1. Description of Business and Summary of Significant Accounting Policies

Business

We are a 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 two suppliers for lasers: Abbott Medical Optics (“AMO”) and Alcon Inc. (“Alcon”). Our vision centers are supported by independent ophthalmologists and credentialed optometrists, as well as other healthcare 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-up care in-center. Most of our patients receive a procedure called LASIK, which we began performing in the United States in 1996.

As of December 31, 2012, we operated 54 LasikPlus^® vision centers in the United States. Included in the number are two vision centers licensed to ophthalmologists to operate using our trademarks. Beginning in 2011, we began offering standard cataract, premium intraocular lens (“IOL”) and implantable Collamer lens (“ICL”) services in certain of our existing markets under our new Visium Eye Institute^® brand. Our cataract, IOL and ICL services were not significant in 2012 and we do not anticipate our cataract services will represent a significant portion of our operations in 2013.

Use of Estimates

The preparation of our Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include investment valuation, allowance for doubtful accounts against patient receivables, insurance reserves, income taxes and enhancement accruals. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.

Consolidation and Basis of Presentation

The Consolidated Financial Statements include all of the assets, liabilities, revenues, expenses and cash flows of entities in which we have a controlling interest. 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. Investments in joint ventures and 20% to 50% owned affiliates where we have the ability to exert significant influence have been accounted for by the equity method. Intercompany transactions and balances have been eliminated upon consolidation.

Reclassifications

We have reclassified certain prior-period amounts in the Consolidated Statements of Operations and Comprehensive Loss to conform to current period presentation. The reclassifications were not material to the Consolidated Financial Statements.

Cash and Cash Equivalents

We consider highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents.

Investments

Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently, we classify all securities as available-for-sale. We carry available-for-sale securities at fair value, with temporary unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ investment. The amortized cost of debt securities in this category reflects amortization of premiums and accretion of discounts to maturity computed under the effective interest method. We include this amortization in the caption “Net investment income and other” within the Consolidated Statements of Operations and Comprehensive Loss. We also include in net investment income realized gains and losses and declines in value determined to be other-than-temporary. We base the cost of securities sold upon the specific identification method. We include interest and dividends on securities classified as available-for-sale in net investment income.

Fair Value Measurements

We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk (including our own non-performance risk).

Patient Receivables and Allowance for Doubtful Accounts

We provide financing to some of our patients, including those who could not otherwise obtain third-party financing. The terms of the financing usually require the patient to pay an up-front fee which is intended to cover some or all of our variable costs, and then generally we deduct the remainder automatically from the patient’s bank account over a period of 12 to 36 months. We have recorded an allowance for doubtful accounts as a best estimate of the amount of probable credit losses from our patient financing program. Each month, we review and adjust the allowance based upon our own experience with patient financing. We charge off receivables against the allowance for doubtful accounts when it is probable that a receivable will not be recovered. Our policy is to reserve for all patient receivables that remain open past their financial maturity date and to provide reserves for patient receivables prior to the maturity date so as to bring patient receivables, net of reserves, down to the estimated net realizable value based on historical collectability rates, recent default activity and the current credit environment. Bad debt expense was $914,000, or 0.9% of revenues for 2012, $746,000, or 0.7% of revenues for 2011, and $1.1 million, or 1.1% of revenues, for 2010. During the period ended December 31, 2012, we wrote off $1.0 million of receivables against the allowance for doubtful accounts and recovered $127,000 in receivables previously written off. During the prior period, we wrote off $851,000 of receivables against the allowance for doubtful accounts and recovered $137,000 in receivables previously written off.

For patients whom we internally finance, we charge interest at market rates. Finance and interest charges on patient receivables were $820,000 in 2012, $621,000 in 2011 and $740,000 in 2010. We include these amounts in “Net investment income and other” within the Consolidated Statements of Operations and Comprehensive Loss.

We maintained an allowance for doubtful accounts for our other accounts receivable of $340,000 at December 31, 2012 and $298,000 at December 31, 2011.

Property and Equipment, Depreciation and Amortization

We record our property and equipment at its original cost, net of accumulated depreciation. At the time that property or equipment is retired, sold, or otherwise disposed of, we deduct the related cost and accumulated depreciation from the amounts reported in the Consolidated Balance Sheets and recognize any gains or losses on disposition in the Consolidated Statements of Operations and Comprehensive Loss. We expense repair and maintenance costs as incurred. We include assets recorded under capitalized leases within property and equipment.

We compute depreciation using the straight-line method, which recognizes the cost of the asset over its estimated useful life. We use the following estimated useful lives for computing the annual depreciation expense:


Fixed Asset Group		Depreciable Lives
Building and building improvements		5 - 39 years
Furniture and fixtures		3 - 7 years
Medical equipment		3 - 5 years
Other equipment		3 - 5 years

We record amortization of leasehold improvements in the Consolidated Statements of Operations and Comprehensive Loss as a component of depreciation expense using the straight-line method based on the lesser of the useful life of the improvement or the lease term, which is typically five years or less.

We assess the impairment of property and equipment whenever events or circumstances indicate that the carrying value might not be recoverable. Recoverability of long-lived assets is assessed by comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. We write down to fair value, which is generally determined from estimated discounted cash flows for assets held for use, recorded values of property and equipment that we do not expect to recover through undiscounted future net cash flows. During 2012, we recognized fixed asset impairment charges of $617,000, primarily as a result of our decision to close under-performing vision centers and relocate our patient communication center to our corporate headquarters. The closures of the vision centers do not qualify for classification as a discontinued operation due to continuing cash flows. We will continue to incur cash expenditures related to these vision centers in the form of future facility lease payments and costs associated with post-operative care and post-surgical enhancements. During 2011, we recognized fixed asset impairment charges of $104,000 for certain assets held for use in a laser vision correction center.

Accrued Enhancement Expense

We include participation in our LasikPlus Advantage Plan^® (acuity program) in the base surgical price for substantially all of our patients. Under the acuity program, if determined to be medically appropriate, we provide post-surgical enhancements free of charge should the patient not achieve the desired visual correction during the initial procedure. Under this pricing structure, we account for the acuity program as a warranty obligation. Accordingly, we accrue the costs expected to be incurred to satisfy the obligation as a liability and direct cost of service at the point of sale given our ability to estimate reasonably such costs based on historical trends and the satisfaction of all other revenue recognition criteria.

We record a post-surgical enhancement accrual based on our best estimate of the number and associated cost of the procedures to be performed. Each month, we review the enhancement accrual and consider factors such as procedure cost and historical procedure volume when determining the appropriateness of the recorded balance. As of December 31, 2012 and 2011, we maintained an enhancement accrual of $2.8 million and $3.4 million, respectively. The long-term portion of the enhancement accrual of $1.8 million and $2.1 million as of December 31, 2012 and 2011, respectively, is recorded as a component of “Other long-term liabilities” on the Consolidated Balance Sheets.

Insurance Reserves

We maintain a captive insurance company to provide professional liability insurance coverage for claims brought against us and our optometrists after December 17, 2002. In addition, our captive insurance company’s charter allows it to provide professional liability insurance for our ophthalmologists, none of whom are currently insured by the captive. We use the captive insurance company for both primary insurance and excess liability coverage. A number of claims are now pending with our captive insurance company. We consolidate the financial statements of the captive insurance company with our financial statements because it is a wholly-owned enterprise. As of December 31, 2012 and 2011, we maintained insurance reserves of $6.6 million and $7.2 million, respectively, which represented primarily an actuarially determined estimate of future costs associated with claims filed as well as claims incurred but not yet reported. We recorded $871,000 and $951,000 of the total insurance reserve as a current liability in “Accrued liabilities and other” at December 31, 2012 and 2011, respectively. Our actuaries determine loss reserves by comparing our historical claim experience to comparable insurance industry experience. Since the inception of the captive insurance company in 2002, it has disbursed total claims and legal expenses of approximately $7.7 million.

Income Taxes

We are subject to income taxes in the United States and Canada. Significant judgment is required in determining our provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable, and those deferred. We determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities, and we measure them using enacted tax rates and laws that are expected to be in effect when the differences reverse. We recognize the effect on deferred taxes of changes in tax rates in the period in which the enactment date changes. We establish valuation allowances when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized.

In the ordinary course of business, there are certain transactions and calculations where the ultimate tax determination is uncertain. The evaluation of a tax position in accordance with U.S. GAAP is a two-step process. The first step is a recognition process to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is assessed to determine the cost or benefit to be recognized in the 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 income applicable to common shares divided 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.

The following is a reconciliation of basic and diluted loss per share (in thousands, except per share data).


	Years Ended December 31,
	2012			2011			2010
Basic Loss
Net loss	$	(8,517	)	$	(6,198	)	$	(20,577	)
Weighted average common shares outstanding		18,982			18,811			18,680
Basic loss per share	$	(0.45	)	$	(0.33	)	$	(1.10	)
Diluted Loss
Net loss	$	(8,517	)	$	(6,198	)	$	(20,577	)
Weighted average common shares outstanding		18,982			18,811			18,680
Effect of dilutive securities
Stock options		—			—			—
Restricted stock		—			—			—

Weighted average common shares outstanding and potential dilutive shares		18,982			18,811			18,680
Diluted loss per share	$	(0.45	)	$	(0.33	)	$	(1.10	)

For 2012, 2011 and 2010, we excluded all outstanding stock options and restricted stock awards from the computation of our diluted earnings per share because the effect of these share-based awards was antidilutive due to our net losses.

Revenue Recognition

We recognize revenues as services are performed and persuasive evidence of an arrangement for payment exists. Additionally, we recognize revenue when the price is fixed and determinable and collectability is reasonably assured. We deferred revenues associated with separately priced acuity programs and recognize it over the period in which future costs of performing the post-surgical enhancement procedures are expected to be incurred as we have sufficient experience to support that costs associated with future enhancements will be incurred on other than a straight-line basis. We report all revenues net of tax assessed by applicable governmental authorities.

Marketing and Advertising Expenditures

We expense marketing and advertising costs as incurred, except for the costs associated with direct mail. Direct mail costs include printing mailers for future use, purchasing mailing lists of potential patients and postage cost. We expense printing and postage costs as the items are mailed.

Stock-Based Compensation

We account for stock-based payment transactions in which we receive employee services in exchange for (a) our stock or (b) liabilities that are based on the fair value of our stock or that may be settled by the issuance of our stock. Stock-based compensation cost for restricted stock units (“RSUs”) are measured based on the closing fair market value of our common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair-value as calculated by the Black-Scholes option-pricing model. We recognize stock-based compensation cost as expense for these awards ratably on a straight-line basis over the requisite service period. We also grant awards that are tied to the achievement of certain financial targets and stock-performance criteria. These awards are granted annually and cover a three-year performance cycle. Performance measures used to determine the actual number of shares issuable upon vesting include a weighting of revenue and operating income targets and our total shareholder return (“TSR”) performance. TSR is considered a market condition while the revenue and operating income targets are considered a performance condition under applicable U.S. GAAP. The fair value of the revenue and operating income target portion of the performance share awards is equal to the fair market value of our common stock on the date of the grant. Compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied. The fair value of the TSR portion of the performance share awards is calculated using a Monte Carlo simulation valuation model. Compensation cost is recognized over the requisite service period regardless of whether the market condition is satisfied. We will recognize a benefit from stock-based compensation in equity if an incremental tax benefit is realized by following the ordering provisions of the tax law. Further information regarding stock-based compensation can be found in Note 9, “Employee Benefits.”

Geographic Information

We have no operations or assets in any countries other than the U.S. and Canada. No single customer represented more than 10% of revenues in 2012, 2011, or 2010. Information about our domestic and international operations is as follows (dollars in thousands):


	Revenues from External Customers						Net Assets				Property and Equipment
	2012		2011		2010		2012		2011		2012		2011
United States	$	101,493	$	102,983	$	99,825	$	15,143	$	21,766	$	6,380	$	10,637
Canada		—		—		—		4,654		4,499		—		—

	$	101,493	$	102,983	$	99,825	$	19,797	$	26,265	$	6,380	$	10,637

Subsequent Events

We evaluated all events or transactions that occurred after December 31, 2012 through the date we issued these Consolidated Financial Statements.