LCA Vision 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006.


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT.

For the transition period from to

Commission file number 0-27610

LCA-Vision Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		11-2882328 (IRS Employer Identification No.)

7840 Montgomery Road, Cincinnati, Ohio 45236
(Address of principal executive offices)

(513) 792-9292

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,889,381 shares as of July 31, 2006.

LCA-Vision Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands except per share data)


	June 30, 2006			December 31, 2005
Assets
Current assets
Cash and cash equivalents	$	131,051		$	111,031
Accounts receivable, net of allowance for doubtful accounts of $2,600 and $2,641		11,387			10,520
Receivables from vendors		3,795			3,207
Prepaid expenses, inventory and other		5,612			4,031
Prepaid income taxes		4,485			2,875
Deferred tax assets		3,561			3,542

Total current assets		159,891			135,206

Property and equipment		68,641			63,026
Accumulated depreciation and amortization		(42,428	)		(38,342	)

Property and equipment, net		26,213			24,684

Accounts receivable, net of allowance for doubtful accounts of $508 and $504		1,296			1,132
Deferred compensation plan assets		3,230			2,569
Investment in unconsolidated businesses		481			158
Deferred tax assets		2,064			2,064
Other assets		1,066			1,039


Total Assets	$	194,241		$	166,852


Liabilities and Stockholders’ Investment
Current liabilities
Accounts payable	$	2,920		$	3,800
Accrued liabilities and other		11,419			8,910
Debt maturing in one year		2,581			2,122


Total current liabilities		16,920			14,832

Capital lease obligations		1,457			1,434
Deferred compensation liability		3,230			2,569
Insurance reserve		5,402			3,840
Minority equity interest		37			41

Stockholders’ investment
Common stock ($0.001 par value; 24,685,172 and 24,368,992 shares and 20,937,878 and 20,768,198 shares issued and outstanding, respectively)		25			24
Contributed capital		155,619			145,262
Common stock in treasury, at cost (3,747,294 shares and 3,600,794 shares)		(23,919	)		(17,671	)
Retained earnings		35,449			16,514
Accumulated other comprehensive income		21			7


Total stockholders’ investment		167,195			144,136


Total Liabilities and Stockholders’ Investment	$	194,241		$	166,852

The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.

LCA-Vision Inc.
Condensed Consolidated Statements of Income
(Dollars in thousands except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005

Revenues — Laser refractive surgery	$	65,453		$	48,391		$	138,849		$	98,581

Operating costs and expenses
Medical professional and license fees		11,312			8,745			24,890			18,264
Direct costs of services		18,259			13,577			39,174			26,924
General and administrative expenses		5,312			3,111			10,241			6,563
Marketing and advertising		11,421			8,030			22,768			14,803
Depreciation		2,107			2,006			4,042			3,756


Operating income		17,042			12,922			37,734			28,271

Equity in earnings from unconsolidated businesses		185			—			323			24
Minority equity interest		(7	)		(237	)		(15	)		(411	)
Interest expense		(64	)		(36	)		(125	)		(49	)
Interest income		1,403			779			2,841			1,289
Dividend income		75			23			140			42


Income before taxes on income		18,634			13,451			40,898			29,166

Income tax expense		7,757			5,623			16,929			12,028


Net income	$	10,877		$	7,828		$	23,969		$	17,138


Income per common share
Basic	$	0.52		$	0.38		$	1.15		$	0.84
Diluted	$	0.51		$	0.36		$	1.12		$	0.80

Dividends declared per share	$	0.12		$	0.08		$	0.24		$	0.16

Weighted average shares outstanding
Basic		20,836			20,429			20,791			20,333
Diluted		21,474			21,548			21,469			21,390

The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.

LCA-Vision Inc.
Condensed Consolidated Statements of Cash Flow
(Dollars in thousands)


	Six Months Ended June 30,
	2006			2005
Cash flow from operating activities:
Net income	$	23,969		$	17,138
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,042			3,756
Provision for loss on doubtful accounts		(37	)		626
Deferred income taxes		(19	)		3,517
Tax benefit on disqualified disposition of stock options		3,303			—
Stock-based compensation		2,852			—
Deferred compensation		661			527
Insurance reserve		1,562			1,038
Equity in earnings of unconsolidated affiliates		(323	)		(24	)
Changes in working capital:
Accounts receivable		(994	)		(3,421	)
Receivables from vendors		(588	)		(503	)
Prepaid expenses, inventory and other		(1,581	)		182
Prepaid income taxes		(1,610	)		—
Accounts payable		(880	)		(3,059	)
Income taxes payable		—			3,616
Accrued liabilities and other		2,502			727


Net cash provided by operations	$	32,859		$	24,120

Cash flow from investing activities:
Purchase of property and equipment		(3,856	)		(4,667	)
Distribution from minority equity investees		—			187
Deferred compensation plan		(661	)		(555	)
Other, net		(17	)		414


Net cash (used in) investing activities	$	(4,534	)	$	(4,621	)

Cash flow from financing activities:
Principal payments of long-term notes, debt and capital lease obligations		(1,226	)		(424	)
Shares repurchased for treasury stock		(6,248	)		—
Exercise of stock options		4,203			4,870
Dividends paid to stockholders		(5,034	)		(3,256	)


Net cash (used in) provided by financing activities		(8,305	)		1,190


Increase in cash and cash equivalents		20,020			20,689

Cash and cash equivalents at beginning of period		111,031			86,588


Cash and cash equivalents at end of period	$	131,051		$	107,277

The notes to the Consolidated Condensed Financial Statements are an integral part of this statement.

LCA-Vision Inc.
Notes to Condensed Consolidated Financial Statements

Summary of Significant Accounting Policies

This filing includes condensed consolidated Balance Sheets as of June 30, 2006 and December 31, 2005; condensed consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005; and condensed consolidated Statements of Cash Flow for the six months ended June 30, 2006 and 2005. In the opinion of management, these condensed consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. We suggest that these financial statements be read together with the financial statements and notes in our 2005 Annual Report on Form 10-K.

About Our Company

We are a leading provider of fixed-site laser vision correction services at our LasikPlus vision centers. Our vision centers provide the staff, facilities, equipment and support services for performing laser vision correction that employ advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism. We currently use three suppliers for our fixed-site excimer lasers: Bausch & Lomb, Advanced Medical Optics and Alcon. Our vision centers are supported mainly by independent, board-certified ophthalmologists and credentialed optometrists, as well as other health care professionals. The ophthalmologists perform the laser vision correction procedures in our vision centers, and either ophthalmologists or optometrists conduct pre-procedure evaluations and post-operative follow-ups in-center. We have performed over 655,000 laser vision correction procedures in our vision centers in the United States and Canada since 1991. Most of our patients receive a procedure called LASIK, which we began performing in the United States in 1997.

We currently operate 53 LasikPlus fixed-site laser vision correction centers, generally located in large metropolitan markets in the United States, and also have a joint venture in Canada.

Internet

The Company’s websites are www.lca-vision.com and www.lasikplus.com. We make available free of charge through a link provided at our websites our Forms 10-K, 10-Q and 8-K, as well as any amendments thereto. These reports are available as soon as reasonably practicable after they are filed or furnished to the Securities and Exchange Commission. To obtain a copy of these forms by mail, please send a request to Investor Relations at LCA-Vision Inc., 7840 Montgomery Road, Cincinnati, Ohio 45236.

Consolidation Policy

We use two different methods to report our investments in our subsidiaries and other companies: consolidation and the equity method.

Consolidation
We use the consolidation method to report our investment in our subsidiaries and other companies when we own a majority of the voting stock of the subsidiary. In addition, we consolidate the results of operations of professional corporations with which we contract to provide the services of ophthalmologists or optometrists at our vision centers, in accordance with EITF 97-2, Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and Certain Other Entities with Contractual Management Agreements, and FASB FIN 46 Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51.

Equity Method
We use the equity method to report investments in businesses where we hold a 20% to 50% voting interest, but do not control operating and financial policies.

Under the equity method, we report:

	•		our interest in the entity as an investment on our balance sheets, and

	•		our percentage share of earnings or losses in our income statements

We own a non-controlling interest in Lasik M.D. Toronto, Inc. and began reporting this investment under the equity method as of July 1, 2005.

Use of Estimates

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may differ significantly from management’s expectations. These estimates and assumptions affect various matters including:

•

Allowance for doubtful accounts — patient financing

•

Loss reserves — insurance captive

Reclassification

We have reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect consolidated financial position, net losses or cash flows for the years presented.

Allowance for Doubtful Accounts

We provide patient financing to some of our customers, including those who could not otherwise obtain third-party financing. The terms of the financing require the patient to pay an up-front fee which is intended to cover some or all of our variable costs, with the remainder due from the patient over a period of 12 to 36 months. We began our patient financing program in May 2002. Based upon our own experience with patient financing and based upon our knowledge of the credit experience of others who provide financing to customers similar to ours, we have established bad debt reserves as of June 30, 2006 of $3,108,000.

Captive Insurance Company Reserves

Effective as of December 18, 2002, we established a captive insurance company to provide professional liability insurance coverage for claims brought against us after December 17, 2002. In addition, our captive insurance company’s charter allows it to provide professional liability insurance for our doctors, some of whom are currently insured by the captive. Our captive insurance company is managed by an independent insurance consulting and management firm and is capitalized and funded by us based on actuarial studies performed by an affiliate of the consulting and management firm. A number of claims are now pending with our captive insurance company. As of June 30, 2006, we have insurance reserves of $5,402,000 which represents an estimate of cost to settle claims. As of December 31, 2005, the insurance reserve was $3,840,000.

Income Taxes

In July 2006, the FASB issued Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation will be effective for the Company beginning January 1, 2007. We are currently assessing the impact of this recent interpretation on our financial statements.

Per Share Data

Basic per share data is income applicable to common shares divided by the weighted average common shares outstanding. Diluted per share data is calculated by dividing income applicable to common shares by the weighted average common shares outstanding plus shares issuable upon the vesting of outstanding restricted stock units and the exercise of in-the-money stock options.

Following is a reconciliation of basic and diluted earnings per share for the three and six month periods ended June 30, 2006 and 2005 (in thousands, except per share amounts):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005

Basic Earnings
Net Income	$	10,877	$	7,828	$	23,969	$	17,138
Weighted average shares outstanding		20,836		20,429		20,791		20,333
Basic earnings per share	$	0.52	$	0.38	$	1.15	$	0.84

Diluted Earnings
Net income	$	10,877	$	7,828	$	23,969	$	17,138
Weighted average shares outstanding		20,836		20,429		20,791		20,233
Effect of dilutive securities
Stock options		638		1,119		678		1,057
Weighted average common shares and potential dilutive shares		21,474		21,548		21,469		21,390
Diluted earnings per share	$	0.51	$	0.36	$	1.12	$	0.80

Stock-Based Compensation

Effective January 1, 2006, on a modified prospective basis, the Company began using the fair value method under Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment,” to recognize equity compensation expense in our results of operations. Prior to January 1, 2006, the Company accounted for stock options using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires the cost of all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values at grant date, or the date of later modification, over the requisite service period. In addition, SFAS 123(R) requires unrecognized cost (based on the amounts previously disclosed in our pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized in the financial statements over the remaining requisite service period.

Under the Modified Prospective Approach, the amount of compensation cost recognized includes: (i) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimate in accordance with the provisions of SFAS 123(R) and (ii) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimate in accordance with the provisions of SFAS 123(R). We recognize the cost of share-based awards on a straight-line basis over the requisite service period. The share-based compensation expense recognized due to the adoption of SFAS 123(R) for the three and six months ended June 30, 2006 was approximately $1,603,000 and $2,852,000, respectively, with associated tax benefits of $352,000 and $565,000, respectively. The amount of share-based compensation capitalized was not material to our consolidated financial statements.

SFAS 123(R) also required us to change the classification in our condensed consolidated statement of cash flows of any tax benefits realized upon the exercise of stock options or issuance of restricted share unit awards in excess of that which is associated with the expense recognized for financial reporting purposes. This excess tax benefit was not material in the three or six months ended June 30, 2006.

Prior to the adoption of SFAS 123(R), the Company granted primarily stock options to employees. Since the adoption of SFAS 123(R), the Company has not granted any stock options, but instead has issued restricted stock units. Restricted stock unit awards to executive officers have performance conditions and cliff vesting. Restricted stock units awarded to other employees and non-employee directors to date do not have performance conditions and vest over specified time periods subject to continued employment or service.

The adoption of SFAS 123(R) did not result in any cumulative adjustments in the financial statements.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the three and six months ended June 30, 2006 are lower than if we had continued to account for share-based compensation under Opinion 25 in the following amounts (in thousands of dollars except per share amounts):


	Period Ended
	June 30, 2006
	Three Months		Six Months

Decrease in income before income taxes	$	1,603	$	2,852
Decrease in net income	$	1,251	$	2,287

Decrease in earnings per share
Basic	$	0.06	$	0.11
Diluted	$	0.06	$	0.11

Because we adopted SFAS 123(R) using the modified prospective basis, the prior interim period has not been restated. The following table sets forth the effect on net income and basic and diluted earnings per share as if we had applied the fair value recognition provisions for our stock-based compensation arrangements for the three- and six-month periods ended June 30, 2005.


	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005

Net income, as reported	$	7,828		$	17,138
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax		(723	)		(1,226	)

Pro forma net income	$	7,105		$	15,912


Earnings per share:
Basic — as reported	$	0.38		$	0.84
Basic — pro forma	$	0.35		$	0.78

Diluted — as reported	$	0.36		$	0.80
Diluted — pro forma	$	0.33		$	0.74

Stock Incentive Plans

We have four stock incentive plans, the 1995 Long-Term Stock Incentive Plan (“1995 Plan”), the 1998 Long-Term Stock Incentive Plan (“1998 Plan”), the 2001 Long-Term Stock Incentive Plan (“2001 Plan”), and the 2006 Stock Incentive Plan (“2006 Plan”). A maximum of 937,500 shares are reserved for the 1995 Plan, 1,875,000 shares are reserved for the 1998 Plan, 937,500 shares are reserved for the 2001 Plan, and 1,750,000 shares are reserved for the 2006 Plan. With the adoption of the 2006 Plan, all prior plans were frozen and no new grants will be made from the 1995 Plan, the 1998 Plan or the 2001 Plan. The Compensation Committee of the Board of Directors administers all of our stock incentive plans.

The 2006 Plan permits us to issue incentive or nonqualified stock options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted stock awards, performance awards, and cash awards to employees and non-employee directors.

Prior to January 1, 2006, stock options were granted with an exercise price not less than fair market value on the date of grant. Stock options granted generally become exercisable over 3 to 5 years after their date of grant; the maximum term is 10 years from the date of grant.

Stock Options

Our stock incentive plans permit certain employees to receive grants of fixed-price stock options. The option price is generally not less than the fair value of a share of the underlying stock at the date of grant. Under the stock incentive plans, approximately 3,034,000 shares of our common stock are reserved for issuance upon the exercise of options, including those outstanding at June 30, 2006. Option terms are generally 10 years, with options generally becoming exercisable between one and five years from the date of grant.

The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. Expected volatility is based on a blend of implied and historical volatility of our common stock. We use historical data on exercises of stock options and other factors to estimate the expected term of the share-based payments granted. The risk free rate is based on the U.S. Treasury yield curve in effect at the date of grant.

No stock options were granted in the second quarter of 2006. The fair value of each common stock option granted during the second quarter of 2005 was estimated using the following weighted-average assumptions:


Dividend yield	1.2
Expected volatility	75 — 81	%
Risk-free interest rate	3.71 — 4.33	%
Expected lives (in years)	2 — 3

The total intrinsic value (market value on date of exercise less exercise price) of options exercised during the three and six months ended June 30, 2006 was approximately $10,599,000 and $12,662,000, respectively. The excess cash tax benefit classified as a financing cash inflow for the six months ended June 30, 2006 was immaterial.

Cash received from option exercises under all share-based payment arrangements for the six months ended June 30, 2006 was approximately $4,203,000. The actual tax benefit recognized for the tax deductions from option exercises under all share-based payment arrangements for the three months ended June 30, 2006 was approximately $3,343,000.

At June 30, 2006, there was $5,768,000 of total unrecognized, pre-tax compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.11 years.

The Company did not make any modifications to outstanding share options prior to the adoption of SFAS 123(R). There were no changes in valuation methodology after the adoption of SFAS 123(R). The only change of assumptions was in the recognition of forfeitures. Prior to the adoption of SFAS 123(R), forfeitures were recognized on a proforma basis in the period in which they occurred. With the adoption of SFAS 123(R), the Company now estimates forfeitures based upon a number of factors, including historical forfeiture rates, trends and expected forfeitures.

The following table summarizes the status of the Company’s stock options for the six months ended June 30, 2006.


						Weighted Average
				Weighted Average		Remaining		Aggregate Intrinsic
	Stock Options			Exercise Price		Contractual Life		Value (in millions)
Outstanding at 1/1/06		1,496,640		$	16.64
Granted		0			0
Exercised		(316,180	)		13.29
Cancelled/forfeited		(24,942	)		25.71

Outstanding at 6/30/06		1,153,518		$	17.36		7.23	$	41.0
Exercisable at 6/30/06		461,365		$	13.80		6.22	$	18.0

Restricted Stock

Our stock incentive plans permit certain employees and non-employee directors to be granted restricted share unit awards in common stock. Awards of restricted share units are valued by reference to shares of common stock that entitle a participant to receive, upon the settlement of the unit, one share of common stock for each unit. The awards vest annually, over either a two or three year period from the date of the award, and do not have voting rights.

Restricted stock awards granted to employees and non-employee directors during the three months and six months ended June 30, 2006 were 7,790 and 143,271 respectively. The fair value of the awards at the grant date is expensed over the applicable vesting periods.

As of June 30, 2006, there was $5,012,000 of total unrecognized pre-tax compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted-average period of approximately 1.91 years

The following table summarizes the activity for the six months ended June 30, 2006:


	Number of
	Non-Vested Share Unit			Weighted Average Grant
	Awards			Date Fair Value
Outstanding at 1/1/06		0
Granted		143,271
Forfeited		(3,375	)

Outstanding at 6/30/06		139,896		$	42.73

Segment Information

We operate in one segment: laser refractive surgery.

Commitments and Contingencies

In the opinion of management, there are currently no commitments or contingencies that will have a material adverse effect on our financial position or results of operations.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements contained herein are based on information available to us as of the date hereof. Actual results could differ materially from those stated or implied in such forward-looking statements due to risks and uncertainties associated with our business, including, without limitation, those concerning economic, political and sociological conditions; market acceptance of our services; the successful execution of marketing strategies; competition in the laser vision correction industry; an inability to attract new patients; the possibility of long-term side effects and adverse publicity regarding laser vision correction; operational and management instability; regulatory action against us or others in the laser vision correction industry; and the relatively high fixed cost structure of our business. Except to the extent required under the federal securities laws and the rules and regulations promulgated by the Securities and Exchange Commission, we assume no obligation to update the information included herein, whether as a result of new information, future events, or circumstances, or otherwise. In addition to the information given herein, please refer to “Item 1A. Risk Factors” in our 2005 Annual Report on Form 10-K for a discussion of important factors that could affect our results.

Overview

We are a leading developer and operator of fixed-site laser vision correction services at our LasikPlus vision centers. Our vision centers provide the staff, facilities, equipment and support services for performing laser vision correction that employs advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism.

We derive substantially all of our revenues from the delivery of laser vision correction services performed in our U.S. vision centers. Our revenues are primarily a function of the number of laser vision correction procedures performed and the pricing for those services. Our vision centers have a relatively high degree of operating leverage due to the fact that many of our costs are fixed in nature. As a result, our level of procedure volume can have a significant impact on our level of profitability.

Our revenues are impacted by a number of factors, including the following:

	•		Our ability to generate customers through our arrangements with managed care companies, direct-to-consumer advertising and word-of-mouth referrals

	•		Our mix of procedures among the different types of laser technology

	•		New vision center openings and our ability to increase procedure volume at existing vision centers

	•		The availability of patient financing

	•		General economic conditions and consumer confidence levels

	•		The continued growth and increased acceptance of laser vision correction

	•		The effect of competition and discounting practices in our industry

Our operating costs and expenses include:

	•		Medical professional and license fees, including per procedure fees for the ophthalmologists performing laser vision correction and license fees per procedure paid to certain suppliers of our excimer lasers

	•		Direct costs of services, including center rent and utilities, equipment lease and maintenance costs, surgical supplies, center staff expense, 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

The following table details the number of laser vision correction procedures performed at our consolidated vision centers.


	2006		2005
	Procedures		Procedures
Q1		53,372		37,578
Q2		47,308		36,010
Q3				34,187
Q4				34,225

Year				142,000

Our strongest quarter in terms of procedures performed historically has been the first quarter of the year. We believe this is related to a number of factors, including the availability of funds under typical employer medical flexible spending programs and the general effect of the New Year season. The historical seasonality of our business was in part offset in 2005 by opening vision centers through the year. As of July 1, 2005, our revenue and reported procedural volume no longer includes the results of our Canadian joint venture.

Results of Operations for the Three Months Ended June 30, 2006 and 2005

In the second quarter of 2006, revenues increased to $65,453,000, up 35% from $48,391,000 in the second quarter of 2005, primarily as a result of higher procedure volume and increased pricing per procedure. For vision centers open at least 12 months, revenues increased by 21% in the second quarter of 2006 compared to the second quarter of 2005. Procedure volume of 47,308 increased 31% from 36,010 in the second quarter of 2006. Revenue per procedure of $1,384 increased about 3% from $1,344 in the second quarter of 2005.

Medical professional and license fees

Medical professional expenses increased by $1,383,000, or 25%, in the second quarter of 2006 from the second quarter of 2005. This increase was due to costs and fees associated with higher revenues. License fees increased by $1,184,000, up 37% from the second quarter of 2005, primarily as a result of higher procedure volume.

Direct costs of services

Direct costs of services include the staffing, equipment, financing charges, medical supplies, and facility costs of operating laser vision correction centers. These direct costs increased in the second quarter of 2006 by $4,682,000, or 34%, over the second quarter of 2005. Of this amount, $4,047,000 was primarily a result of increased salaries, employee incentives, fringe benefits, rent and utilities, financing fees, laser maintenance and surgical supplies in connection with an increase in the number of vision centers and our higher procedure volumes. The recording of stock-based compensation expense (SFAS 123(R)) accounted for $635,000 of the remainder.

General and administrative

General and administrative expenses increased by $2,201,000, or 71%, in the second quarter of 2006 from the second quarter of 2005. Of this amount, $1,233,000 was primarily due to increases in salaries, fringe benefits, contracted / professional services, and voice and data communications expenses. The recording of stock-based compensation expense (SFAS 123(R)) accounted for $968,000 of the remainder.

Marketing and advertising expenses

Marketing and advertising expenses increased by $3,391,000, or 42%, in the second quarter of 2006 from the second quarter of 2005, primarily as a result of our efforts to support new markets and grow market share in existing markets.

Depreciation expense

Depreciation and amortization increased by $101,000 in the second quarter of 2006 from the second quarter of 2005 as a result of having more vision centers in operation.

Non-operating income and expenses

Interest income in the second quarter of 2006 increased $624,000, due to income on patient financing, higher levels of invested cash and higher interest rates.

Income Taxes

The following table summarizes the components of income tax provision for the second quarter of 2006 and 2005:


	Q2 2006		Q2 2005
Federal income taxes	$	6,415	$	4,537
State income taxes, net of federal benefit		1,342		801
Foreign income taxes		—		285

Income tax provision	$	7,757	$	5,623

Results of Operations for the Six Months Ended June 30, 2006 and 2005

In the first six months of 2006, revenues increased to $138,849,000, up 41% from $98,581,000 in the first six months of 2005, primarily as a result of higher procedure volume and increased pricing per procedure. Procedure volume of 100,680 increased 37% from 73,588 the first six months of 2005. Revenue per procedure of $1,379 increased about 3% from $1,340 in the first six months of 2005.

Medical professional and license fees

Medical professional expenses increased by $3,514,000 or 31%, in the first six months of 2006 from the first six months of 2005. This increase was due to costs and fees associated with higher revenues. License fees increased by $3,112,000, up 45% from the first six months of 2005, primarily as a result of higher procedure volume.

Direct costs of services

Direct costs of services include the staffing, equipment, financing charges, medical supplies, and facility costs of operating laser vision correction centers. These direct costs increased in the first six months of 2006 by $12,250,000 or 45% over the first six months of 2005. Of this amount, $10,788,000 was primarily a result of increased salaries, employee incentives, fringe benefits, rent and utilities, financing fees, laser maintenance, insurance, and surgical supplies in connection with an increase in the number of vision centers and our higher procedure volumes. The recording of stock-based compensation expense (SFAS 123(R)) accounted for $1,462,000 of the remainder.

General and administrative

General and administrative expenses increased by $3,678,000, or 56%, in the first six months of 2006 from the first six months of 2005. Of this amount, $2,288,000 was primarily due to increases in salaries, fringe benefits and voice and data communications expenses. The recording of stock-based compensation expense (SFAS 123(R)) accounted for $1,390,000 of the remainder.

Marketing and advertising expenses

Marketing and advertising expenses increased by $7,965,000, or 54%, in the first six months of 2006 from the first six months of 2005, primarily as a result of our efforts to support new markets and help continue to grow market share in existing markets.

Depreciation and amortization

Depreciation and amortization increased by $286,000 in the first six months of 2006 from the first six months of 2005, primarily as a result of having more vision centers in operation.

Non-operating income and expenses

Interest income in the second quarter of 2006 increased $1,552,000, due to income on patient financing, higher levels of invested cash and higher interest rates.

Income Taxes

The following table summarizes the components of income tax provision for the first six months of 2006 and 2005:


	For the Six Months Ended
	June 30,
	2006		2005
Federal income taxes	$	13,813	$	9,911
State income taxes, net of federal benefit		3,116		1,621
Foreign income taxes		—		496

Income tax provision	$	16,929	$	12,028

Liquidity and Capital Resources

Net cash provided by operating activities in the first six months of 2006 was $32,859,000. Proceeds from the exercise of stock options totaled $4,203,000. Cash provided by operations more than offset the combined cash used in investing and financing activities. As a result, cash and cash equivalents were $131,051,000 as of June 30, 2006, an increase of 18% from $111,031,000 as of December 31, 2005.

During the second quarter of 2006, the Company, with guidance from the Board of Directors, adopted a new investment policy for the company’s liquid assets. The objectives of the policy are to maintain adequate liquidity, to provide safety of principal, to maximize the after-tax rate of return, and to maintain a well-diversified portfolio. This policy places limitations on maturity, acceptable credit ratings, authorized securities, and credit concentration.

In the second quarter of 2006, the board of directors declared a dividend to common stock of $0.12 per share, which resulted in a cash payment of $2,534,000.

As of June 30, 2006, we had approximately $12,683,000 in accounts receivable, net of allowance for doubtful accounts, which was an increase of approximately $1,031,000 since December 31, 2005.

Prepaid income taxes increased to $4,485,000 at June 30, 2006 from $2,875,000 at December 31, 2005. The prepayment of income taxes in the first half of 2006 will result in less cash payments for estimated taxes in the third quarter of 2006.

In May 2005, the Board of Directors authorized the purchase of up to one million shares of common stock. During the first three months of 2006, 146,500 shares were purchased under this authorization at an average price of $42.65 per share. No shares were purchased in the second quarter of 2006.

Our consolidated cash and cash equivalents includes $500,000 of cash maintained by our consolidated captive insurance company pursuant to statutory requirements as of June 30, 2006. These funds are not available for general corporate purposes.

Our costs associated with the opening of a vision center primarily consist of capital expenditures, including the purchase or lease of lasers, diagnostic equipment, office equipment, leases and leasehold improvements. In addition, we typically incur other startup expenses and pre-opening advertising expenses. Generally, we estimate the costs associated with opening a vision center to be between $1,000,000 and $1,500,000. Actual costs will vary from vision center to vision center based upon the market, the number of lasers purchased or leased for the vision center, the site of the vision center and the level of leasehold improvements required, among other variables. Our capital expenditures consist primarily of investments incurred in connection with the opening of new vision centers and equipment purchases or upgrades at existing facilities.

Year-to-date, we have opened four vision centers in Paramus, New Jersey; Grand Rapids, Michigan; Seattle, Washington; and Sugar Land, Texas. Capital expenditures through June 30, 2006 were $3,856,000. We have additional facilities under development and currently expect to open a total of 10 — 12 vision centers in 2006.

The ability to fund our marketing and advertising program, planned capital expenditures and new vision center rollouts depends on our future performance, which, to a certain extent, is subject to general economic, competitive, legislative, regulatory and other factors, some of which are beyond our control. Based upon our current level of operations and anticipated revenue growth, we currently believe that cash flow from operations and available cash and short-term investments should provide sufficient cash reserves and liquidity to fund our working capital needs and our capital expenditures.

New Accounting Pronouncements

See the “Stock-Based Compensation” section of the Notes to the condensed consolidated financial statements for information on the Company’s adoption of SFAS 123(R).

Critical Accounting Estimates

Significant accounting policies are disclosed in the Notes to Condensed Consolidated Financial Statements. Critical accounting estimates are discussed below.

Accounts Receivable and Allowance for Doubtful Accounts

We provide patient financing to some of our customers, including those who could not otherwise obtain third-party financing. The terms of the financing require the patient to pay an up-front fee which is intended to cover some or all of our variable costs, with the remainder due from the patient over 12 to 36 months. We began our patient financing program in May 2002. Accounts receivable for patients that we finance for a period of 12 months or less are recorded at the undiscounted total expected payments less an estimated allowance for doubtful accounts. For patients we finance with an initial term over 12 months, we record the present value of expected payments. Interest income is recorded over the term of the payment program. As of June 30, 2006, the discount in receivables with an initial term over 12 months was $175,000.

Based upon our own experience with patient financing and based upon the credit experience of some others who provide financing to customers similar to ours, we have established bad debt reserves as of June 30, 2006 of $3,108,000 against accounts receivable of $15,791,000. To the extent that our actual bad debt write-offs are greater than our estimated bad debt reserve, it would adversely impact our results of operations and cash flows. To the extent that our actual bad debt write-offs are less than our estimated bad debt reserve, it would favorably impact our results of operations and cash flows.

Captive Insurance Company Reserves

Effective December 18, 2002, we established a captive insurance company to provide professional liability insurance coverage for claims brought against us after December 17, 2002. In addition, our captive insurance company’s charter allows it to provide professional liability insurance for our doctors, some of whom are currently insured by the captive. Our captive insurance company is managed by an independent insurance consulting and management firm, and it is capitalized and funded by us based on actuarial studies performed by an affiliate of the consulting and management firm.

The financial statements of the captive insurance company are consolidated with our financial statements since it is a wholly-owned enterprise. As of June 30, 2006, we recorded an insurance reserve amount of $5,402,000 which represents an estimate of costs to settle claims. To the extent that our actual claim experience is greater than our estimated insurance reserve, it would adversely impact our results of operations and cash flows. To the extent that our actual claim experience is less than our estimated insurance reserve, it would favorably impact our results of operations and cash flows.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

The carrying values of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of the short maturity of these instruments.

We have historically had low exposure to changes in foreign currency exchange rates and, as such, have not used derivative financial instruments to manage foreign currency fluctuation risk.

Item 4. Controls and Procedures.

(a)		Evaluation Of Disclosure Controls And Procedures

		Under the supervision of and with the participation of the Company’s management, including the Company’s Interim Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation of the effectiveness of the Company’s disclosure controls and procedures was performed as of June 30, 2006. Based on this evaluation, the Interim CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information is (1) accumulated and communicated to our management to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder.

(b)		Changes In Internal Control Over Financial Reporting

		Under the supervision of and with the participation of the Company’s Interim CEO and CFO, an evaluation of the Company’s internal control over financial reporting was performed as of June 30, 2006. Based on this evaluation, the Interim CEO and CFO have concluded that there were no changes in the Company’s internal control over financial reporting that occurred during the last quarter that have materially affected, or are reasonably like to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information.

Item 4. Submission of Matters to Vote of Security Holders.

The Company held its Annual Meeting of Stockholders on June 12, 2006. Four matters were submitted to the vote of the stockholders. Results were as outlined below:

Election of directors.


	Shares Voted For		Authority Withheld
William F. Bahl		19,055,980		523,984
Thomas G. Cody		19,053,742		526,222
John H. Gutfreund		18,734,765		845,200
John C. Hassan		19,055,082		524,882
Craig P. R. Joffe		19,060,025		519,940
David W. Whiting, M.D.		19,134,761		445,203
E. Anthony Woods		19,065,323		514,642

Amendment of the Company’s Restated Certificate of Incorporation, increased the authorized number of shares of common stock from 27,500,000 to 55,000,000:


Shares Voted For	Shares Voted Against		Shares Abstaining		Broker Non-Votes
18,270,116		1,293,281		16,567		-0-

Approval of the LCA-Vision Inc. 2006 Stock Incentive Plan:


Shares Voted For	Shares Voted Against		Shares Abstaining		Broker Non-Votes
13,669,751		1,686,499		50,702		4,173,012

Ratification of Ernst & Young as auditors of the Company for the fiscal year ending December 31, 2006:


Shares Voted For	Shares Voted Against		Shares Abstaining		Broker Non-Votes
19,551,113		19,988		8,863		-0-

Item 5. Other Information

Effective July 27, 2006, Dr. Stephen N. Joffe agreed to provide LCA-Vision through December 31, 2006 certain services on an exclusive basis in connection with technological issues, international expansion opportunities or other non-operational matters. These services will be provided without additional consideration to that described in LCA-Vision’s report on Form 8-K dated as of February 21, 2006. In addition, the parties agreed to mutually release and not disparage each other.

Item 6. Exhibits


Number		Description
	10.1	Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (incorporated by reference from Current Report on Form 8-K dated June 12, 2006, filed June 16, 2006)
	31.1	Interim CEO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	CFO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
	32	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



Date: August 2, 2006	/s/ Craig P. R. Joffe
	Craig P. R. Joffe
	Interim Chief Executive Officer, Chief Operating Officer and General Counsel


Date: August 2, 2006	/s/ Alan H. Buckey
	Alan Buckey
	Executive Vice President/Finance and Chief Financial Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


Part I. Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005	3

		Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005	4

		Condensed Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2006 and 2005	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17

	Item 4.	Controls and Procedures	17

Part II. Other Information

	Item 4.	Submission of Matters to Vote of Security Holders	17

	Item 5.	Other Information	18

	Item 6.	Exhibits	18

Signatures			19
EX-31.1
EX-31.2
EX-32