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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, 2006
 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.
 (Exact name of registrant as specified in charter)
 Delaware
    
    11-2882328(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification Number)7840 Montgomery Road, Cincinnati, OH
    
    45236(Address of principal executive offices)
    
    (Zip Code)
   Title of each class
    
    Name of each exchange on which
registeredCommon Stock, $.001 par value
    
    The NASDAQ Stock Market
  o þ
 o þ
 þ o
 o
  o þ o
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##### Table of Contents



LCA-VISION INC.
 FISCAL YEAR 2006 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
    
    
    15Item 6. Selected Financial Data
    
    
    17Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    17Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 8. Financial Statements and Supplementary Data
    
    
    24Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    45Item 9A. Controls and Procedures
    
    
    45Item 9B. Other Information
    
    
    45Part III.Item 10. Directors, Executive Officers and Corporate Governance
    
    
    45Item 11. Executive Compensation
    
    
    45Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    45Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    46Item 14. Principal Accountant Fees and Services
    
    
    46Part IV.Item 15. Exhibits and Financial Statement Schedules
    
    
    46Signatures
    
    
    49EX-21EX-23EX-31.1EX-31.2EX-32
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PART I
 SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
  
 Item 1. Business.
 Background and History of Company
 Plus
 Plus
  Laser Vision Correction Procedures
   PRK and Surface Ablation .
 3




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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.
 .
  
    
    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,
    
    Technology  compared to earlier laser vision correction procedures, the LASIK
procedure typically results in less patient discomfort and a shorter recovery period,
and
    
    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.
 4




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Estimated Number of Laser Vision Correction Procedures in North America per Year
 
 
 Our Business Strategy
   
    
    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.
 Providing patients with a Continuum of Care.
 Opening and operating new laser vision correction centers.
 5




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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
 Competition
     6




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Employees
  Trademarks
  Suppliers of Equipment and Financing Services
   Government Regulation
    Restrictions on medical devices
   7




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##### Table of Contents




    
    Product seizures
    
    Recalls
    
    Withdrawal of approvals
    
    Civil and criminal penalties
    Federal and state laws on kickbacks and physician referrals
  Advertising restrictions
  Fee-splitting
  8




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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
  Internet
 www.lasikplus.com www.lca-vision.com
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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.
  Our industry is highly correlated with consumer confidence.
  We derive 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.
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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.
  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.
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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
 
    
    Possible unknown side effects not yet revealed by long-term follow-up data
 
    
    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
 
    
    Infection of the eye
 
    
    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
 
    
    Decreased corneal integrity
 
    
    Corneal flap or corneal healing complications
 
    
    Loss of best corrected visual acuity
 
    
    Inflammation or infection
 
    
    Need for corrective lenses or reading glasses post-operatively
 
    
    Need for further treatment
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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
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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.
  Our business is very reliant upon direct-to-consumer marketing.
  Recent changes in management and dependence on a small number of senior managers
 
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Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
    
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 .
  2006
    
    2005High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    56.68
    
    
    $
    40.30
    
    
    $
    34.46
    
    
    $
    22.02Second Quarter
    
    
    58.25
    
    
    
    46.00
    
    
    
    49.89
    
    
    
    32.00Third Quarter
    
    
    54.57
    
    
    
    37.58
    
    
    
    51.24
    
    
    
    33.87Fourth Quarter
    
    
    37.43
    
    
    
    29.90
    
    
    
    50.29
    
    
    
    33.43
 15




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2006
    
    2005First Quarter
    
    $
    0.12
    
    
    $
    0.08Second Quarter
    
    
    0.12
    
    
    
    0.08Third Quarter
    
    
    0.12
    
    
    
    0.08Fourth Quarter
    
    
    0.18
    
    
    
    0.12Total
    
    $
    0.54
    
    
    $
    0.36
   Issuer Purchases of Equity Securities(c) Total Number of
    
    (d) Maximum Number(a) Total
    
    
    
    
    
    Shares Purchased as
    
    of Shares/Dollars thatNumber of
    
    (b) Average
    
    Part of Publicly
    
    May Yet be PurchasedShares
    
    Price Paid per
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Purchased
    
    Share
    
    Programs
    
    Program10/1/06  10/31/06
    
    
    361,700
    
    
    $
    35.33
    
    
    
    361,700
    
    
    
    191,80011/1/06  11/30/06
    
    
    191,800
    
    
    $
    34.97
    
    
    
    191,800
    
    
    
    -0-12/1/06  12/31/06
    
    
    442,400
    
    
    $
    35.06
    
    
    
    442,400
    
    
    $
    34,488,000Total
    
    
    995,900
    
    
    $
    35.14
    
    
    
    995,900
    
    
    $
    34,488,000
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Item 6. Selected Financial Data.
  Year Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(amounts in thousands, except per share and operating data)Consolidated Statements of Operations Data:Revenues:Laser refractive surgery
    
    $
    256,927
    
    
    $
    192,397
    
    
    $
    127,122
    
    
    $
    81,423
    
    
    $
    61,838Operating costs and expenses:Medical professional and license fees
    
    
    44,754
    
    
    
    35,051
    
    
    
    24,275
    
    
    
    15,779
    
    
    
    12,270Direct costs of services
    
    
    77,612
    
    
    
    54,952
    
    
    
    40,842
    
    
    
    31,507
    
    
    
    28,796General and administrative expenses
    
    
    21,156
    
    
    
    14,021
    
    
    
    10,292
    
    
    
    8,043
    
    
    
    8,327Marketing and advertising
    
    
    47,971
    
    
    
    31,813
    
    
    
    20,468
    
    
    
    12,566
    
    
    
    12,823Depreciation and amortization
    
    
    8,453
    
    
    
    7,636
    
    
    
    7,045
    
    
    
    6,377
    
    
    
    5,997Special (benefit) charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174
    )Total expenses
    
    
    199,946
    
    
    
    143,473
    
    
    
    102,922
    
    
    
    74,272
    
    
    
    68,039Operating income (loss)
    
    
    56,981
    
    
    
    48,924
    
    
    
    24,200
    
    
    
    7,151
    
    
    
    (6,201
    )Equity in earnings from unconsolidated
businesses
    
    
    746
    
    
    
    328
    
    
    
    369
    
    
    
    317
    
    
    
    241Interest expense
    
    
    (302
    )
    
    
    (104
    )
    
    
    (24
    )
    
    
    (18
    )
    
    
    (4
    )Interest and dividend income
    
    
    6,484
    
    
    
    4,033
    
    
    
    2,161
    
    
    
    540
    
    
    
    225Litigation settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,282Other (expense)
    
    
    (27
    )
    
    
    (397
    )
    
    
    (306
    )
    
    
    (130
    )
    
    
    (195
    )Income (loss) before taxes on income
    
    
    63,882
    
    
    
    52,784
    
    
    
    26,400
    
    
    
    7,860
    
    
    
    (3,652
    )Income tax expense (benefit)
    
    
    25,586
    
    
    
    21,131
    
    
    
    (5,629
    )
    
    
    591
    
    
    
    174Income (loss) available to common shareholders
    
    $
    38,296
    
    
    $
    31,653
    
    
    $
    32,029
    
    
    $
    7,269
    
    
    $
    (3,826
    )Income (loss) per common shareBasic
    
    $
    1.85
    
    
    $
    1.54
    
    
    $
    1.59
    
    
    $
    0.44
    
    
    $
    (0.24
    )Diluted
    
    
    1.80
    
    
    
    1.47
    
    
    
    1.54
    
    
    
    0.44
    
    
    
    (0.24
    )Cash dividends per common share
    
    $
    0.54
    
    
    $
    0.36
    
    
    $
    0.13
    
    
    
    
    
    
    
    Weighted average shares used in computationBasic
    
    
    20,694
    
    
    
    20,500
    
    
    
    20,099
    
    
    
    16,391
    
    
    
    16,191Diluted
    
    
    21,235
    
    
    
    21,492
    
    
    
    20,814
    
    
    
    16,616
    
    
    
    16,191Selected Operating DataLaser vision correction procedures
    
    
    185,268
    
    
    
    142,000
    
    
    
    95,835
    
    
    
    65,485
    
    
    
    57,104
 At December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Balance Sheet DataCash and short-term investments
    
    $
    98,052
    
    
    $
    110,531
    
    
    $
    86,088
    
    
    $
    64,408
    
    
    $
    17,798Working capital
    
    
    106,890
    
    
    
    119,874
    
    
    
    91,182
    
    
    
    60,486
    
    
    
    12,520Total assets
    
    
    166,987
    
    
    
    166,852
    
    
    
    129,577
    
    
    
    90,037
    
    
    
    39,996Debt maturing in one year
    
    
    3,360
    
    
    
    2,122
    
    
    
    542
    
    
    
    
    
    
    
    10Total debt, excluding current portion
    
    
    2,431
    
    
    
    1,434
    
    
    
    376
    
    
    
    
    
    
    
    Retained earnings (deficit)
    
    
    43,679
    
    
    
    16,514
    
    
    
    (7,732
    )
    
    
    (37,069
    )
    
    
    (44,338
    )Total stockholders investment
    
    
    136,475
    
    
    
    144,136
    
    
    
    111,837
    
    
    
    78,802
    
    
    
    32,112
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  17




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Overview
 Plus
   
    
    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 Alcon
 
    
    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 revenues
 
    
    General and administrative costs, including headquarters staff expense and other overhead costs
 
    
    Marketing and advertising costs
 
    
    Depreciation of equipment
 Results of Operations
 Revenues
   
    
    Our ability to generate customers through our arrangements with managed care
companies, direct to consumer advertising and word of mouth referrals
 
    
    Our mix of procedures among the different types of laser technology
 
    
    New vision center openings and our ability to increase procedure volume at existing vision centers
 
    
    The availability of patient financing
 
    
    General economic conditions and consumer confidence levels
 
    
    The continued growth and increased acceptance of laser vision correction
 
    
    The effect of competition and discounting practices in our industry
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2006
    
    2005
    
    
    2004First Quarter
    
    
    53,372
    
    
    
    37,578
    
    
    
    24,270Second Quarter
    
    
    47,308
    
    
    
    36,010
    
    
    
    24,093Third Quarter
    
    
    42,539
    
    
    
    34,187
    
    
    
    23,248Fourth Quarter
    
    
    42,049
    
    
    
    34,225
    
    
    
    24,224Year
    
    
    185,268
    
    
    
    142,000
    
    
    
    95,835
    Operating Costs and Expenses
   % of Revenue2006
    
    2005
    
    Increase
    
    2006
    
    2005Medical professional and license fees
    
    $
    44,754
    
    
    $
    35,051
    
    
    $
    9,703
    
    
    
    17.4
    %
    
    
    18.2
    %Direct costs of services
    
    
    77,612
    
    
    
    54,952
    
    
    
    22,660
    
    
    
    30.2
    
    
    
    28.6General and administrative expenses
    
    
    21,156
    
    
    
    14,021
    
    
    
    7,135
    
    
    
    8.2
    
    
    
    7.3Marketing and advertising
    
    
    47,971
    
    
    
    31,813
    
    
    
    16,158
    
    
    
    18.7
    
    
    
    16.5Depreciation and amortization
    
    
    8,453
    
    
    
    7,636
    
    
    
    817
    
    
    
    3.3
    
    
    
    4.0
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% 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
       Income Taxes
  2006
    
    
    2005
    
    
    2004Federal income taxes
    
    $
    21,393
    
    
    $
    16,882
    
    
    $
    8,409State and local income taxes, net of federal benefit
    
    
    4,193
    
    
    
    3,753
    
    
    
    1,740Foreign income taxes
    
    
    
    
    
    
    496
    
    
    
    621Valuation allowance (decrease)
    
    
    
    
    
    
    
    
    
    
    (16,399
    )Income tax provision
    
    $
    25,586
    
    
    $
    21,131
    
    
    $
    (5,629
    )
  Liquidity and Capital Resources
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Payments due by PeriodMore than 5Contractual Obligations
    
    Total
    
    Less than 1 year
    
    1 - 3 years
    
    3 - 5 years
    
    yearsCapital Leases
    
    $
    6,205,000
    
    
    $
    3,668,000
    
    
    $
    2,537,000
    
    
    $
    
    
    
    $
    Operating Lease Obligations
    
    
    24,913,000
    
    
    
    6,187,000
    
    
    
    10,502,000
    
    
    
    5,623,000
    
    
    
    2,601,000Deferred Compensation
    
    
    4,136,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,136,000Total
    
    $
    35,254,000
    
    
    $
    9,855,000
    
    
    $
    13,039,000
    
    
    $
    5,623,000
    
    
    $
    6,737,000
    2006
    
    2005Paramus, NJ
    
    Sacramento, CAGrand Rapids, MI
    
    Norfolk, VASeattle, WA
    
    Hartford, CTSugar Land, TX
    
    Milwaukee, WIDenver, CO
    
    Phoenix, AZNew Haven, CT
    
    Austin, TXDallas, TX
    
    Portland, OROakdale, MN
    
    Pittsburgh, PALexington, KY
    
    Albuquerque, NMLincoln Park, IL
    
    Birmingham, AL
     Critical Accounting Estimates
 Accounts Receivable
  21




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##### Table of Contents



Allowance for Doubtful Accounts
  Captive Insurance Company Reserves
  Income Taxes
   Consolidation
 Application of FASB Statement 94
and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual
Management Agreements
 22




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##### Table of Contents



Recent Accounting Pronouncements
 Share-Based Payment
 Accounting for Uncertainty in Income
Taxes.
 Fair Value
Measurements,
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
    23




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
 Index to Financial Statements
 PageReport of Management on Internal Control over Financial Reporting
    
    
    25Report of Independent Registered Public Accounting Firm on Financial Statements
    
    
    26Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
    
    
    27Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    28Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    29Consolidated Statements of Cash Flows for the three years ended December 31, 2006, 2005 and 2004
    
    
    30Consolidated Statements of Stockholders Investment for the three years ended December 31, 2006, 2005 and 2004
    
    
    31Notes to Consolidated Financial Statements
    
    
    32
 24




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##### Table of Contents



REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    /s/ Steven C. Straus
    
    
    
    /s/ Alan H. BuckeySteven C. Straus
    
    
    
    Alan H. BuckeyChief Executive Officer
    
    
    
    Executive Vice President/Finance, Chief Financial Officer(Principal Executive Officer)
    
    
    
    (Principal Financial and Accounting Officer)
 25




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
         
 26




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
      .
   
 27




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##### Table of Contents



LCA-VISION INC.
 
 CONSOLIDATED BALANCE SHEETS
 At December 31,2006
    
    
    2005(Dollars in thousands, except per share amounts)AssetsCurrent assetsCash and cash equivalents
    
    $
    27,251
    
    
    $
    110,531Short-term investments
    
    
    70,801
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of $2,310 and $2,641
    
    
    12,160
    
    
    
    10,520Receivables from vendors
    
    
    3,310
    
    
    
    3,207Prepaid expenses and other
    
    
    6,414
    
    
    
    4,031Prepaid income taxes
    
    
    1,667
    
    
    
    2,875Deferred tax assets
    
    
    3,022
    
    
    
    3,542Total current assets
    
    
    124,625
    
    
    
    134,706Property and equipment
    
    
    77,323
    
    
    
    63,026Accumulated depreciation and amortization
    
    
    (46,399
    )
    
    
    (38,342
    )Property and equipment, net
    
    
    30,924
    
    
    
    24,684Accounts receivable, net of allowance for doubtful accounts of $532 and $504
    
    
    2,174
    
    
    
    1,132Deferred compensation plan assets
    
    
    4,090
    
    
    
    2,569Investment in unconsolidated businesses
    
    
    904
    
    
    
    158Deferred tax assets
    
    
    2,775
    
    
    
    2,064Other assets
    
    
    1,495
    
    
    
    1,539Total assets
    
    $
    166,987
    
    
    $
    166,852Liabilities and stockholders investmentCurrent liabilitiesAccounts payable
    
    $
    5,264
    
    
    $
    3,800Accrued liabilities and other
    
    
    9,111
    
    
    
    8,910Capital lease obligations maturing in one year
    
    
    3,360
    
    
    
    2,122Total current liabilities
    
    
    17,735
    
    
    
    14,832Capital lease obligations
    
    
    2,431
    
    
    
    1,434Deferred compensation liability
    
    
    4,136
    
    
    
    2,569Insurance reserve
    
    
    6,163
    
    
    
    3,840Minority equity interest
    
    
    47
    
    
    
    41Stockholders investmentCommon stock ($.001 par value; 24,814,542 and 24,368,992 shares and
19,821,348 and 20,768,198 shares issued and outstanding, respectively)
    
    
    25
    
    
    
    24Contributed capital
    
    
    162,245
    
    
    
    145,262Common stock in treasury, at cost (4,993,194 shares and 3,600,794 shares)
    
    
    (69,487
    )
    
    
    (17,671
    )Retained earnings
    
    
    43,679
    
    
    
    16,514Accumulated other comprehensive income
    
    
    13
    
    
    
    7Total stockholders investment
    
    
    136,475
    
    
    
    144,136Total liabilities and stockholders investment
    
    $
    166,987
    
    
    $
    166,852
  28




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##### Table of Contents



LCA-VISION INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31,2006
    
    
    2005
    
    
    2004(Dollars in thousands, except per share amounts)Revenues   Laser refractive surgery
    
    $
    256,927
    
    
    $
    192,397
    
    
    $
    127,122Operating costs and expensesMedical professional and license fees
    
    
    44,754
    
    
    
    35,051
    
    
    
    24,275Direct costs of services
    
    
    77,612
    
    
    
    54,952
    
    
    
    40,842General and administrative expenses
    
    
    21,156
    
    
    
    14,021
    
    
    
    10,292Marketing and advertising
    
    
    47,971
    
    
    
    31,813
    
    
    
    20,468Depreciation
    
    
    8,453
    
    
    
    7,636
    
    
    
    7,045Operating income
    
    
    56,981
    
    
    
    48,924
    
    
    
    24,200Equity in earnings from unconsolidated businesses
    
    
    746
    
    
    
    328
    
    
    
    369Net investment income
    
    
    6,182
    
    
    
    3,929
    
    
    
    2,137Other income, net
    
    
    (27
    )
    
    
    (397
    )
    
    
    (306
    )Income before taxes on income
    
    
    63,882
    
    
    
    52,784
    
    
    
    26,400Income tax expense (benefit)
    
    
    25,586
    
    
    
    21,131
    
    
    
    (5,629
    )Net income
    
    $
    38,296
    
    
    $
    31,653
    
    
    $
    32,029Income per common shareBasic
    
    $
    1.85
    
    
    $
    1.54
    
    
    $
    1.59Diluted
    
    $
    1.80
    
    
    $
    1.47
    
    
    $
    1.54Weighted average shares outstandingBasic
    
    
    20,694
    
    
    
    20,500
    
    
    
    20,099Diluted
    
    
    21,235
    
    
    
    21,492
    
    
    
    20,814
  29




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##### Table of Contents



LCA-VISION INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31,2006
    
    
    2005
    
    
    2004(dollars in thousands)Cash flow from operating activities:Net income
    
    $
    38,296
    
    
    $
    31,653
    
    
    $
    32,029Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    8,453
    
    
    
    7,636
    
    
    
    7,045Provision for loss on doubtful accounts
    
    
    1,855
    
    
    
    1,778
    
    
    
    1,344Deferred income taxes
    
    
    (160
    )
    
    
    3,002
    
    
    
    (8,608
    )Tax benefit on disqualified disposition of stock options
    
    
    
    
    
    
    5,670
    
    
    
    1,311Stock-based compensation
    
    
    5,665
    
    
    
    
    
    
    
    Deferred compensation
    
    
    1,567
    
    
    
    1,354
    
    
    
    758Insurance reserve
    
    
    2,323
    
    
    
    1,272
    
    
    
    1,605Equity in earnings from unconsolidated affiliates
    
    
    (746
    )
    
    
    (328
    )
    
    
    (369
    )Changes in working capital:Accounts receivables
    
    
    (4,537
    )
    
    
    (3,829
    )
    
    
    (6,906
    )Receivables from vendors
    
    
    (103
    )
    
    
    (2,130
    )
    
    
    (275
    )Prepaid expenses and other
    
    
    (2,383
    )
    
    
    (1,544
    )
    
    
    (998
    )Prepaid income taxes
    
    
    1,208
    
    
    
    (2,608
    )
    
    
    (267
    )Accounts payable
    
    
    1,464
    
    
    
    (1,723
    )
    
    
    81Income taxes payable
    
    
    
    
    
    
    (254
    )
    
    
    16Accrued liabilities and other
    
    
    630
    
    
    
    1,111
    
    
    
    3,041Net cash provided by operations
    
    
    53,532
    
    
    
    41,060
    
    
    
    29,807Cash flows from investing activities:Purchases of property and equipment
    
    
    (9,656
    )
    
    
    (10,748
    )
    
    
    (7,213
    )Purchases of investment securities
    
    
    (308,943
    )
    
    
    
    
    
    
    Proceeds from sale of investment securities
    
    
    238,013
    
    
    
    
    
    
    
    Distribution from minority equity investors
    
    
    
    
    
    
    1,215
    
    
    
    586Deferred compensation plan
    
    
    (1,521
    )
    
    
    (1,382
    )
    
    
    (726
    )Other, net
    
    
    119
    
    
    
    170
    
    
    
    (108
    )Net cash used in investing activities
    
    
    (81,988
    )
    
    
    (10,745
    )
    
    
    (7,461
    )Cash flows from financing activities:Principal payments of capital lease obligations
    
    
    (2,795
    )
    
    
    (1,140
    )
    
    
    (176
    )Shares repurchased for treasury stock
    
    
    (51,816
    )
    
    
    (2,209
    )
    
    
    Tax benefits related to stock-based compensation
    
    
    5,409
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    5,528
    
    
    
    4,884
    
    
    
    2,202Distribution paid to minority equity investors
    
    
    (19
    )
    
    
    
    
    
    
    Dividends paid to stockholders
    
    
    (11,131
    )
    
    
    (7,407
    )
    
    
    (2,692
    )Net cash used in financing activities
    
    
    (54,824
    )
    
    
    (5,872
    )
    
    
    (666
    )(Decrease) increase in cash and cash equivalents
    
    
    (83,280
    )
    
    
    24,443
    
    
    
    21,680Cash and cash equivalents at beginning of year
    
    
    110,531
    
    
    
    86,088
    
    
    
    64,408Cash and cash equivalents at end of year
    
    $
    27,251
    
    
    $
    110,531
    
    
    $
    86,088
  30




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##### Table of Contents



LCA-VISION INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount(dollars in thousands)
    
    
    
    
    
    
    (dollars in thousands)Common StockBalance at beginning of year
    
    
    24,368,992
    
    
    $
    24
    
    
    
    23,767,353
    
    
    $
    24
    
    
    
    23,465,342
    
    
    $
    16Employee plans
    
    
    445,550
    
    
    
    1
    
    
    
    601,639
    
    
    
    
    
    
    
    304,169
    
    
    
    Stock split  par value effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Partial shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,158
    )
    
    
    Balance at end of year
    
    
    24,814,542
    
    
    
    25
    
    
    
    24,368,992
    
    
    
    24
    
    
    
    23,767,353
    
    
    
    24Treasury StockBalance at beginning of year
    
    
    (3,600,794
    )
    
    
    (17,671
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )Shares repurchased
    
    
    (1,392,400
    )
    
    
    (51,816
    )
    
    
    (50,000
    )
    
    
    (2,209
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    (4,993,194
    )
    
    
    (69,487
    )
    
    
    (3,600,794
    )
    
    
    (17,671
    )
    
    
    (3,550,794
    )
    
    
    (15,462
    )Contributed CapitalBalance at beginning of year
    
    
    
    
    
    
    145,262
    
    
    
    
    
    
    
    134,708
    
    
    
    
    
    
    
    131,203Stock split  par value effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )Employee plans
    
    
    
    
    
    
    5,527
    
    
    
    
    
    
    
    4,884
    
    
    
    
    
    
    
    2,250Stock split fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )Stock based compensation
    
    
    
    
    
    
    5,665
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred tax benefit of
disqualified stock options
    
    
    
    
    
    
    5,791
    
    
    
    
    
    
    
    5,670
    
    
    
    
    
    
    
    1,311Balance at end of year
    
    
    
    
    
    
    162,245
    
    
    
    
    
    
    
    145,262
    
    
    
    
    
    
    
    134,708Retained Earnings (deficit)Balance at beginning of year
    
    
    
    
    
    
    16,514
    
    
    
    
    
    
    
    (7,732
    )
    
    
    
    
    
    
    (37,069
    )Net income
    
    
    
    
    
    
    38,296
    
    
    
    
    
    
    
    31,653
    
    
    
    
    
    
    
    32,029Dividends paid
    
    
    
    
    
    
    (11,131
    )
    
    
    
    
    
    
    (7,407
    )
    
    
    
    
    
    
    (2,692
    )Balance at end of year
    
    
    
    
    
    
    43,679
    
    
    
    
    
    
    
    16,514
    
    
    
    
    
    
    
    (7,732
    )Accumulated Other Comprehensive
Loss (Income)Balance at beginning of year
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    299
    
    
    
    
    
    
    
    114Translation adjustments
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (286
    )
    
    
    
    
    
    
    154Unrealized investment gain
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    31Balance at end of year
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    299Total Stockholders Investment
    
    
    
    
    
    $
    136,475
    
    
    
    
    
    
    $
    144,136
    
    
    
    
    
    
    $
    111,837
  31




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Description Of Business And Summary Of Significant Accounting Policies
 Business
 Plus
 Plus
 Consolidation and Basis of Presentation
 Application of FASB Statement 94
and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual
Management Agreements
 Use of Estimates
  Reclassification
  Cash and Cash Equivalents
  Short-term Investments
  32




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##### Table of Contents



EstimatedGross
    
    Gross
    
    Fair ValueAmortized
    
    Unrealized
    
    Unrealized
    
    (Net CarryingCost
    
    Gains
    
    Losses
    
    Value)Corporate bonds
    
    $
    6,795
    
    
    $
    
    
    
    $
    
    
    
    $
    6,795US Government securities
    
    
    11,468
    
    
    
    12
    
    
    
    (6
    )
    
    
    11,474Municipal bonds
    
    
    52,615
    
    
    
    10
    
    
    
    (93
    )
    
    
    52,532Total short term investments
    
    $
    70,878
    
    
    $
    22
    
    
    $
    (99
    )
    
    $
    70,801
    Amortized
    
    Estimated(Dollars in
thousands at December 31, 2006)
    
    Cost
    
    Fair ValueDue in one year or less
    
    $
    24,251
    
    
    $
    24,203Due after one year through three years
    
    
    15,479
    
    
    
    15,459Due after three years
    
    
    31,148
    
    
    
    31,139Total debt securities
    
    $
    70,878
    
    
    $
    70,801
 Accounts Receivable
  Allowance for Doubtful Accounts
  Property and Equipment, and Depreciation and Amortization
 Property and Equipment
  33




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##### Table of Contents



Depreciation and Amortization
   Deferred Compensation Plan Assets
  Financial Instruments
 Concentration of Credit Risk
  Fair Values of Financial Instruments
  Accrued Enhancement Expense
  Captive Insurance Company Reserves
  Income Taxes
 Accounting for Income Taxes.
 34




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##### Table of Contents



Accounting for Contingencies. Accounting for
Uncertainty in Income Taxes
  Per Share Data
   2006
    
    2005
    
    2004Options
    
    
    957,242
    
    
    
    1,494,640
    
    
    
    1,773,465Restricted stock
    
    
    119,247
    
    
    
    
    
    
    
    
  2006
    
    2005
    
    2004Basic EarningsNet income
    
    $
    38,296
    
    
    $
    31,653
    
    
    $
    32,029Weighted average shares outstanding
    
    
    20,694
    
    
    
    20,500
    
    
    
    20,099Basic earnings per share
    
    $
    1.85
    
    
    $
    1.54
    
    
    $
    1.59Diluted EarningsNet income
    
    $
    38,296
    
    
    $
    31,653
    
    
    $
    32,029Weighted average shares outstanding
    
    
    20,694
    
    
    
    20,500
    
    
    
    20,095Effect of dilutive securitiesStock options
    
    
    525
    
    
    
    992
    
    
    
    715Restricted stock
    
    
    16
    
    
    
    
    
    
    
    Weighted average common shares and potential dilutive shares
    
    
    21,235
    
    
    
    21,492
    
    
    
    20,814Diluted earnings per share
    
    $
    1.80
    
    
    $
    1.47
    
    
    $
    1.54
 Revenue Recognition
  35




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##### Table of Contents



Marketing and Advertising Expenditures
  Stock-Based Compensation
 Share Based Payment, Accounting for Stock Issued to Employees.
     2006Decrease in income before income taxes
    
    $
    5,665Decrease in net income
    
    $
    4,511Decrease in earnings per shareBasic
    
    $
    0.22Diluted
    
    $
    0.21
 36




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##### Table of Contents



2005
    
    
    2004Net income, as reported
    
    $
    31,653
    
    
    $
    32,029Deduct: Total stock-based employee compensation
expense determined under fair value based method, net
of tax
    
    
    2,627
    
    
    
    1,320Pro forma net income
    
    $
    29,026
    
    
    $
    30,709Earnings per share:Basic  as reported
    
    $
    1.54
    
    
    $
    1.59Based  pro forma
    
    
    1.42
    
    
    
    1.53Diluted  as reported
    
    $
    1.47
    
    
    $
    1.54Diluted  pro forma
    
    
    1.35
    
    
    
    1.48
 Other Recent Accounting Pronouncements
 Fair Value Measurements
 2. Stockholders Investment
   3. Investment in Unconsolidated Businesses
    December 31,2006
    
    2005Financial Position:Current assets
    
    $
    4,308
    
    
    $
    3,170Total assets
    
    
    4,318
    
    
    
    3,170Current liabilities
    
    
    3,771
    
    
    
    1,568Total liabilities
    
    
    3,771
    
    
    
    1,568Members equity
    
    
    547
    
    
    
    1,602Operating Results:Revenue
    
    $
    26,956
    
    
    $
    16,632Net income
    
    
    5,435
    
    
    
    2,919
 37




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##### Table of Contents



4. Income Taxes
  2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    21,686
    
    
    $
    14,247
    
    
    $
    487State and local
    
    
    4,060
    
    
    
    3,386
    
    
    
    559Foreign
    
    
    
    
    
    
    496
    
    
    
    621Total
    
    
    25,746
    
    
    
    18,129
    
    
    
    1,667Deferred:Federal
    
    
    (293
    )
    
    
    2,635
    
    
    
    7,922State and local
    
    
    133
    
    
    
    367
    
    
    
    1,181Total
    
    
    (160
    )
    
    
    3,002
    
    
    
    9,103Income tax expense
    
    
    25,586
    
    
    
    21,131
    
    
    
    10,770Valuation allowance (decrease)
    
    
    
    
    
    
    
    
    
    
    (16,399
    )Net income tax expense (benefit)
    
    $
    25,586
    
    
    $
    21,131
    
    
    $
    (5,629
    )
    2006
    
    
    2005
    
    
    2004Domestic
    
    $
    63,174
    
    
    $
    51,609
    
    
    $
    25,286Foreign
    
    
    708
    
    
    
    1,175
    
    
    
    1,114Total
    
    $
    63,882
    
    
    $
    52,784
    
    
    $
    26,400
 38




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##### Table of Contents



December 31,2006
    
    
    2005Current deferred tax assets:Net operating loss carryforward
    
    $
    684
    
    
    $
    1,341Allowance for doubtful accounts
    
    
    1,135
    
    
    
    1,370Captive insurance reserves
    
    
    601
    
    
    
    462Accrued enhancement expense
    
    
    571
    
    
    
    360Other
    
    
    31
    
    
    
    9Total current deferred tax assets
    
    
    3,022
    
    
    
    3,542Long-term deferred tax assets:Net operating loss carryforwards
    
    
    
    
    
    
    684Deferred compensation
    
    
    1,567
    
    
    
    956Share-based compensation
    
    
    978
    
    
    
    Property and equipment
    
    
    230
    
    
    
    424Total long-term deferred tax assets
    
    
    2,775
    
    
    
    2,064Net deferred tax assets
    
    $
    5,797
    
    
    $
    5,606
  2006
    
    
    2005
    
    
    2004Tax at statutory federal rate
    
    $
    22,359
    
    
    $
    18,494
    
    
    $
    9,240State and local income taxes, net of
federal benefit
    
    
    2,775
    
    
    
    2,474
    
    
    
    1,890Permanent differences
    
    
    702
    
    
    
    49
    
    
    
    22Foreign income tax
    
    
    
    
    
    
    107
    
    
    
    46Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    (16,399
    )Change in effective tax rate
    
    
    
    
    
    
    93
    
    
    
    (434
    )Other
    
    
    (250
    )
    
    
    (86
    )
    
    
    6Income tax provision (benefit)
    
    $
    25,586
    
    
    $
    21,131
    
    
    
    ($5,629
    )
  39




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##### Table of Contents



5. Leasing Arrangements
   December 31, 2006Capital
    
    
    OperatingLeases
    
    
    LeasesYear2007
    
    $
    3,668
    
    
    $
    6,1872008
    
    
    1,952
    
    
    
    5,6212009
    
    
    585
    
    
    
    4,8812010
    
    
    
    
    
    
    3,5522011
    
    
    
    
    
    
    2,071Beyond 2011
    
    
    
    
    
    
    2,601Total minimum rental commitment
    
    
    6,205
    
    
    $
    24,913Less interest
    
    
    414Present value of minimum lease payments
    
    
    5,791Less current installments
    
    
    3,360Long-term obligations at December 31, 2006
    
    $
    2,431
   6. Employee Benefits
 Savings Plan
  Stock Incentive Plans
    2006Stock Options
    
    $
    4,080Restricted Stock
    
    
    1,585$
    5,665Income Tax Benefit
    
    $
    1,154
 40




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##### Table of Contents



Stock Options
    2005
    
    2004Dividend yield
    
    
    1.0  1.2
    %
    
    
    1.2
    %Expected volatility
    
    
    77  93
    %
    
    
    52  91
    %Risk-free interest rate
    
    
    3.28  4.33
    %
    
    
    1.52  3.48
    %Expected lives (in years)
    
    
    2  5
    
    
    
    2  5
  Intrinsic Value of Options at December 31, 2006
 Options Outstanding
    
    $
    15,618,000Options Vested and Expected to Vest
    
    
    15,317,000Options Exercisable
    
    
    11,316,000
     41




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##### Table of Contents



Weighted AverageStock Options
    Exercise PriceOutstanding 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
    
    
    
    16.64Exercised
    
    
    (440,774
    )
    
    
    12.54Cancelled/forfeited
    
    
    (96,624
    )
    
    
    19.21Outstanding at 12/31/06
    
    
    957,242
    
    
    
    18.27Options exercisable, December 31, 2006
    
    
    566,503
    
    
    
    14.52Options expected to vest, December 31, 2006
    
    
    931,855
    
    
    
    18.14
  Stock Options Outstanding
    
    
    
    
    
    
    Stock Options ExercisableWeighted-average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Range of exercise
    
    # outstanding
    
    
    remaining
    
    
    average exercise
    
    
    # Exercisable as
    
    
    average exerciseprices
    
    as of 12/31/06
    
    
    contractual life
    
    
    price
    
    
    of 12/31/06
    
    
    price$2.25 - $5.92
    
    
    124,285
    
    
    
    6.03
    
    
    $
    4.34
    
    
    
    122,035
    
    
    $
    4.36$6.08 - $11.84
    
    
    42,337
    
    
    
    5.73
    
    
    $
    10.87
    
    
    
    34,837
    
    
    $
    10.66$12.19 - $12.19
    
    
    154,127
    
    
    
    6.88
    
    
    $
    12.19
    
    
    
    154,127
    
    
    $
    12.19$12.50 - $16.57
    
    
    164,963
    
    
    
    5.77
    
    
    $
    15.01
    
    
    
    102,463
    
    
    $
    14.52$16.58 - $17.27
    
    
    97,901
    
    
    
    7.69
    
    
    $
    16.65
    
    
    
    36,301
    
    
    $
    16.60$17.29 - $22.81
    
    
    58,918
    
    
    
    7.83
    
    
    $
    21.09
    
    
    
    21,916
    
    
    $
    21.09$27.05 - $27.05
    
    
    197,693
    
    
    
    8.14
    
    
    $
    27.05
    
    
    
    34,032
    
    
    $
    27.05$28.59 - $38.69
    
    
    106,518
    
    
    
    4.02
    
    
    $
    32.15
    
    
    
    57,294
    
    
    $
    31.54$42.56 - $44.60
    
    
    5,500
    
    
    
    8.57
    
    
    $
    44.41
    
    
    
    1,832
    
    
    $
    44.42$48.25 - $48.25
    
    
    5,000
    
    
    
    8.50
    
    
    $
    48.25
    
    
    
    1,666
    
    
    $
    48.25$2.25 - $48.25
    
    
    957,242
    
    
    
    6.63
    
    
    $
    18.27
    
    
    
    566,503
    
    
    $
    14.52
  42




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##### Table of Contents



Restricted Stock
     Number of
    
    Weighted AverageShare Unit
    
    Grant DateAwards
    
    Fair ValueOutstanding at 1/1/06
    
    
    
    
    
    $
    Granted
    
    
    142,895
    
    
    
    42.40Released
    
    
    (4,776
    )
    
    
    41.57Forfeited
    
    
    (18,872
    )
    
    
    42.45Outstanding at 12/31/06
    
    
    119,247
    
    
    $
    42.43
 7. Commitments and Contingencies
    43




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##### Table of Contents



8. Additional Financial Information
  Balance Sheet Information
 At December 31,2006
    
    
    2005Property and Equipment is comprised of the following:Land
    
    $
    354
    
    
    $
    354Building and improvements
    
    
    6,351
    
    
    
    6,106Leasehold improvements
    
    
    12,929
    
    
    
    8,353Furniture and fixtures
    
    
    4,804
    
    
    
    4,046Equipment
    
    
    40,913
    
    
    
    35,607Equipment under capital leases
    
    
    7,834
    
    
    
    3,87773,185
    
    
    
    58,343Accumulated depreciation
    
    
    (46,399
    )
    
    
    (38,342
    )Construction in progress
    
    
    4,138
    
    
    
    4,683$
    30,924
    
    
    $
    24,684Accrued Liabilities and Other is comprised of the following:Accrued payroll and related benefits
    
    $
    2,457
    
    
    $
    2,744Accrued financing fees
    
    
    1,257
    
    
    
    2,423Accrued enhancement expense
    
    
    1,314
    
    
    
    898Other accrued liabilities
    
    
    4,083
    
    
    
    2,845$
    9,111
    
    
    $
    8,910
  Cash Flow Information
 For the Year Ended December 31,2006
    
    2005
    
    2004Cash paid during the year for:Interest
    
    $
    302
    
    
    $
    104
    
    
    $
    24Income taxes
    
    
    18,961
    
    
    
    15,348
    
    
    
    1,907Non-cash investing activities:Capital leases
    
    $
    5,030
    
    
    $
    3,778
    
    
    $
    1,094Other Comprehensive Income (Loss) InformationComprehensive income (loss):Income applicable to common stock
    
    
    38,296
    
    
    $
    31,653
    
    
    $
    32,029Unrealized (loss) gain on investment, net of tax
    
    
    5
    
    
    
    (6
    )
    
    
    31Foreign currency translation adjustments
    
    
    1
    
    
    
    (286
    )
    
    
    154Total comprehensive income
    
    $
    38,302
    
    
    $
    31,361
    
    
    $
    32,214
 44




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##### Table of Contents



9. Quarterly Financial Data (unaudited)
  2006 Quarters
    
    2005 QuartersFirst
    
    Second
    
    Third
    
    Fourth
    
    First
    
    Second
    
    Third
    
    FourthRevenues
    
    $
    73,396
    
    
    $
    65,453
    
    
    $
    59,302
    
    
    $
    58,776
    
    
    $
    50,190
    
    
    $
    48,391
    
    
    $
    47,031
    
    
    $
    46,785Operating income
    
    
    20,692
    
    
    
    17,042
    
    
    
    9,933
    
    
    
    9,314
    
    
    
    15,348
    
    
    
    12,922
    
    
    
    12,028
    
    
    
    8,626Income before taxes
    
    
    22,264
    
    
    
    18,634
    
    
    
    11,633
    
    
    
    11,351
    
    
    
    15,716
    
    
    
    13,451
    
    
    
    13,340
    
    
    
    10,277Net Income
    
    
    13,092
    
    
    
    10,877
    
    
    
    7,245
    
    
    
    7,082
    
    
    
    9,311
    
    
    
    7,828
    
    
    
    7,946
    
    
    
    6,568Earnings per shareBasic
    
    
    0.63
    
    
    
    0.52
    
    
    
    0.35
    
    
    
    0.35
    
    
    
    0.46
    
    
    
    0.38
    
    
    
    0.39
    
    
    
    0.32Diluted
    
    
    0.61
    
    
    
    0.51
    
    
    
    0.34
    
    
    
    0.34
    
    
    
    0.44
    
    
    
    0.36
    
    
    
    0.37
    
    
    
    0.30
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Disclosure controls and procedures
  Changes in Internal Control Over Financial Reporting
  Managements report on internal control over financial reporting
  
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
  45




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##### Table of Contents



Equity Compensation Plan Information
 Number of securitiesWeighted-average
    
    remaining available for futureNumber of securities to
be
    
    exercise price of
    
    issuance under equityissued upon exercise of
    
    outstanding options,
    
    compensation plansoutstanding
awards, options,
    
    warrants and rights
    
    (excluding securities reflectedPlan Category
    
    warrants and rights (a)
    
    (b)
    
    in column (a))Equity compensation
plans approved by
security holders
    
    
    1,076,489
    
    
    
    $18.27
    
    
    
    1,731,922Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,076,489
    
    
    
    $18.27
    
    
    
    1,731,922
 
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 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
  46




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##### Table of Contents



Schedule II Valuation and Qualifying Accounts and Reserves
 LCA-Vision Inc.
For the years ended December 31, 2006, 2005, and 2004
(in thousands)
 ChargesBalance at
    
    to Cost
    
    
    
    
    
    BalanceBeginning
    
    and
    
    
    
    
    
    at End ofDescription
    
    of Period
    
    Expenses
    
    Deductions
    
    PeriodYear ended December 31, 2006:Allowance for doubtful accounts
    
    $
    3,145
    
    
    $
    1,855
    
    
    $
    2,158
    
    
    $
    2,842Insurance reserve
    
    
    3,840
    
    
    
    2,530
    
    
    
    207
    
    
    
    6,163Year ended December 31, 2005:Allowance for doubtful accounts
    
    $
    2,865
    
    
    $
    1,778
    
    
    $
    1,498
    
    
    $
    3,145Insurance reserve
    
    
    2,568
    
    
    
    1,466
    
    
    
    194
    
    
    
    3,840Year ended December 31, 2004:Allowance for doubtful accounts
    
    $
    1,896
    
    
    $
    1,344
    
    
    $
    375
    
    
    $
    2,865Insurance reserve
    
    
    963
    
    
    
    1,859
    
    
    
    254
    
    
    
    2,568
 47




---



##### 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 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(e)
    
    Executive Cash Bonus Plan (Exhibit 10.1 to Current Report on Form 8-K filed February 28, 2005)*10(f)
    
    Compensation Arrangements with named executive officers (Exhibit 10.2 to Current Report on Form 8-K filed February
28, 2005)*10(g)
    
    Executive Cash Bonus Plan (as amended February 21, 2006) (Exhibit 10.1 to Current Report on Form 8-K filed February
24, 2006)*10(h)
    
    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(i)
    
    Form of Stock Option Agreement with outside directors (Exhibit 10.3 to Current Report on Form 8-K filed February
24, 2006)*10(j)
    
    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)*10(k)
    
    LCA-Vision Inc. 2006 Stock Incentive Plan (definitive Proxy Statement for 2006 Annual Meeting of Stockholders,
filed April 28, 2006)*10(l)
    
    Form of Notice of Grant of Award and Award Agreement for Restricted Stock Units (Exhibit 10.2 to Current Report on
Form 8-K filed June 16, 2006)*10(m)
    
    Employment Agreement of Steven C. Straus (Exhibit 99.1 to Current Report on Form 8-K filed November 6, 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. 48




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##### Table of Contents



LCA-Vision Inc.Date: February 27, 2007
    By:
    /s/ Steven C. StrausSteven C. Straus, Chief Executive Officer    /s/ Steven C. Straus

Steven C. Straus
    
    
    
    Chief Executive Officer (Principal
Executive Officer)/s/ Alan H. Buckey

Alan H. Buckey
    
    
    
    Executive Vice President/Finance
and Chief Financial Officer (Principal
Financial and Accounting Officer)/s/ E. Anthony Woods

E. Anthony Woods
    
    
    
    Chairman of the Board/s/ William F. Bahl

William F. Bahl
    
    
    
    Director/s/ Thomas G. Cody

Thomas G. Cody
    
    
    
    Director/s/ John H. Gutfreund

John H. Gutfreund
    
    
    
    Director/s/ John C. Hassan

John C. Hassan
    
    
    
    Director/s/ Craig P. R. Joffe

Craig P. R. Joffe
    
    
    
    Director/s/ David W. Whiting

David W. Whiting
    
    
    
    Director
 49