benefit)
    
    
    21,131
    
    
    
    (5,629
    )
    
    
    591
    
    
    
    174
    
    
    
    16,589Income (loss) available to common shareholders
    
    $
    31,653
    
    
    $
    32,029
    
    
    $
    7,269
    
    
    $
    (3,826
    )
    
    $
    (23,375
    )Income (loss) per common shareBasic
    
    $
    1.54
    
    
    $
    1.59
    
    
    $
    0.44
    
    
    $
    (0.24
    )
    
    $
    (1.34
    )Diluted
    
    
    1.47
    
    
    
    1.54
    
    
    
    0.44
    
    
    
    (0.24
    )
    
    
    (1.34
    )Cash dividends
    
    $
    0.36
    
    
    $
    0.13
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares used in computationBasic
    
    
    20,500
    
    
    
    20,099
    
    
    
    16,391
    
    
    
    16,191
    
    
    
    17,465Diluted
    
    
    21,492
    
    
    
    20,814
    
    
    
    16,616
    
    
    
    16,191
    
    
    
    17,465Selected Operating DataLaser vision correction procedures
    
    
    142,000
    
    
    
    95,835
    
    
    
    65,485
    
    
    
    57,104
    
    
    
    72,032
 At December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Balance Sheet DataCash and cash equivalents
    
    $
    111,031
    
    
    $
    86,588
    
    
    $
    64,908
    
    
    $
    18,298
    
    
    $
    16,609Working capital
    
    
    120,374
    
    
    
    91,682
    
    
    
    60,986
    
    
    
    13,020
    
    
    
    14,378Total assets
    
    
    166,852
    
    
    
    129,577
    
    
    
    90,037
    
    
    
    39,996
    
    
    
    43,188Debt maturing in one year
    
    
    2,122
    
    
    
    542
    
    
    
    
    
    
    
    10
    
    
    
    26Total debt, excluding current portion
    
    
    1,434
    
    
    
    376
    
    
    
    
    
    
    
    
    
    
    
    4Retained earnings (deficit)
    
    
    16,514
    
    
    
    (7,732
    )
    
    
    (37,069
    )
    
    
    (44,338
    )
    
    
    (40,512
    )Total stockholders investment
    
    
    144,136
    
    
    
    111,837
    
    
    
    78,802
    
    
    
    32,112
    
    
    
    38,202
 17




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
 Plus
   x
    
    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 Advanced Medical Optics, Bausch & Lomb and Alconx
    
    Direct costs of services, including vision center rent and utilities, equipment lease
and maintenance costs, surgical supplies, center staff expense, financing charges and
costs related to other revenuesx
    
    General and administrative costs, including headquarters staff expense and other overhead costsx
    
    Marketing and advertising costsx
    
    Depreciation of equipment
  Results of Operations
 Revenues
   x
    
    Our ability to generate customers through our arrangements with managed care
companies, direct to consumer advertising and word of mouth referralsx
    
    Our mix of procedures among the different types of laser technologyx
    
    New vision center openings and our ability to increase procedure volume at existing vision centersx
    
    The availability of patient financingx
    
    General economic conditions and consumer confidence levelsx
    
    The continued growth and increased acceptance of laser vision correctionx
    
    The effect of competition and discounting practices in our industry
  18




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2005
    
    2004
    
    2003First Quarter
    
    
    37,578
    
    
    
    24,270
    
    
    
    17,028Second Quarter
    
    
    36,010
    
    
    
    24,093
    
    
    
    16,432Third Quarter
    
    
    34,187
    
    
    
    23,248
    
    
    
    15,965Fourth Quarter
    
    
    34,225
    
    
    
    24,224
    
    
    
    16,060Year
    
    
    142,000
    
    
    
    95,835
    
    
    
    65,485
     Operating Costs and Expenses
   % of Revenue2005
    
    2004
    
    Increase
    
    2005
    
    2004Medical professional and license fees
    
    $
    35,051
    
    
    $
    24,275
    
    
    $
    10,776
    
    
    
    18.2
    
    
    
    19.1
    %Direct costs of services
    
    
    54,952
    
    
    
    40,842
    
    
    
    14,110
    
    
    
    28.6
    
    
    
    32.1General and administrative expenses
    
    
    14,021
    
    
    
    10,292
    
    
    
    3,729
    
    
    
    7.3
    
    
    
    8.1Marketing and advertising
    
    
    31,813
    
    
    
    20,468
    
    
    
    11,345
    
    
    
    16.5
    
    
    
    16.1Depreciation and amortization
    
    
    7,636
    
    
    
    7,045
    
    
    
    591
    
    
    
    4.0
    
    
    
    5.5
     19




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% of Revenue2004
    
    
    2003
    
    
    Increase
    
    
    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
        Liquidity and Capital Resources
  20




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Payments due by PeriodMore than 5Contractual Obligations
    
    Total
    
    Less than 1 year
    
    1 - 3 years
    
    3 - 5 years
    
    yearsCapital Leases
    
    
    3,689,000
    
    
    
    2,194,000
    
    
    
    1,495,000Operating Lease Obligations
    
    
    17,215,000
    
    
    
    4,475,000
    
    
    
    7,174,000
    
    
    
    4,450,000
    
    
    
    1,116,000Deferred Compensation
    
    
    2,569,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,569,000Total
    
    
    23,473,000
    
    
    
    6,669,000
    
    
    
    8,669,000
    
    
    
    4,450,000
    
    
    
    3,685,000
    2005
    
    2004Sacramento, CA
    
    Orlando, FLNorfolk, VA
    
    Toronto, CanadaHartford, CT
    
    San Antonio, TXMilwaukee, WI
    
    Jacksonville, FLPhoenix, AZ
    
    Kansas City, KSAustin, TX
    
    St. Louis, MOPortland, OR
    
    Salt Lake City, UTPittsburgh, PAAlbuquerque, NMBirmingham, AL
     Critical Accounting Estimates
 Accounts Receivable
   21




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Allowance for Doubtful Accounts
  Captive Insurance Company Reserves
  Income Taxes
   Consolidation
 Application of FASB Statement No. 94 and APB
Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual
Management Arrangements
 Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51,
 22




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Recent Accounting Pronouncements
 Share-Based Payment
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
   
 Item 8. Financial Statements and Supplementary Data.
 Index to Financial Statements
 PageReport of Management on Internal Control over Financial Reporting
    
    
    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, 2005 and 2004
    
    
    27Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
    
    
    28Consolidated Statements of Cash Flows for the three years ended December 31, 2005, 2004 and 2003
    
    
    29Consolidated Statements of Stockholders Investment for the three years ended December 31, 2005, 2004 and 2003
    
    
    30Notes to Consolidated Financial Statements
    
    
    31
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REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    /s/ Craig P. R. Joffe
    
    
    
    /s/ Alan H. BuckeyCraig P. R. Joffe
    
    
    
    Alan H. BuckeyInterim Chief Executive Officer
    
    
    
    Executive Vice President/Finance, Chief Financial Officer(Principal Executive Officer)
    
    
    
    (Principal Financial and Accounting Officer)
 24




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Report of Independent Registered Public Accounting Firm
      
 25




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Report
of Independent Registered Public Accounting Firm on
Managements Assessment of Internal
Control Over Financial Reporting
      .
  
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LCA-VISION INC.
 
 CONSOLIDATED BALANCE SHEETS
 At December 31,2005
    
    
    2004(Dollars in thousands, except per share amounts)AssetsCurrent assetsCash and cash equivalents
    
    $
    111,031
    
    
    $
    86,588Accounts
receivable, net of allowance for doubtful accounts of $2,641 and $2,260
    
    
    10,520
    
    
    
    8,395Receivables from vendors
    
    
    3,207
    
    
    
    1,077Prepaid expenses, inventory and other
    
    
    4,031
    
    
    
    2,420Income taxes receivable
    
    
    2,875
    
    
    
    267Deferred tax assets
    
    
    3,542
    
    
    
    6,015Total current assets
    
    
    135,206
    
    
    
    104,762Property and equipment
    
    
    63,026
    
    
    
    50,374Accumulated depreciation and amortization
    
    
    (38,342
    )
    
    
    (31,743
    )Property and equipment, net
    
    
    24,684
    
    
    
    18,631Accounts receivable, net of allowance for doubtful accounts of $504 and $605
    
    
    1,132
    
    
    
    1,171Deferred compensation plan assets
    
    
    2,569
    
    
    
    1,187Investment in unconsolidated businesses
    
    
    158
    
    
    
    168Deferred tax assets
    
    
    2,064
    
    
    
    2,593Other assets
    
    
    1,039
    
    
    
    1,065Total assets
    
    $
    166,852
    
    
    $
    129,577Liabilities and stockholders investmentCurrent liabilitiesAccounts payable
    
    $
    3,800
    
    
    $
    4,964Accrued liabilities and other
    
    
    8,910
    
    
    
    7,574Debt maturing in one year
    
    
    2,122
    
    
    
    542Total current liabilities
    
    
    14,832
    
    
    
    13,080Capital lease obligations
    
    
    1,434
    
    
    
    376Deferred compensation liability
    
    
    2,569
    
    
    
    1,215Insurance reserve
    
    
    3,840
    
    
    
    2,568Minority equity interest
    
    
    41
    
    
    
    501Stockholders investmentCommon stock ($.001 par value; 24,368,992 and 23,767,353 shares and
20,768,198 and 20,216,559 shares issued and outstanding, respectively)
    
    
    24
    
    
    
    24Contributed capital
    
    
    145,262
    
    
    
    134,708Common stock in treasury, at cost (3,600,794 shares and 3,550,794 shares)
    
    
    (17,671
    )
    
    
    (15,462
    )Retained earnings (deficit)
    
    
    16,514
    
    
    
    (7,732
    )Accumulated other comprehensive income
    
    
    7
    
    
    
    299Total stockholders investment
    
    
    144,136
    
    
    
    111,837Total Liabilities and Stockholders Investment
    
    $
    166,852
    
    
    $
    129,577
  27




---



##### Table of Contents



LCA-VISION INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands, except per share amounts)Revenues   Laser refractive surgery
    
    $
    192,397
    
    
    $
    127,122
    
    
    $
    81,423Operating costs and expensesMedical professional and license fees
    
    
    35,051
    
    
    
    24,275
    
    
    
    15,779Direct costs of services
    
    
    54,952
    
    
    
    40,842
    
    
    
    31,507General and administrative expenses
    
    
    14,021
    
    
    
    10,292
    
    
    
    8,043Marketing and advertising
    
    
    31,813
    
    
    
    20,468
    
    
    
    12,566Depreciation and amortization
    
    
    7,636
    
    
    
    7,045
    
    
    
    6,377Operating income
    
    
    48,924
    
    
    
    24,200
    
    
    
    7,151Equity in earnings from unconsolidated businesses
    
    
    328
    
    
    
    369
    
    
    
    317Minority equity interest
    
    
    (417
    )
    
    
    (544
    )
    
    
    (372
    )Interest expense
    
    
    (104
    )
    
    
    (24
    )
    
    
    (18
    )Interest and dividend income
    
    
    4,033
    
    
    
    2,161
    
    
    
    540Other income, net
    
    
    20
    
    
    
    238
    
    
    
    242Income before taxes on income
    
    
    52,784
    
    
    
    26,400
    
    
    
    7,860Income tax expense (benefit)
    
    
    21,131
    
    
    
    (5,629
    )
    
    
    591Net income
    
    $
    31,653
    
    
    $
    32,029
    
    
    $
    7,269Income per common shareBasic
    
    $
    1.54
    
    
    $
    1.59
    
    
    $
    0.44Diluted
    
    $
    1.47
    
    
    $
    1.54
    
    
    $
    0.44Weighted average shares outstandingBasic
    
    
    20,500
    
    
    
    20,099
    
    
    
    16,391Diluted
    
    
    21,492
    
    
    
    20,814
    
    
    
    16,616
  28




---



##### Table of Contents



LCA-VISION INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31,2005
    
    
    2004
    
    
    2003(dollars in thousands)Cash flow from operating activities:Net income
    
    $
    31,653
    
    
    $
    32,029
    
    
    $
    7,269Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    7,636
    
    
    
    7,045
    
    
    
    6,377Provision for loss on doubtful accounts
    
    
    280
    
    
    
    969
    
    
    
    1,781Gain on disposal of assets
    
    
    (20
    )
    
    
    
    
    
    
    (190
    )Deferred income taxes
    
    
    3,002
    
    
    
    (8,608
    )
    
    
    Deferred tax benefit on disqualified stock options
    
    
    5,670
    
    
    
    1,311
    
    
    
    Deferred compensation
    
    
    1,354
    
    
    
    758
    
    
    
    328Insurance reserve
    
    
    1,272
    
    
    
    1,605
    
    
    
    908Equity in earnings from unconsolidated businesses
    
    
    (328
    )
    
    
    (369
    )
    
    
    (317
    )Changes in working capital:Accounts receivables
    
    
    (2,331
    )
    
    
    (6,531
    )
    
    
    (5,191
    )Receivables from vendors
    
    
    (2,130
    )
    
    
    (275
    )
    
    
    (465
    )Prepaid expenses, inventory and other
    
    
    (1,544
    )
    
    
    (998
    )
    
    
    40Income taxes receivable
    
    
    (2,608
    )
    
    
    (267
    )
    
    
    Accounts payable
    
    
    (1,723
    )
    
    
    81
    
    
    
    1,028Income taxes payable
    
    
    (254
    )
    
    
    16
    
    
    
    81Accrued liabilities and other
    
    
    1,131
    
    
    
    3,041
    
    
    
    831Net cash provided by operating activities
    
    
    41,060
    
    
    
    29,807
    
    
    
    12,480Cash flows from investing activities:Purchase of property and equipment
    
    
    (10,748
    )
    
    
    (7,213
    )
    
    
    (5,231
    )Proceeds from sale of property and equipment
    
    
    20
    
    
    
    
    
    
    
    225Distribution from minority equity investees
    
    
    1,215
    
    
    
    586
    
    
    
    195Deferred compensation plan
    
    
    (1,382
    )
    
    
    (726
    )
    
    
    (334
    )Other, net
    
    
    150
    
    
    
    (108
    )
    
    
    204Net cash (used in) investing activities
    
    
    (10,745
    )
    
    
    (7,461
    )
    
    
    (4,941
    )Cash flows from financing activities:Principal payments of capital lease obligations
    
    
    (1,140
    )
    
    
    (176
    )
    
    
    (10
    )Loan payments made by stockholders
    
    
    
    
    
    
    
    
    
    
    1,353Loans to stockholders
    
    
    
    
    
    
    
    
    
    
    (22
    )Shares repurchased for treasury stock
    
    
    (2,209
    )
    
    
    
    
    
    
    Stock offering
    
    
    
    
    
    
    
    
    
    
    36,727Exercise of stock options and warrants
    
    
    4,884
    
    
    
    2,202
    
    
    
    1,023Dividends paid to stockholders
    
    
    (7,407
    )
    
    
    (2,692
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (5,872
    )
    
    
    (666
    )
    
    
    39,071Increase in cash and cash equivalents
    
    
    24,443
    
    
    
    21,680
    
    
    
    46,610Cash and cash equivalents at beginning of year
    
    
    86,588
    
    
    
    64,908
    
    
    
    18,298Cash and cash equivalents at end of year
    
    $
    111,031
    
    
    $
    86,588
    
    
    $
    64,908
  29
    Table of Contents  LCA-VISION INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount(dollars in thousands)
    
    
    
    
    
    
    (dollars in thousands)Common StockBalance at beginning of year
    
    
    23,767,353
    
    
    $
    24
    
    
    
    23,465,342
    
    
    $
    16
    
    
    
    19,665,459
    
    
    $
    13Employee plans
    
    
    601,639
    
    
    
    
    
    
    
    304,169
    
    
    
    
    
    
    
    199,883
    
    
    
    Stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,600,000
    
    
    
    3Stock split  par value effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Partial shares
    
    
    
    
    
    
    
    
    
    
    (2,158
    )
    
    
    
    
    
    
    
    
    
    
    Balance at end of Year
    
    
    24,368,992
    
    
    
    24
    
    
    
    23,767,353
    
    
    
    24
    
    
    
    23,465,342
    
    
    
    16WarrantsBalance at beginning of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    1,982Expired warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150,000
    )
    
    
    (1,982
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Notes Receivable from StockholdersBalance at beginning of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,532
    )Decrease in notes outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,554Increase in notes outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury StockBalance at beginning of year
    
    
    (3,550,794
    )
    
    
    (15,462
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )Shares repurchased
    
    
    (50,000
    )
    
    
    (2,209
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    
    (3,600,794
    )
    
    
    (17,671
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )Contributed CapitalBalance at beginning of year
    
    
    
    
    
    
    134,708
    
    
    
    
    
    
    
    131,203
    
    
    
    
    
    
    
    91,474Stock Split  par value effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    Employee plans
    
    
    
    
    
    
    4,884
    
    
    
    
    
    
    
    2,250
    
    
    
    
    
    
    
    1,022Stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,725Stock split fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    Expired warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,982Deferred tax benefit of disqualified stock options
    
    
    
    
    
    
    5,670
    
    
    
    
    
    
    
    1,311
    
    
    
    
    
    
    
    Balance at end of year
    
    
    
    
    
    
    145,262
    
    
    
    
    
    
    
    134,708
    
    
    
    
    
    
    
    131,203Retained earnings (deficit)Balance at beginning of year
    
    
    
    
    
    
    (7,732
    )
    
    
    
    
    
    
    (37,069
    )
    
    
    
    
    
    
    (44,338
    )Net Income (loss)
    
    
    
    
    
    
    31,653
    
    
    
    
    
    
    
    32,029
    
    
    
    
    
    
    
    7,269Dividends paid ($0.13 per share)
    
    
    
    
    
    
    (7,407
    )
    
    
    
    
    
    
    (2,692
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    
    
    
    
    16,514
    
    
    
    
    
    
    
    (7,732
    )
    
    
    
    
    
    
    (37,069
    )Accumulated Other Comprehensive Loss (Income)Balance at beginning of year
    
    
    
    
    
    
    299
    
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    (25
    )Translation adjustments
    
    
    
    
    
    
    (286
    )
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    139Unrealized investment gain
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    Balance at end of year
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    299
    
    
    
    
    
    
    
    114Total Stockholders Investment
    
    
    
    
    
    $
    144,136
    
    
    
    
    
    
    $
    111,837
    
    
    
    
    
    
    $
    78,802
  30
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Description Of Business And Summary Of Significant Accounting Policies
 Business
 Plus
 Plus
 Consolidation Policy
  Consolidation
 Application
of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and Certain Other
Entities with Contractual Management Agreements.
 Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51
 Equity Method
 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.
   31
    Table of Contents  Use of Estimates
  
    
    Allowance for doubtful accounts  patient financing
    
    Loss reserves  insurance captive
 Cash and Cash Equivalents
  Trade Receivables
  Allowance for Doubtful Accounts
  Property and Equipment, and Depreciation and Amortization
 Property and Equipment
  Depreciation and Amortization
   Deferred Compensation Plan Assets
  32
    Table of Contents  Financial Instruments
 Concentration of Credit Risk
  Fair Values of Financial Instruments
  Captive Insurance Company Reserves
  Income Taxes
    Per Share Data
   2005
    
    
    2004
    
    
    2003Options
    
    
    1,494,640
    
    
    
    1,773,465
    
    
    
    1,663,877
 33
    Table of Contents  2005
    
    
    2004
    
    
    2003Basic EarningsNet income
    
    $
    31,653
    
    
    $
    32,029
    
    
    $
    7,269Weighted average shares outstanding
    
    
    20,500
    
    
    
    20,099
    
    
    
    16,391Basic earnings per share
    
    $
    1.54
    
    
    $
    1.59
    
    
    $
    0.44Diluted EarningsNet income
    
    $
    31,653
    
    
    $
    32,029
    
    
    $
    7,269Weighted average common shares and potential dilutive shares
    
    
    20,500
    
    
    
    20,095
    
    
    
    16,391Effect of dilutive securitiesStock Options
    
    
    992
    
    
    
    715
    
    
    
    225Weighted average common shares and potential dilutive shares
    
    
    21,492
    
    
    
    20,814
    
    
    
    16,616Diluted earnings per share
    
    $
    1.47
    
    
    $
    1.54
    
    
    $
    0.44
 Revenue Recognition
  Stock-Based Compensation
 Accounting for Stock-Based Compensation  Transition and
Disclosure Accounting for Stock-Based Compensation
  Years ended December 31,2005
    
    2004
    
    2003Net income
    
    As reported
    

$         31,653
    
    $         32,029
    
    $            7,269Pro forma
    
    29,026
    
    30,709
    
    6,231Basic net income per share
    
    As reported
    
    $             1.54
    
    $             1.59
    
    $              0.44Pro forma
    
    1.42
    
    1.53
    
    0.38Diluted net income per share
    
    As reported
    
    $             1.47
    
    $             1.54
    
    $              0.44Pro forma
    
    1.35
    
    1.48
    
    0.38
  2005
    
    2004
    
    2003Dividend yield
    
    1.0  1.2%
    
    1.2%
    
    0%Expected volatility
    
    77  93%
    
    52  91%
    
    89  97%Risk free interest rate
    
    3.28  4.33%
    
    1.52  3.48%
    
    1.44  3.21%Expected lives (in years)
    
    2 to 5
    
    2 to 5
    
    2 to 5
  34
    Table of Contents  Marketing and Advertising Expenditures
  Recent Accounting Pronouncements
 Share-Based Payment
 2. Stockholders Investment
 Common Stock
  Preferred stock
  Treasury stock
  3. Credit Arrangements
  4. Investment in Unconsolidated Businesses
   December 31,2005
    
    
    2004Financial Position:Current assets
    
    $
    3,170
    
    
    $
    455Total assets
    
    
    3,170
    
    
    
    455Total liabilities
    
    
    1,568
    
    
    
    72Members equity
    
    
    1,602
    
    
    
    383Operating Results:Revenue
    
    $
    16,632
    
    
    $
    1,043Net income
    
    
    2,919
    
    
    
    810
 35
    Table of Contents  5. Income Taxes
  2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    14,247
    
    
    $
    487
    
    
    $
    193State and local
    
    
    3,386
    
    
    
    559
    
    
    
    51Foreign
    
    
    496
    
    
    
    621
    
    
    
    347Total
    
    
    18,129
    
    
    
    1,667
    
    
    
    591Deferred:Federal
    
    
    2,635
    
    
    
    7,922
    
    
    
    1,864State and local
    
    
    367
    
    
    
    1,181
    
    
    
    190Total
    
    
    3,002
    
    
    
    9,103
    
    
    
    2,054Income tax expense (benefit)
    
    
    21,131
    
    
    
    10,770
    
    
    
    2,645Valuation allowance (decrease) increase
    
    
    
    
    
    
    (16,399
    )
    
    
    (2,054
    )Net income tax (benefit) expense
    
    $
    21,131
    
    
    
    ($5,629
    )
    
    $
    591
     2005
    
    
    2004
    
    
    2003Domestic
    
    $
    51,609
    
    
    $
    25,286
    
    
    $
    6,761Foreign
    
    
    1,175
    
    
    
    1,114
    
    
    
    1,099Total
    
    $
    52,784
    
    
    $
    26,400
    
    
    $
    7,860
 36
    Table of Contents  December 31,2005
    
    
    2004Current deferred tax assets:Net operating loss carryforward
    
    $
    1,341
    
    
    $
    3,835Accounts receivable
    
    
    1,370
    
    
    
    1,156Equity investments
    
    
    9
    
    
    
    4Captive insurance
    
    
    462
    
    
    
    360Alternate minimum tax
    
    
    
    
    
    
    678Other
    
    
    
    
    
    
    18Enhancement Reserve
    
    
    360
    
    
    
    Total current deferred tax assets
    
    
    3,542
    
    
    
    6,051Long-term deferred tax assets:Net operating loss carryforwards
    
    
    684
    
    
    
    2,103Deferred compensation
    
    
    956
    
    
    
    490Property and equipment
    
    
    424
    
    
    
    Total long-term deferred tax assets
    
    
    2,064
    
    
    
    2,593Total deferred tax assets
    
    
    5,606
    
    
    
    8,644Deferred tax
liabilities  property and equipment
    
    
    
    
    
    
    (36
    )Net deferred tax assets
    
    $
    5,606
    
    
    $
    8,608
  2005
    
    
    2004
    
    
    2003Tax at statutory federal rate
    
    $
    18,494
    
    
    $
    9,240
    
    
    $
    2,673State income taxes, net of federal benefit
    
    
    2,474
    
    
    
    1,890
    
    
    
    159Permanent differences
    
    
    49
    
    
    
    22
    
    
    
    21Foreign income tax
    
    
    107
    
    
    
    46
    
    
    
    347Change in valuation allowance
    
    
    
    
    
    
    (16,399
    )
    
    
    (2,054
    )Change in effective tax rate
    
    
    93
    
    
    
    (434
    )
    
    
    Other
    
    
    (86
    )
    
    
    6
    
    
    
    (555
    )Income tax provision (benefit)
    
    $
    21,131
    
    
    
    ($5,629
    )
    
    $
    591
    37
    Table of Contents  6. Leasing Arrangements
   December 31, 2005Capital
    
    
    OperatingLeases
    
    
    LeasesYear2006
    
    $
    2,194
    
    
    $
    4,4752007
    
    
    1,122
    
    
    
    3,7932008
    
    
    373
    
    
    
    3,3812009
    
    
    
    
    
    
    2,8562010
    
    
    
    
    
    
    1,594Beyond 2010
    
    
    
    
    
    
    1,116Total minimum rental commitment
    
    $
    3,689
    
    
    $
    17,215Less interest
    
    
    133Present value of minimum lease payments
    
    
    3,556Less current installments
    
    
    2,122Long-term obligations at December 31, 2005
    
    $
    1,434
   7. Employee Benefits
 Savings Plan
  Stock Incentive Plans
    38
    Table of Contents  Stock Options
    
    
    Exercise PriceOutstanding 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
    
    
    
    10.83Granted
    
    
    403,398
    
    
    
    28.99Exercised
    
    
    (601,639
    )
    
    
    8.12Cancelled/forfeited
    
    
    (80,584
    )
    
    
    16.54Outstanding at 12/31/05
    
    
    1,494,640
    
    
    
    16.64Options exercisable,December 31,2003
    
    
    637,641
    
    
    
    9.182004
    
    
    708,210
    
    
    
    9.102005
    
    
    533,870
    
    
    
    11.29
  Stock Options Outstanding
    
    
    
    
    
    Stock Options ExercisableWeighted-average
    
    Weighted-
    
    
    
    
    
    Weighted-Range of exercise
    
    # outstanding
    
    remaining
    
    average
    
    # Exercisable as
    
    averageprices
    
    as of 12/31/05
    
    contractual life
    
    exercise price
    
    of 12/31/05
    
    exercise price$  1.78$  5.92
    
    
    209,671
    
    
    
    6.75
    
    
    $
    4.62
    
    
    
    122,055
    
    
    $
    4.25$  5.99$11.84
    
    
    165,587
    
    
    
    5.86
    
    
    $
    8.86
    
    
    
    107,087
    
    
    $
    9.42$12.19$12.19
    
    
    254,927
    
    
    
    7.94
    
    
    $
    12.19
    
    
    
    142,051
    
    
    $
    12.19$12.50$16.57
    
    
    235,126
    
    
    
    6.72
    
    
    $
    15.09
    
    
    
    97,426
    
    
    $
    14.15$16.58$17.27
    
    
    160,551
    
    
    
    8.68
    
    
    $
    16.67
    
    
    
    32,251
    
    
    $
    16.68$17.29$22.81
    
    
    77,250
    
    
    
    8.81
    
    
    $
    21.10
    
    
    
    14,250
    
    
    $
    20.83$27.05$27.05
    
    
    265,500
    
    
    
    9.15
    
    
    $
    27.05
    
    
    
    0
    
    
    $
    0.00$28.59$44.60
    
    
    116,028
    
    
    
    5.28
    
    
    $
    32.81
    
    
    
    18,750
    
    
    $
    29.67$48.25$48.25
    
    
    5,000
    
    
    
    9.50
    
    
    $
    48.25
    
    
    
    0
    
    
    $
    0.00$48.52$48.52
    
    
    5,000
    
    
    
    9.52
    
    
    $
    48.52
    
    
    
    0
    
    
    $
    0.00$  1.78$48.52
    
    
    1,494,640
    
    
    
    7.49
    
    
    $
    16.64
    
    
    
    533,870
    
    
    $
    11.29
   39
    Table of Contents  8. Commitments and Contingencies
  9. Additional Financial Information
   At December 31,2005
    
    
    2004Property and EquipmentLand
    
    $
    354
    
    
    $
    354Building and improvements
    
    
    6,106
    
    
    
    5,698Leasehold improvements
    
    
    8,353
    
    
    
    6,467Furniture and fixtures
    
    
    4,046
    
    
    
    3,331Equipment
    
    
    35,607
    
    
    
    31,166Equipment under capital leases
    
    
    3,877
    
    
    
    1,25058,343
    
    
    
    48,266Accumulated depreciation
    
    
    (38,342
    )
    
    
    (31,743
    )Construction in progress
    
    
    4,683
    
    
    
    2,108$
    24,684
    
    
    $
    18,631
  For the Year Ended December 31,2005
    
    
    2004
    
    
    2003Cash paid during the year forInterest
    
    $
    104
    
    
    $
    24
    
    
    $
    (18
    )Income taxes
    
    
    15,348
    
    
    
    1,907
    
    
    
    608Other comprehensive income (loss) informationComprehensive income (loss):Income applicable to common stock
    
    $
    31,653
    
    
    $
    32,029
    
    
    $
    7,269Unrealized (loss) gain on investment
    
    
    (6
    )
    
    
    31
    
    
    
    0Other comprehensive (loss) income, net of
income tax/currency translation adjustments
    
    
    (286
    )
    
    
    154
    
    
    
    139Total comprehensive income
    
    $
    31,361
    
    
    $
    32,214
    
    
    $
    7,408
 40
    Table of Contents  10. Quarterly Financial Data (unaudited) (1)
  2005 Quarters
    
    
    2004 QuartersFirst
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthRevenues
    
    $
    50,190
    
    
    $
    48,391
    
    
    $
    47,031
    
    
    $
    46,785
    
    
    $
    31,650
    
    
    $
    31,554
    
    
    $
    31,203
    
    
    $
    32,715Operating income
    
    
    15,348
    
    
    
    12,922
    
    
    
    12,028
    
    
    
    8,626
    
    
    
    6,761
    
    
    
    6,273
    
    
    
    5,537
    
    
    
    5,629Net Income
    
    
    9,311
    
    
    
    7,828
    
    
    
    7,946
    
    
    
    6,568
    
    
    
    12,729
    
    
    
    10,849
    
    
    
    3,595
    
    
    
    4,856Earnings per shareBasic(1)
    
    
    0.46
    
    
    
    0.38
    
    
    
    0.39
    
    
    
    0.32
    
    
    
    0.64
    
    
    
    0.54
    
    
    
    0.18
    
    
    
    0.24Diluted(1)
    
    
    0.44
    
    
    
    0.36
    
    
    
    0.37
    
    
    
    0.30
    
    
    
    0.62
    
    
    
    0.52
    
    
    
    0.17
    
    
    
    0.23
 
 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Disclosure controls and procedures
   Managements report on internal control over financial reporting
  
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
  
 Item 11. Executive Compensation.
  41
    Table of Contents  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
   Equity Compensation Plan Information
 Number of securitiesWeighted-average
    
    remaining available for futureNumber of securities to
    
    exercise price of
    
    issuance under equitybe issued upon exercise
    
    outstanding options,
    
    compensation plansof outstanding options,
    
    warrants and rights
    
    (excluding securities reflectedPlan Category
    
    warrants and rights (a)
    
    (b)
    
    in column (a))Equity compensation
plans approved by
security holders
    
    
    1,494,646
    
    
    $
    16.64
    
    
    
    571,984Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,494,640
    
    
    $
    16.64
    
    
    
    571,984
 
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accountant Fees and Services.
  
 PART IV
 
 Item 15.
Exhibits and Financial Statements Schedules.
 (a)(1) List of Financial Statements
  
 (a)(2) List of Schedules
 Schedule II
  42
    Table of Contents  Schedule II Valuation and Qualifying Accounts and Reserves
 LCA-Vision Inc.
For the years ended December 31, 2005, 2004, and 2003
(in thousands)
 ChargesBalance at
    
    
    to Cost
    
    
    
    
    
    
    BalanceBeginning
    
    
    and
    
    
    
    
    
    
    at End ofDescription
    
    of Period
    
    
    Expenses
    
    
    Deductions
    
    
    PeriodYear ended December 31, 2005:Allowance for doubtful accounts
    
    $
    2,865
    
    
    $
    1,778
    
    
    $
    1,498
    
    
    $
    3,145Enhancement reserve
    
    
    498
    
    
    
    1,264
    
    
    
    1,186
    
    
    
    576Insurance reserve
    
    
    2,568
    
    
    
    1,466
    
    
    
    194
    
    
    
    3,840Year 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
    
    
    
    963
 43
    Table of Contents  (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 (Exhibit (b) to Annual Report on Form 10-K for the year ended December 31, 2004)*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)*10(h)
    
    Executive Cash Bonus Plan (as amended February 21, 2006) (Exhibit 10.1 to Current Report on Form 8-K filed February
24, 2006)*10(i)
    
    Form of Restricted Stock Award Agreement with all employees, including named executive officers (Exhibit 10.2 to
Current Report on Form 8-K filed February 24, 2006)*10(j)
    
    Form of Stock Option Agreement with outside directors (Exhibit 10.3 to Current Report on Form 8-K filed February
24, 2006)*10(k)
    
    Form of Stock Option Agreement with all employees, including named executive officers (Exhibit 10.4 to Current
Report on Form 8-K filed February 24, 2006)*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
    Table of Contents  LCA-Vision Inc.Date: March 13, 2006
    
    By: /s/ Craig P. R. Joffe

Craig P. R. Joffe, Interim Chief Executive Officer
    /s/ Craig P. R. Joffe
    
    Interim Chief Executive OfficerCraig P. R. Joffe
    
    (Principal
Executive Officer)Executive Vice President/Finance and/s/ Alan H. Buckey
    
    Chief Financial OfficerAlan H. Buckey
    
    (Principal
Financial and Accounting Officer)/s/ Stephen N. Joffe
    
    Chairman of the BoardStephen N. Joffe/s/ William F. Bahl
    
    DirectorWilliam F. Bahl/s/ Thomas G. Cody
    
    DirectorThomas G. Cody/s/ John H. Gutfreund
    
    DirectorJohn H. Gutfreund/s/ John C. Hassan
    
    DirectorJohn C. Hassan/s/ E. Anthony Woods
    
    DirectorE. Anthony Woods
 45