Annual Report

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2012, the last business day of the registrant’s most recently completed second quarter, was approximately $81.8 million based on the closing price as reported on The NASDAQ Stock Market.

The number of shares outstanding of the registrant’s Common Stock as of February 15, 2013 was 19,050,504.

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held May 21, 2013 are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Report.

Certain statements contained in this Annual Report on Form 10-K, including information with respect to our future business plans, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “may,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by our forward-looking statements. These factors include those set forth in “Item 1A—Risk Factors.”

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. 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 the ophthalmologists or optometrists conduct pre-procedure evaluations and post-operative follow-up care in-center. Most of our patients currently receive a procedure called laser-assisted in situ keratomileusis (“LASIK”), which we began performing in the United States in 1996. We have performed over 1.2 million laser vision correction procedures in our vision centers in the United States and Canada since 1996.

As of December 31, 2012, we operated 54 LasikPlus^® fixed-site laser vision correction centers generally located in metropolitan markets in the United States, including two vision centers licensed to ophthalmologists who operate using our trademarks and four satellite vision centers which perform preoperative and postoperative care for patients living considerable distances from our full service vision centers. 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. In 2012 we expanded these initiatives to ten total markets utilizing the existing infrastructure in our laser vision correction centers. We expect this diversification, if successful, to lessen the impact of economic downturns over the long-term.

We derive substantially all of our revenues from the delivery of laser vision correction procedures performed in our vision centers. Financial information concerning revenues, profit and loss and total assets are contained in “Item 8. Financial Statements and Supplementary Data” under “Consolidated Balance Sheets” and “Consolidated Statements of Operations and Comprehensive Loss.” See Note 1 of the “Notes to Consolidated Financial Statements” for financial information by geographic area.

Procedure volume and revenues in our industry is highly correlated with the Consumer Confidence Index and has been severely affected by the general economic slowdown in the United States. In general, industry demand peaked during 2007 when there was strong consumer confidence, declined through 2010 with declining consumer confidence and began to improve in 2011 and 2012. However, industry reports anticipate demand for laser vision correction procedures to remain soft in 2013.

Laser vision correction procedures reshape the cornea with an excimer laser to correct refractive vision errors by changing the curvature of the cornea. These procedures may reduce the need for wearing corrective lenses such as glasses and contact lenses. Our doctors make an assessment of a patient’s candidacy for laser vision correction and determine the correction required to program the excimer laser. The software of the excimer laser then calculates the number and pattern of pulses needed to achieve the intended correction using a specially developed algorithm. The typical laser vision correction procedure takes approximately 15 – 20 minutes to complete. The eye is anesthetized using topical eye drops. The patient reclines under the laser, a lid speculum holds the eyelids open, and the patient focuses on a blinking fixation light while the excimer laser pulses are applied. The excimer laser is a high-energy ultraviolet “cold” laser, meaning that no heat is generated. This non-thermal ablation permits precise reshaping of the cornea. The amount of tissue ablated and the ablation pattern depend upon the refractive error being corrected. Shortly after the procedure, the patient leaves the laser vision center with instructions to rest the remainder of the day. Follow-up visits with an optometrist or ophthalmologist are typically scheduled for one day, one week and one to three months post-procedure.

We currently use two suppliers for our fixed-site excimer lasers: Abbott Medical Optics (“AMO”) and Alcon Inc. (“Alcon”).

In 1996, we began performing LASIK, which continues to account for the majority of the laser vision correction procedures performed in the United States. In LASIK procedures, our surgeons use a femtosecond laser to create a thin flap in the cornea, which remains hinged to the eye. The surgeon then lays back this corneal flap and applies excimer laser pulses to the exposed surface of the cornea to treat the eye according to the patient’s prescription. The surgeon then folds the corneal flap back to its original position and inspects it to ensure that it remains secured in position by the natural suction of the cornea. Because the surface layer of the cornea remains intact with LASIK, a bandage contact lens is normally not required and the patient typically experiences little discomfort. LASIK often has the advantage of more rapid recovery than Photorefractive Keratectomy (“PRK”), with most patients seeing well enough to drive a car the next day. The LASIK procedure generally allows an ophthalmologist to treat both eyes of a patient during the same visit.

In PRK procedures, the ophthalmologist removes the thin layer of cells covering the outer surface of the cornea (the epithelium) in order to apply the excimer laser pulses directly to the surface of the cornea. Following the PRK procedure, the ophthalmologist places a bandage contact lens on the eye to protect it. The patient may experience discomfort and blurred vision until the epithelium heals, which can take several days. The doctor generally will prescribe certain topical pharmaceuticals for use by the patient post-procedure to assist in alleviating discomfort, minimizing infection and helping to promote corneal healing. Although a patient generally experiences substantial improvement in clarity of vision within a few days following the procedure, it can take several months for the full benefits of the PRK procedure to be realized. Some patients elect to have one eye treated in one visit and the second eye treated at a later date.

LASIK and PRK procedures are performed using the same excimer lasers and offer the same results after healing occurs. Each has its advantages. Based on the pre-procedure examination and assessment, our doctors determine which laser correction procedure is best for each patient.

More than 190 million Americans, or approximately 60% of the U.S. population, require eyeglasses or contact lenses to correct common vision problems. Most people seeking vision correction suffer from one or more refractive vision disorders, which often result from improper curvature of the cornea as related to the size and shape of the eye. If the cornea’s curvature is not precisely correct, it cannot properly focus the light passing through it onto the retina, resulting in a blurred image. Three common refractive vision disorders are:

Since the U.S. Food and Drug Administration (“FDA”) approved the first laser to perform laser vision correction procedures in the United States in 1995, industry sources estimate that approximately 15.8 million eyes have been treated. Laser vision correction is currently one of the most widely performed elective surgical procedures in the United States, with an estimated 625,000 laser vision correction procedures performed in 2012, an increase of less than 1% from 2011. An industry report on the U.S. refractive market estimates that 2013 laser vision correction procedures are forecasted to increase 7% over 2012 and the potential market for laser vision correction procedures in the United States is approximately 146 million procedures. Laser vision correction is typically a private pay procedure performed on an outpatient basis.

Estimated Number of Laser Vision Correction Procedures in North America per Year

(a) = Market Scope recast 2011 and 2012 estimated laser vision correction volume, but did not recast years 2010 and prior.

Our business strategy is to transform lives by providing quality laser vision correction services at an affordable price. We generally operate our vision centers as closed-access facilities, where we are responsible for marketing and patient acquisition and contract with independent ophthalmologists for their medical services.

We intend to grow our business through increased penetration in our current markets and, after the economy and our cash flow improve, expansion into new markets. Key elements of our business strategy include:

Recruiting and retaining independent, board certified ophthalmologists and credentialed optometrists.

We generally focus our recruiting efforts on leading independent ophthalmologists and optometrists who have a reputation for providing quality eye care within their respective markets and who have experience in laser vision correction procedures. Our ophthalmologists have completed extensive FDA-mandated training and also have met our qualification criteria, which includes a review of state licensure, board certification, malpractice insurance and surgical experience.

Providing patients with continuity of care under our “LasikPlus Advantage Plan^®”

We strive to achieve high patient satisfaction and have established the “LasikPlus Advantage Plan^®,” the goal of which is to achieve the level of visual correction agreed to by the patient and physician. A patient’s care begins with our initial contact with the prospective patient. We train our call center personnel to answer questions regarding procedures and generally we provide potential patients access both to a physician to address more difficult inquiries and to past patients who can relate procedure experience. In the vision center, we provide potential patients a free eye evaluation with the local vision center’s optometrist or independent ophthalmologist as well as a consultation focused on educating the patient on vision correction procedures and how the procedure may help correct the patient’s specific refractive vision disorder. The ophthalmologist will determine whether the patient is a candidate and review the risks associated with the procedure and what results the patient may expect after the procedure. Additionally, we design our vision centers to create a patient-friendly environment to reduce any anxiety associated with having laser vision correction. We schedule post-surgical follow-up appointments with patients who have received the procedure to monitor results and provide enhancements to those patients who did not receive the desired correction in the initial procedure. The vast majority of our treated patients who respond to our patient satisfaction surveys indicate that they are satisfied with the care that they received in our vision centers.

Because laser vision correction procedures are elective and generally not reimbursable by third party payers, including governmental programs such as Medicare and Medicaid, we currently offer patients several financing alternatives. A significant percentage of our patients finance some or all of the cost of their procedure. We work closely with an unaffiliated third-party finance company that offers multiple payment plans to qualifying patients. These payment plans typically provide for payments over a 12-month to 60-month period. We bear no credit risk for loans made under this third-party program. For patients not qualifying for these plans, we offer our own direct financing in which we charge an up-front fee, with the remaining balance paid by the patients in installments over a period of 12 to 36 months. We bear the credit risk of our own direct financing programs.

Nurturing relationships with leading managed care providers in the United States and partnership programs to source additional patients.

With a large number of employers offering vision services in their employee benefit packages, we continue to nurture, develop and grow relationships with managed care organizations, through which we offer discounted rates to plan participants. In general, the plan participant, and not the managed care organization, is responsible for the payment of our fees under these arrangements. We currently have agreements with most of the largest health and vision plans. In addition to the discounted programs, a small number of plans offer a funded, insured LASIK product that covers a portion of the procedure cost.

We continue to participate in partnership programs that have proven to be successful. These programs allow for their members to obtain reward points or discounts for attending a pre-operative appointment and for having the laser vision correction procedure performed. We will continue to evaluate expansions or terminations of these programs as well as explore opportunities for more partnership programs in 2013 and beyond.

We also partnered with the Wounded Warrior Project and Fisher House Foundation beginning in 2010 to provide laser vision correction at no cost to wounded U.S. military veterans and their primary caregivers. Our surgeons offer their services at no cost and our vendors support us in this cause.

Our marketing programs seek to reinforce the LasikPlus^® brand name in addition to raising awareness concerning laser vision correction and promoting our vision centers and the experience of our independent ophthalmologists. In each market, we target a specific demographic group of potential patients through the use of traditional and online radio, internet, social media, mobile, print media and/or direct mail campaigns, among other strategies. In most advertisements, we provide prospective patients a website address and a toll-free number to contact us. Our call center representatives answer initial questions that potential patients may have, and attempt to schedule eye evaluation appointments with the local vision center to determine whether the prospective patient is a candidate for laser vision correction. We are also reaching new prospective patients through innovative programs such as partnerships with other companies that provide their members with options such as reduced out-of-pocket procedure costs or other incentives. With the support of advertising agencies, we continue to refine our branding to differentiate LasikPlus^® from our competitors and to continually develop more compelling messages.

We began expanding our patient care model in 2011 to include other medical and surgical eye services and products. We desire to diversify into related eye-health businesses to leverage our capabilities and resources, drive more revenue through our existing vision centers, capitalize on our past patients and high patient satisfaction rate, and lessen the impact of future economic downturns. Our focus is on programs that require minimal up-front investment and that we can roll out in a modular approach, allowing for phased introductions. We are also developing a partner network with optometrists and other eye health care providers. We see a partner network as an opportunity to make ourselves known to patients of optometrists and other eye health providers and to share in the care of those patients, whether for laser vision correction or cataract services.

During the third quarter of 2011 we began offering standard cataract and premium IOL services in two of our LasikPlus^® markets under our new Visium Eye Institute^® brand. As of December 31, 2012, we had 10 Visium Eye Institute^® centers. Expansion into cataract services capitalizes on our current multi-site operation and clinical skills, while exposing us to a growing potential patient population of “Baby Boomers” as they begin to approach 70 years of age. Industry analysts estimate the cataract market is currently four times as large as the laser vision correction market. This expansion into cataract and premium IOL services is an expansion from our current model of operating solely in a self-pay environment and into services generally paid by third-party payers, including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Additionally, while the pre-operative and post-operative exams are performed in our vision centers, the surgeries are performed at independent ambulatory surgery centers. Our revenue from cataract services was not significant in 2012 and we do not anticipate it to represent a significant portion of our operations in 2013. Attracting new patients remains the most significant challenge with growing our Visium Eye Institute^® business. We are also offering ICL surgery in our Visium Eye Institute^® markets. This procedure is not covered by Medicare or other third-party payers, but it is appropriate for some patients who are not candidates for LASIK due to conditions such as extreme nearsightedness, uncertain corneal topography or insufficient corneal thickness.

Laser vision correction, whether performed at one of our vision centers or elsewhere, is an alternative to other surgical as well as non-surgical treatments to correct refractive vision disorders. These non-surgical treatments include eyeglasses and contact lenses. Other refractive surgery procedures include refractive lens exchange and ICL. In the future, other surgical procedures such as corneal inlays, currently under FDA trial, may prove to be an option as well.

We face competition from other providers of laser vision correction. A fragmented system of local providers, including individual or small groups of opticians, optometrists and ophthalmologists, and chains of retail optical stores and multi-site eye care vision centers deliver eye care services in the United States. Industry sources estimate that local ophthalmologists and hospitals represent approximately 70% of the laser vision correction market. Corporate laser vision correction providers, such as LasikPlus^®, are a specialized type of provider, operating multi-site eye care centers that provide primarily laser vision correction. In many of our markets, we also compete with other corporate laser vision correction center chains.

We currently face competitors offering discounted prices in some geographic markets where we conduct business. It is possible that our business could be materially adversely affected in the future by discounting practices of competitors, including from both a price and volume perspective. Laser vision correction procedure volume correlates with the Consumer Confidence Index. In individual markets, our challenge is to leverage the national strengths of our company and enhance local efforts in order to grow market share.

As of December 31, 2012, we had approximately 381 employees, 335 of whom were full-time. The number of employees included 87 optometrists and independent ophthalmologists employed by professional corporations with which we have contracts. None of our employees are subject to a collective bargaining agreement nor have we experienced any work stoppages. We believe our relations with our employees are good.

We have several registered trademarks in the United States, including the name LasikPlus^®. We have not registered all of the names that we use for our products and services with the United States Patent and Trademark Office. Where we use the “TM” (trademark) symbol, we intend to claim trademark rights on those names under common law. The duration of such trademarks under common law is the length of time that we continue to use them.

We are not involved in the research, development or manufacture of ophthalmic laser systems or diagnostic equipment. Several companies, including AMO and Alcon, our two current suppliers, offer excimer and femtosecond laser systems which have been approved by the FDA for commercial sale in the United States. We currently rely primarily on AMO to provide us with patient interface kits and McKesson Corporation (“McKesson”) to provide other disposable items required in LASIK procedures. If our relationship with any of these suppliers ceased, we believe we would be able to enter into alternative supplier arrangements.

Extensive federal, state and local laws, rules and regulations affecting the healthcare industry and the delivery of healthcare apply to our operations. Some of these include laws and regulations, which vary significantly from state to state, prohibiting unlawful rebates and division of fees, and limiting the manner in which we may solicit prospective patients. Furthermore, state and federal laws, some of which may be applicable to our business operations, extensively regulate contractual arrangements with surgery centers, ophthalmologists and optometrists.

The following is a more detailed description of certain laws and regulations that affect our operations.

In the United States, the FDA regulates the use, manufacturing, labeling, distribution and marketing of medical devices, including excimer and femtosecond lasers and certain other equipment that we use in laser vision correction surgery.

Once medical device manufacturers obtain FDA approval, medical device manufacturers are subject to continuing FDA obligations. For example, the FDA requires that medical devices be manufactured in accordance with its Quality System Regulations. In essence, this means that medical devices must be manufactured and records must be maintained in a prescribed manner with respect to production, testing and control activities. In addition, the FDA imposes restrictions and requirements regarding the labeling and promotion of medical devices with which we must comply.

If we or our excimer or femtosecond laser manufacturers fail to comply with applicable FDA requirements, the FDA could take enforcement action, including product seizures, recalls, withdrawal of approvals and imposition of civil and criminal penalties, any one or more of which could have a material adverse effect on our business, financial condition and results of operations. In addition, the FDA could withdraw clearance or approvals in some circumstances. If we or our principal suppliers fail to comply with regulatory requirements or any adverse regulatory action, we could be named as a party in ensuing litigation or incur a limitation on or prohibition of our use of excimer lasers, financing programs, or other necessary services to our business, which in turn would have a material adverse effect on our business, financial condition or results of operations. Discovery of problems, violations of current laws or future legislation or administrative action in the United States or elsewhere may adversely affect the ability of our suppliers to obtain or maintain appropriate regulatory approval.

The FDA requires that some medical facilities report serious injuries involving medical devices to device manufacturers and deaths involving medical devices to the FDA. The FDA requires that subject medical facilities have specific written procedures regarding such reporting obligations. Those of our vision centers that meet the FDA’s definition of user facilities are subject to these requirements. Although we believe that our procedures meet regulatory requirements, if the FDA determines that our procedures or our reporting practices are not adequate, we could be subject to FDA enforcement action. FDA enforcement action could discourage potential patients from having laser vision correction, or could limit our ability to use medical devices, potentially having a material adverse effect on our business, financial condition and results of operations by decreasing the total number of procedures that we perform.

Regulations require manufacturers to obtain a supplemental FDA authorization for new uses of existing medical devices. Obtaining these authorizations is time consuming and expensive, and we cannot be sure that manufacturers of the devices that we use will be able to obtain any such additional FDA authorizations. Further, later discovery of problems with the medical devices that we use may result in restrictions on use of the devices or enforcement action against the manufacturers, including withdrawal of devices from the market. Changes in legislation or regulation could affect whether and how we can use our medical devices. These and other regulatory actions could limit the supply of devices that we use or our ability to use them, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The FDA’s advisory board on ophthalmic devices began reviewing concerns about post-LASIK surgery quality of life matters in 2010, and the FDA has commenced a major new study on LASIK outcomes and quality of life. The FDA or another agency could take legal or regulatory action against us or others in the laser vision correction industry. The outcome of this review or legal or regulatory action potentially could impact negatively the acceptance of LASIK.

Section 1128B(b) of the Social Security Act (42 U.S.C. § 3120a-7b(b)) prohibits knowingly and willfully soliciting or receiving, offering or paying remuneration directly or indirectly, in cash or in kind, in order to induce the referral of individuals for care reimbursable under Medicare, Medicaid and other federal health care programs, or in return for recommending, arranging, purchasing, leasing or ordering any goods or services reimbursable under Medicare, Medicaid and other federal health care programs (the “Anti-Kickback Statute”). This provision is extremely broad. The offense is classified as a felony and is punishable by fines of up to $25,000 and imprisonment for up to 5 years. Violations of the Anti-Kickback Statute also may result in the imposition of a civil money penalty (“CMP”) under Section 1128A(a)(7) of the Social Security Act (42 U.S.C. 1320a-7a(a)(7)) or exclusion from participation in Medicare and State health care programs under Section 1128 of the Social Security Act (42 U.S.C. 1320a-7). The Balanced Budget Act of 1997 amended the CMP provisions to allow the government to recover treble damages in addition to $50,000 for each violation of the Anti-Kickback Statute.

Courts have interpreted the Anti-Kickback Statute to require proof of a knowing and willful intent to induce or arrange for referrals or for other business reimbursable under the Federal health care programs. Thus, the extent to which conduct is motivated by inducing or arranging for referrals will, in large part, determine liability under the statute. To prove a violation of the Anti-Kickback Statute, it must be shown that the remuneration between two parties was intended to induce the referral of business payable under the federal health care programs. The U.S. Health and Human Services Office of Inspector General (“OIG”) has defined a narrow set of circumstances that create “safe harbors” from prosecution and enforcement under the Anti-Kickback Statute. The safe harbors have specific defined elements that must be met to give protection to a particular transaction. The OIG has stated that if a person participates in an arrangement that fully complies with a given safe harbor, he or she will be assured of not being prosecuted criminally or civilly for the arrangement that is the subject of that safe harbor.

Because laser vision correction procedures currently are not reimbursable by Medicare, Medicaid or other governmental health programs, we do not believe that the Anti-Kickback Statute applies to our laser vision correction business. Any changes in the reimbursement and coverage rules for these governmental health programs may cause such business to be subject to such federal laws. Although we do not anticipate such changes in the near future, we cannot predict this with any degree of certainty.

Cataract services are reimbursable under Medicare, and thus the Anti-Kickback Statute may apply to our Visium Eye Institute^® cataract business. Our arrangements with ophthalmologists and optometrists providing cataract services may not fit within a safe harbor to the Anti-Kickback Statute. However, the OIG has stated that the optional regulatory safe harbors do not purport to define the full range of lawful activity, and payment practices that do not fully comply with a safe harbor may still be lawful if no purpose of the payment practice is to induce referrals of Federal health care program business. We believe that our arrangements with ophthalmologists and optometrists providing cataract services comply with the Anti-Kickback Statute. However, if the OIG were to challenge successfully our arrangements with ophthalmologists and optometrists providing cataract services, we may be required to restructure such arrangements and/or be subject to civil or criminal fines and penalties, including the exclusion of our company and the ophthalmologists and optometrists from the Medicare and Medicaid programs, any of which events could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The Ethics in Patient Referral Act of 1989, as amended (the “Stark Law”), is a civil statute that generally (i) prohibits physicians from making referrals for designated health services to entities in which the physicians have a direct or indirect financial relationship and (ii) prohibits entities from presenting or causing to be presented claims or bills to any individual, third party payer, or other entity for designated health services furnished pursuant to a prohibited referral. Under the Stark Law, a physician may not refer patients for certain designated health services to entities with which the physician has a direct or indirect financial relationship, unless allowed under an enumerated exception. Under the Stark Law, there are numerous statutory and regulatory exceptions for certain otherwise prohibited financial relationships. A transaction must fall entirely within an exception to be lawful under the Stark Law.

The Stark Law contains significant civil sanctions for violations, including denial of payment, refunds of amounts collected in violation of the Stark Law and exclusion from Medicare or Medicaid programs. In addition, OIG may impose a penalty of not more than $15,000 for submitting an illegal claim or not refunding such a claim on a timely basis and a civil monetary penalty of up to $100,000 for each circumvention arrangement or scheme.

We believe that any referrals between or among the company, the ophthalmologists and optometrists providing cataract services, and the facilities at which cataract procedures are performed will be for services that are not designated health services under the Stark Law. For example, services for which payment is included in the ambulatory surgical center composite rate (e.g., IOLs used in cataract surgery) are not designated health services. If the ophthalmologists, optometrists or contracted surgical facilities make referrals between or among themselves for any designated health service, we will endeavor to structure their arrangements either to be exempt from the Stark Law or to meet a statutory or regulatory exception to the Stark Law prohibitions. If these arrangements are found to violate the Stark Law, we may be required to restructure such arrangements or be subject to civil or criminal fines and penalties, including the exclusion of our company, the ophthalmologists and optometrists, and the facilities from the Medicare and Medicaid programs, any of which events could have a material adverse effect on our business, financial condition and results of operations.

Some states have enacted statutes, similar to the federal Anti-Kickback Statute and Stark Law, which are applicable to our operations because they cover all referrals of patients regardless of the payer or type of healthcare service provided. These state laws vary significantly in their scope and penalties for violations. Although we have endeavored to structure our business operations to be in material compliance with such state laws, authorities in those states could determine that our business practices are in violation of their laws. This could have a material adverse effect on our business, financial condition and results of operations.

Our business is heavily dependent on advertising, which is subject to regulation by the Federal Trade Commission (“FTC”). In 2002, the FTC conducted an extensive review of our advertising practices. Following this review, the FTC concluded that certain of our past advertisements contained claims that were not properly substantiated. We elected to settle voluntarily with the FTC. In July 2003, the FTC formally entered a Complaint and an Agreement Containing Consent Order in which we agreed, among other things, that we would not represent in our advertising that our LASIK surgery services eliminate the need for glasses and contacts for life, pose significantly less risk to patients’ eye health than wearing glasses or contacts or eliminate the risk of glare and haloing, unless, at the time made, we possess and rely upon competent and reliable scientific evidence that substantiates the representation. No monetary penalties were imposed on us. Although we consented to this order in 2003, we cannot be certain that this order will not restrict our ability to effectively generate demand for our laser vision correction services.

In 2009 the FDA issued a letter to eye care professionals noting that the FDA’s Ophthalmic Devices Panel had received complaints that advertisements for LASIK procedures and FDA-approved lasers used for LASIK procedures failed to inform consumers of the indications, limitations, and risks associated with LASIK procedures and the approved lasers used for the LASIK procedures. In this letter, the FDA said that an advertisement may be considered misleading if it fails to reveal facts that are material to representations made in the advertisement. In September 2011, the FDA issued a second letter to eye care professionals emphasizing the importance of providing adequate risk information in advertisements of FDA-approved lasers used in refractive procedures. The September 2011 letter stated that eye care professionals had 90 days from the letter’s date to correct any non-compliant advertisements and promotional materials and that the FDA may take regulatory action against eye care professionals whose advertisements and promotional materials violate FDA regulations. In 2012, the FDA issued

warning letters to five eye care professionals to stop misleading advertising and promotion of refractive lasers. We believe that we have structured our advertising practices to be in material compliance with FDA and FTC regulations and guidance. However, we cannot be certain that the FDA or the FTC will not determine that our advertising practices are in violation of such laws and guidance.

In addition, the laws of many states restrict certain advertising practices by and on behalf of physicians and optometrists. Many states do not offer clear guidance on the bounds of acceptable advertising practices or on the limits of advertising provided by management companies on behalf of physicians and optometrists. Although we have endeavored to structure our advertising practices to be in material compliance with such state laws, authorities in those states could determine that our advertising practices are in violation of those laws.

Many states prohibit professionals (including ophthalmologists and optometrists) from paying a portion of a professional fee to another individual unless that individual is an employee or partner in the same professional practice. If we violate a state’s fee-splitting prohibition, we may be subject to civil or criminal fines, and the physician participating in such arrangements may lose his or her licensing privileges. Many states do not offer clear guidance on what relationships constitute fee-splitting, particularly in the context of providing management services for doctors. Although we have endeavored to structure our business operations in material compliance with these laws, state authorities could find that fee-splitting prohibitions apply to our business practices in their states. If any aspect of our operations were found to violate fee-splitting laws or regulations, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The laws of many states prohibit business corporations, such as us, from practicing medicine and employing or engaging physicians to practice medicine. Some states prohibit business corporations from practicing optometry or employing or engaging optometrists to practice optometry. Such laws preclude companies that are not owned entirely by eye care professionals from:

This prohibition is generally referred to as the prohibition against the corporate practice of medicine or optometry. Violation of this prohibition may result in civil or criminal fines, as well as sanctions imposed against the professional through licensing proceedings. Although we have endeavored to structure our contractual relationships to be in material compliance with these laws, if any aspect of our operations were found to violate state corporate practice of medicine or optometry prohibitions, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

State Departments of Health may require us to obtain licenses in the various states in which we have laser vision correction centers or other business operations. We believe that we have obtained the necessary material licensure in states where licensure is required and that we are not required to obtain licenses in other states. However, not all of the regulations governing the need for licensure are clear and there is limited guidance available regarding certain interpretative issues. Therefore, it is possible that a state regulatory authority could determine that we are improperly conducting business operations without a license in that state. This could subject us to significant fines or penalties, result in our being required to cease operations in that state or otherwise have a material adverse effect on our business, financial condition and results of operations. Although we currently have no reason to believe that we will be unable to obtain the necessary licenses without unreasonable expense or delay, there can be no assurance that we will be able to obtain any required licensure.

Some states require permission by the State Department of Health in the form of a Certificate of Need (“CON”) prior to the construction or modification of an ambulatory care facility or the purchase of certain medical equipment in excess of a certain amount. We believe that we have obtained the necessary CONs in states where a CON is required. However, not all of the regulations governing the need for CONs are clear and there is little guidance regarding certain interpretive issues. Therefore, it is possible that a state regulatory authority could determine that we are improperly conducting business operations without a CON in that state. There can be no assurance that we will be able to acquire a CON in all states where it is required, or that our failure or inability to obtain a CON in markets into which we believe we could otherwise be successful expanding will not have a material adverse effect on our business, financial condition and results of operations.

In December 2000, the U.S. Department of Health and Human Services (“DHHS”) released final health privacy regulations implementing portions of the Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). These final health privacy regulations were effective in April 2003, for providers that engage in certain electronic transactions, including the submission of claims for payment. Additionally, DHHS published final standards to protect the security of health-related information in February 2003. Finally, in August 2009 DHHS published interim final breach notification regulations implementing section 13402 of the Health Information Technology for Economic and Clinical Health (“HITECH”) Act. The HIPAA privacy and security regulations and the HITECH Act extensively regulate the use and disclosure of individually identifiable health-related information. The ophthalmologists and their professional corporations with which we contract are covered entities under HIPAA if those entities provide services that are reimbursable under Medicare or other third-party payers (e.g., cataract services). Although the covered health care providers themselves are primarily liable for HIPAA compliance, as a “business associate” to these covered entities we are bound indirectly to comply with the HIPAA privacy regulations, and we are directly bound to comply with certain of the HIPAA security regulations.

Although we have endeavored to comply with these regulations, a finding of lack of compliance with these regulations could require us to incur substantial expenses, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we will continue to remain subject to any state laws that are more restrictive than the privacy regulations issued under the Administrative Simplification Provisions.

Our websites are www.lasikplus.com and www.lca-vision.com. There we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as well as any beneficial ownership reports of officers and directors filed on Forms 3, 4 and 5. We will make all such reports available as soon as reasonably practicable after we file them with or furnish them to the Securities and Exchange Commission (“SEC”). Our committee charters, governance guidelines and code of ethics are also available on our websites. To obtain a copy of any of these documents by mail, free of charge, please send a request to Investor Relations at LCA-Vision Inc., 7840 Montgomery Road, Cincinnati, Ohio 45236. Information contained on our websites is not part of this Annual Report on Form 10-K and is not incorporated by reference in this document. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

In evaluating and understanding us and our business, you should carefully consider (1) all of the information set forth in this Annual Report on Form 10-K, including the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis, (2) information in our other filings with the SEC, including any future reports on Forms 10-Q and 8-K and (3) the risks described below. These are not the only risks we face. Additional risks not presently known or which we currently deem immaterial may also impact our business operations, and the risks identified below may adversely affect our business in ways we cannot currently anticipate. Our business, financial condition, results of operations and cash flows could be materially adversely affected by any of these risks.

We incurred losses in 2010, 2011 and 2012, and expect to continue to incur losses in 2013.

Our procedure volume remained consistent in 2012 compared with 2011, and we incurred losses in both years due in large part to continued weak consumer confidence, a weak overall economy, high unemployment and investment in our cataract services expansion. We sustained losses in three quarters in 2011 and three quarters in 2012. We anticipate that in 2013 we will continue generating losses and negative cash flows. These continued losses have reduced our working capital. At December 31, 2012 and 2011, we had approximately $34.5 million and $44.8 million, respectively, in cash and investments. We are uncertain as to how long the negative economic and industry conditions will continue. There could be a number of other effects from these adverse economic conditions on our business, including reduced consumer demand for our services; insolvency of our patients, resulting in increased provisions for credit losses; insolvency of our key equipment suppliers; inability of consumers to obtain credit to finance some or all of the cost of their procedures; and decreased consumer confidence. If macroeconomic conditions do not improve, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Changes in general economic conditions may cause fluctuations in our revenues and profitability.

The cost of laser vision correction procedures typically is not reimbursed by third-party payers such as health care insurance companies or government programs. Accordingly, as we are experiencing and have experienced in prior fiscal periods, our operating results may vary based upon the impact of changes in the disposable income of consumers interested in laser vision correction, among other economic factors. A significant decrease in consumer disposable income in a weak economy results in a decrease in the number of laser vision correction procedures performed and a decline in our revenues and profitability. In addition, weak economic conditions may cause some of our patients to experience financial distress or declare bankruptcy, which may negatively impact our accounts receivable collection experience. Weak economic conditions also may change the risk profile or volume of business that our unaffiliated finance company partner is willing to underwrite, which could adversely affect our business, financial condition, results of operations and cash flows.

Our industry is highly correlated with consumer confidence. Declines or volatility in consumer confidence may continue to negatively impact our business.

Recessionary economic conditions, uncertainty in the credit markets, a period of rising energy costs and depressed housing prices have all contributed to a deterioration in volume of procedures performed, especially for patients at middle- and lower-income levels. Depressed consumer confidence negatively impacts our financial performance. The current market conditions in the credit markets and high unemployment have created uncertainty and caused potential patients to be more cautious in their purchasing decisions.

Our quarterly and annual operating results are subject to significant fluctuations.

Our revenue and operating results have fluctuated and may continue to fluctuate significantly from quarter to quarter and from year to year depending on many factors, including but not limited to:

In addition, our revenue and operating results are subject to seasonal factors. In terms of the number of procedures performed, our strongest quarter historically has been the first quarter of the year, and our business is generally weaker in the latter half of the year. We believe these fluctuations are due primarily to:

Reductions in revenues or net income between quarters or our failure to achieve expected quarterly earnings per share has in the past and could in the future result in a decrease in the market price of our common stock.

The effectiveness of our marketing programs and messages to consumers can have a significant impact on our financial performance. The effectiveness of marketing fluctuates, resulting in changes in the cost of marketing per procedure, and variations in our margins. Less effective marketing programs could adversely affect our business, financial condition and results of operations.

We derive substantially all of our revenue from laser vision correction services. A decrease in the provision of these services could result in a significant decrease in our revenues and profitability.

We derive substantially all of our revenues from laser vision correction services. If we are not able to provide those services or the number of laser vision correction procedures we perform significantly decreases, our revenues and results of operations will decrease materially. We do not currently have other matured diversified revenue sources to offset a significant decrease in revenues from our provision of laser vision correction services.

Our expansion into new services or products beyond laser vision correction may not be successful.

Beginning in 2011, we began offering standard cataract, premium IOL and ICL services in certain of our existing markets under our new Visium Eye Institute^® brand. In 2012 we expanded these initiatives to ten total markets utilizing our existing infrastructure from our laser vision correction centers. This diversification requires us to incur start-up losses, and we have not received significant revenues from these services. Our diversification into cataract services may not be successful, and we can give no assurance that we can develop these opportunities or that we will have adequate capital to do so.

If we are unable to attract and retain qualified independent ophthalmologists, our ability to maintain operations at existing vision centers, to attract patients or to open new vision centers could be negatively affected.

We generate our revenues through independent ophthalmologists who work with us to perform surgeries. In states where the corporate practice of medicine is prohibited, we contract with professional corporations for ophthalmologists to perform surgeries at our vision centers. The retention of those ophthalmologists is a critical factor in the success of our existing vision centers, and the hiring of independent qualified ophthalmologists is a critical factor in our ability to launch a new vision center successfully. However, it is sometimes difficult for us to retain or hire qualified ophthalmologists. If we are unable consistently to hire and retain qualified ophthalmologists, our ability to open new vision centers, maintain operations at existing vision centers, and attract patients could be negatively affected.

Throughout 2012, we continued to feature our ophthalmologists in local marketing materials. If we are unable to retain these featured ophthalmologists, our ability to maintain operations at existing vision centers and attract patients could be negatively affected.

If technological changes occur that 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 results of operations to decline.

Industry, competitive or clinical factors, among others, may require us to introduce alternate ophthalmic laser technology or other surgical or non-surgical methods for correcting refractive vision disorders than those that we currently use in our laser vision correction centers. Such alternative technologies could include various intraocular lens technologies or other new technologies. Introducing such technology could require significant capital investment or force us to modify our business model in such a way as to make our revenues or results of operations decline. An increase in costs could reduce our ability to maintain our margins. An increase in prices could adversely affect our ability to attract new patients.

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 results of operations could decline.

Laser eye surgery competes with other surgical and non-surgical treatments for refractive vision disorders, including eyeglasses, contact lenses, other types of refractive surgery, corneal implants and other technologies currently under development. Among providers of laser vision correction, competition comes from firms similar to us and from hospitals, hospital-affiliated group entities, physician group practices and private ophthalmologists, among others that, in order to offer laser vision correction to patients, purchase or rent excimer lasers. Suppliers of conventional eyeglasses and contact lenses, such as optometry chains, also may compete with us by purchasing laser systems and offering laser vision correction to their customers.

Some of our current competitors or other companies that may choose to enter the industry in the future, including laser manufacturers themselves, may have substantially greater financial, technical, managerial, marketing or other resources and experience than we do and may be able to compete more effectively. Similarly, competition could increase if the market for laser vision correction does not experience growth, and existing providers compete for market share. Additional competition may develop, particularly if the price to purchase or rent excimer laser systems decreases. Our management, operations, strategy and marketing plans may not be successful in meeting this competition.

If more competitors offer laser vision correction or other competitive types of vision treatments in a given geographic market, we might find it necessary to reduce the prices we charge, particularly if competitors offer the procedures at lower prices than we do. If that were to happen or we were not successful in cost effectively acquiring patients for our procedures, we may not be able to make up for the reduced gross profit margin by increasing the number of procedures that we perform, and our business, financial condition and results from operations could be adversely affected, as we have experienced in prior fiscal periods.

Our business has been adversely affected in the past by deeply-discounted pricing by some competitors, and it is possible that such competitive practices may adversely affect our business in the future.

In the past, certain competitors have utilized deeply-discounted pricing in an effort to generate procedure volume. This practice has caused periods of intense price competition in our industry. As a result, we have lowered our prices in the past in order to remain competitive. We currently face competitors offering discounted prices, including several providers of laser vision correction procedures, in some geographic markets where we conduct business. It is possible that, in the future, business, financial condition and results of operations could be adversely affected, as a result of the discounting practices of competitors.

We have credit risk from accounts receivable from internally financed patients.

A significant percentage of our patients finance some or all of the cost of their procedure. We provide certain of our patients, including patients who could not otherwise obtain third-party financing, with the ability to pay for our procedures with direct financing. The terms of our direct financing typically require the patient to pay a fee up-front, with the remaining balance paid by the patient in up to 36 monthly installments. As of December 31, 2012, we had $5.5 million in gross patient receivables, compared to $4.8 million as of December 31, 2011. We are exposed to significant credit risk from our direct financing program, particularly given that patients who participate in the program

generally have not been deemed creditworthy by third-party financing companies with more experience in credit issues. If the uncollectible amounts exceed the amounts that we have reserved, we could be required to write down our accounts receivable, and our cash flow and results of operations would be adversely affected.

Extensive state and federal laws and regulations, some of which may be applicable to our business operations, regulate the extension of credit to patients. Non-compliance could subject us to litigation, enforcement action, or civil or criminal penalties. Any such action could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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.

Some people and publications have raised concerns with respect to the predictability and stability of results and potential complications or side effects of laser vision correction. Physicians have provided laser vision correction in the United States since 1995. Any long-term complications or side effects of laser vision correction may call into question its safety and effectiveness, which in turn may negatively affect market acceptance of laser vision correction. Complications or side effects of laser vision correction could lead to professional liability, malpractice or other claims against us and product liability claims against the manufacturers of our lasers. Courts have awarded several significant verdicts against non-affiliated refractive surgeons in the past. Consequences of proceedings could include increased liability to us in connection with malpractice litigation, increased difficulty in hiring and retaining qualified independent ophthalmologists who may be wary of the increased liability associated with laser eye surgery, and decreased operational and financial yield from pre-operative examinations, among other effects that would be adverse to our business, financial condition, and results of operations.

We depend on limited sources for the excimer lasers and diagnostic equipment we use and for the third-party financing made available to our patients. Shortages of these items or services could hinder our ability to increase our procedure volume.

We use two suppliers, AMO and Alcon, for our excimer lasers. If either or both of these companies became unwilling or unable to supply us with excimer lasers and diagnostic equipment or to repair or replace parts or to provide services, our ability to maintain or increase our capacity to perform laser vision correction services at existing vision centers or to open new vision centers could be restricted.

We currently rely primarily on AMO to provide us with femtosecond lasers and patient interface kits, the devices used to create the corneal flap in the LASIK procedure, and McKesson for other disposable items required for LASIK. If we were to require alternate or additional suppliers, there can be no assurance that such items would be available in the quantities, at the costs or within the time frames that we require. Any shortages in our supplies of this equipment could limit our ability to maintain or increase the volume of procedures that we perform, which could adversely affect our business, financial condition and results from operations.

We currently rely exclusively on one unaffiliated finance company for third-party financing made available to our patients. The percentage of our patients who choose to obtain financing from this unaffiliated finance company is significant. We cannot give assurance that financing services will be available on terms or at interest rates or costs that we or our patients may require. Any reduction in available financing could limit our ability to maintain or increase the volume of procedures that we perform, which could adversely affect our business, financial condition and results from operations.

Our business may be impaired due to government regulations which could restrict our equipment, services and relationships with ophthalmologists, optometrists and other healthcare providers.

As described under “Government Regulation” and below, we, excimer laser manufacturers and our other business partners, including managed care companies and third-party patient financing companies, among others, are subject to extensive federal, state and foreign laws, rules and regulations, including all or some of the following:

Some of these laws and regulations are vague or ambiguous, and courts and regulatory authorities have not always provided clarification. Moreover, state and local law, including, but not limited to those on sales and use taxes, vary from jurisdiction to jurisdiction. As a result, some of our activities could be challenged, the success of which cannot be predicted.

The failure of our suppliers to obtain regulatory approvals for any additional uses of excimer or femtosecond lasers or otherwise comply with regulatory requirements could limit the number of excimer or femtosecond lasers that we have available for use and, therefore, limit the number of procedures that we can perform.

Failure of the laser manufacturers to comply with applicable FDA requirements could subject us, the independent ophthalmologists who practice in our vision centers or those manufacturers to enforcement actions, including product seizure, recalls, withdrawal of approvals and civil and criminal penalties. Further, failure to comply with regulatory requirements, or any adverse regulatory action, could result in limitations or prohibitions on our use of excimer or femtosecond lasers. Any such actions or proceedings could result in negative publicity, which in turn could result in decreased demand for our services and decrease our capacity to perform laser vision correction services.

Our business depends heavily on advertising, which is subject to regulation by the Federal Trade Commission (“FTC”) and various state boards of medicine and optometry. We are subject to a 2003 FTC Consent Order in which it was agreed, among other things, that we would not represent in our advertising that our LASIK surgery services eliminate the need for glasses and contacts for life, pose significantly less risk to patients’ eye health than wearing glasses or contacts, or eliminate the risk of glare and haloing, unless, at the time made, we possess and rely upon competent and reliable scientific evidence that substantiates the representation. We cannot be certain that this order to which we agreed, or any future action by the FTC, will not restrict our laser vision correction services, or otherwise result in negative publicity and damage our reputation.

The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care and Education Reconciliation Act (“HCERA,” and together with PPACA the “Affordable Care Act”) was signed into law on March 23, 2010. The Affordable Care Act contains provisions affecting numerous aspects of the health care and insurance industries. Effective in 2013, the Affordable Care Act will limit flexible spending account contributions to $2,500, which may negatively impact our business because many of our customers use flexible spending accounts to pay for our procedures. These changes could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The FDA is conducting a study to examine LASIK’s impact on quality of life, the results of which could adversely impact broader market acceptance, and our profitability and growth.

The FDA has launched a collaborative study with the National Eye Institute and the U.S. Department of Defense to examine LASIK’s potential impact on quality of life. The goal of the LASIK Quality of Life Collaboration Project is to determine the percentage of patients with significant quality of life problems after LASIK surgery and to identify predictors of these problems. The results of the project will help identify factors that can affect quality of life following LASIK and potentially reduce the risk of adverse affects that can impact the surgical outcome. If any of these factors are related to the safety or effectiveness of the lasers used in LASIK surgery, the FDA will evaluate whether any action is necessary. The project is part of the FDA’s ongoing effort to better monitor and improve the safety and effectiveness of the lasers used in LASIK surgery. The results of this study could adversely impact broader market acceptance of LASIK, which could have a direct impact on our profitability and growth. In addition, any new adverse regulatory actions by the FDA could result in limitations or prohibitions with respect to LASIK surgery.

We are subject to lawsuits for patient injuries, which could subject us to significant judgments and damage our reputation.

The laser vision correction procedures performed in our vision centers involve the risk of injury to patients. Such risk could result in professional liability, malpractice, or other claims brought against us, or our independent ophthalmologists and optometrists based upon injuries or alleged injuries associated with malpractice by an ophthalmologist, optometrist, technician or other healthcare professional. Product liability claims could also be made against our manufacturers associated with defects in their products. Some injuries or defects may not become evident for a number of years. Significant lawsuits against us could subject us to significant judgments and damage our reputation. In addition, a partially or completely uninsured claim against us could have a material adverse effect on our business, financial condition and results of operations. We rely primarily and intend to continue to rely primarily on the independent ophthalmologists’ professional liability insurance policies and the manufacturers’ product liability insurance policies, although we have limited umbrella general and professional liability insurance. We require the independent ophthalmologists who use our vision centers to maintain professional liability insurance, although an inability of an ophthalmologist to procure insurance could disrupt business while a replacement ophthalmologist is being recruited.

The availability of professional liability insurance has decreased and its cost has increased for a variety of reasons, including reasons outside our control, particularly in certain states. A future increase in cost could adversely affect the results of operations of our business, and a future lack of availability of coverage for us or our independent ophthalmologists could result in increased exposure to liability and potentially limit our ability to expand in certain markets.

We own a captive insurance company and its payment of significant claims could affect our results of operations and financial condition.

Disputes with respect to intellectual property could result in a decrease in revenues and profitability.

We have not registered all of the names we use for our products and services with the United States Patent and Trademark Office. Some of our internal processes and systems do not have intellectual property protection. If a competitor were to attempt to use our names, processes or systems, we may not be able to prevent such use. The unauthorized use of our name could cause confusion among patients, and the misappropriation of internal processes or systems could reduce our competitive advantages, either of which could adversely affect our business, financial condition and results of operations.

The loss of the services of any members of our senior management team could impair our ability to execute our business strategy and as a result, reduce our sales and profitability.

We depend on the continued services of our senior management team. The loss of key personnel could have a material adverse affect on our ability to execute our business strategy and on our business, financial condition and results of operations. We do not maintain key-person insurance for members of our senior management team.

Our corporate headquarters and one of our laser vision correction centers are located in an office building that we own in Cincinnati, Ohio, which contains approximately 30,000 square feet. Our other laser vision correction centers and our Patient Call and Data Centers are in leased locations. In January 2013, we relocated our Patient Call Center to our corporate headquarters. The typical vision center location is in a professional office building or retail site and includes a laser surgery room, private examination rooms and patient waiting areas. Vision centers range in size from approximately 2,400 to 6,900 square feet with lease expiration dates through September 2021.

Our business results in a number of medical malpractice lawsuits. Claims reported to us on or prior to December 17, 2002 were generally covered by external insurance policies and to date have not had a material financial impact on our business other than the cost of insurance and our deductibles under those policies. In December 2002, we established a captive insurance company to provide coverage for claims brought against us after December 17, 2002. 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. Since the inception of the captive insurance company in 2002, it has disbursed total claims and expense payments of approximately $7.7 million. At December 31, 2012, we maintained insurance reserves of $6.6 million.

In addition to the above, we are periodically subject to various other claims and lawsuits. We believe that none of these other claims or lawsuits to which we are currently subject, individually or in the aggregate, will have a material adverse affect on our business, financial condition, results of operations or cash flows.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market under the symbol “LCAV.” There were approximately 9,191 record holders of our common stock as of February 15, 2013.

The following table sets forth the range of high and low sales prices of the common stock as reported on the NASDAQ Global Select Market for the specific periods.

The Board of Directors may declare dividends in its discretion. We did not pay dividends in 2012 or 2011.

The data set forth below should be read in conjunction with the Consolidated Financial Statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All amounts are in thousands of U.S. dollars, except procedure volume and per share data.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion provides an understanding of our financial results and condition by focusing on changes in certain key measures from year to year. We have organized Management’s Discussion and Analysis in the following sections:

You should read the following discussion and analysis in conjunction with ‘‘Item 6. Selected Financial Data’’ above and with the financial statements and related notes included in “Item 8. Financial Statements and Supplemental Data” of this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could contribute to such differences include, but are not limited to, those discussed in “Item 1A. Risk Factors.”

We derive substantially all of our revenues from the delivery of laser vision correction procedures performed in our U.S. vision centers. Our revenues and operating results, therefore, depend on the number of procedures performed and are impacted by a number of factors, including the following:

Because our revenues are primarily a function of the number of laser vision correction procedures performed and the pricing for these services, and many of our costs are fixed, our vision centers have a relatively high degree of operating leverage. As a result, changes in our level of procedure volume can have a significant impact on our level of financial performance. The following table details the number of total procedures performed at our vision centers during the last three fiscal years. Included within total procedure volume are laser vision correction, cataract and implantable collamer lens procedures.

Economic conditions in the United States have resulted in cautious high-end discretionary spending for many consumers that has continued to impact our procedure volume and operating results. We have no immediate plans to open any new full service vision centers until we move closer to sustained profitability in our core laser vision correction business. We will open a satellite LasikPlus^® vision center in northern New Jersey during the first quarter of 2013 to leverage our marketing spending in that market. The satellite center will perform pre-operative and post-operative exams, providing added convenience for patients who live considerable distances from our full-service LasikPlus^® vision center in that market. In addition to the use of satellite vision centers we have begun to grow a network of optometrists and other health care providers to share in the care of those patients.

Key financial highlights for the year ended December 31, 2012 include (all comparisons are with 2011):

We have provided both adjusted revenues and operating losses as a means of measuring performance that adjusts for the non-cash impact of accounting for separately priced extended warranties. We believe that the adjusted information better reflects operating performance and therefore is more meaningful to investors. We provide below a reconciliation of revenues and operating losses reported in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) (dollars in thousands).

In 2012, revenues decreased by $1.5 million, or 1.4%, to $101.5 million, from $103.0 million in 2011, compared to an increase of $3.2 million, or 3.2% in 2011. In 2012, adjusted revenues were $99.0 million compared with $98.6 million in 2011 and $93.7 million in 2010. Procedure volume decreased by approximately 2% in 2012 to 58,525, compared to 59,587 in 2011. The components of the revenue change include the following (dollars in thousands):

The adjusted revenue per procedure, which excludes the impact of deferred revenue from the sale of separately priced acuity programs, increased to $1,691 in 2012 from $1,655 in 2011 and $1,652 in 2010.

Although 2012 industry procedure volume increased compared to both 2011 and 2010, industry sources indicate that economic uncertainty and other macroeconomic factors continue to impact negatively the entire laser vision correction industry. During 2012 we experienced challenges with our direct-to-consumer marketing model as we attempt to optimize our media buys and identify messages that better compete with local ophthalmologists who control about 60% of the LASIK market. Despite these challenges we experienced improvements to our operational metrics from efforts to improve patient interactions and organizational effectiveness. We experienced an increase in preoperative appointment show rate in 2012 compared to 2011 and 2010 and conversion rates in 2012 compared to 2011 but were down to 2010 results. Treatment show rate remained stable in 2012 compared with 2011 and 2010.

Amortization of prior deferred revenues for 2012, 2011 and 2010 was $2.5 million, $4.4 million and $6.2 million, respectively.

Our operating costs correlate in part with revenues and procedure volumes due to the fact that some of our costs are variable and some are fixed. The following table shows the change in components of operating expenses between 2012, 2011 and 2010 in dollars and as a percentage of revenues for each period (dollars in thousands):

Medical professional and license fees in 2012 decreased $913,000, or 3.7%, from 2011. License fees decreased $941,000 as a result of decreased enhancement costs, partially offset by lower volume rebates in 2012 and increased costs from our cataract services business. The amortization of the deferred medical professional fees associated with the sale of separately priced extended acuity programs also impacted medical professional and license fees. We amortized deferred medical professional fees attributable to prior years of $252,000 in 2012 compared to $438,000 in 2011.

Medical professional and license fees in 2011 increased $467,000, or 1.9%, from 2010. Medical professional fees increased $466,000, or 4.7%, due to increased costs and physician fees associated with increased procedure volumes and revenues. License fees increased slightly as a result of increased procedure volumes in 2011 offset by lower volume rebates on purchases and decreased enhancement costs. The amortization of the deferred medical professional fees associated with the sale of separately priced extended acuity programs also impacted medical professional and license fees. We amortized deferred medical professional fees attributable to prior years of $438,000 in 2011 compared to $615,000 in 2010.

Direct costs of services in 2012 increased by $1.3 million, or 3.0%, from 2011. The increase was due primarily to salaries, benefits, and stock compensation expense of $1.7 million related to filling open and new positions, including our business expansion roles as well as merit increases in 2012. Additional increases included insurance costs of $292,000 due to actuarial adjustments based on our historical claim activity and bad debt expense of $168,000 as a result of changes in financing plan mix. Partially offsetting the increases was a decrease in rent expense of $337,000 from recent favorable negotiations of leases and state and local taxes of $247,000 due to unfavorable audit assessments in the prior year.

Direct costs of services in 2011 decreased by $3.6 million, or 7.7%, from 2010. Our decision to close under-performing laser vision centers and other cost reduction efforts in 2010 drove lower direct costs of services primarily in the areas of salaries and employee incentives of $1.3 million and rent and utilities costs of $1.4 million. We also benefited from a decline in financing fees, laser rent, bad debt expense, insurance, telecommunications, and state and local taxes. These decreases in direct costs of services were offset partially by increased stock-based compensation and travel costs. Direct costs as a percentage of revenues decreased to 41.8% in 2011 from 46.7% in 2010.

General and administrative expenses decreased $500,000, or 3.6% from 2011. The decrease was due primarily to reductions in professional services costs from additional spending for growth initiatives in 2011, partially offset by $404,000 in increased sales tax costs resulting from a favorable state sales tax audit settlement in 2011. General and administrative expenses decreased 0.3% to 13.2% as a percentage of revenues.

General and administrative expenses of $13.9 million in 2011 remained relatively flat compared to 2010. During the year we incurred approximately $528,000 in additional spending for growth initiatives offset by $433,000 in reduced sales tax costs resulting from a favorable state sales tax audit settlement. General and administrative expenses decreased 0.5% to 13.5% as a percentage of revenues due to an increase in revenues.

Marketing and advertising expenses in 2012 increased $377,000, or 1.7%, from 2011. These expenses constituted 22.7% of revenues during 2012, up from 22.0% in 2011. Marketing cost per eye increased to $394 for 2012 from $381 in 2011. Adjusted marketing cost per eye, which excludes the impact of cataract services marketing spend of $491,000, increased to $387 compared with $379 in 2011. Marketing and advertising expenses in 2011 decreased $1.4 million, or 6.0%, from 2010. These expenses constituted 22.0% of revenues during 2011, down from 24.2% in 2010. Marketing cost per eye decreased to $381 for 2011 from $425 in 2010, due primarily to more effective spending on media.

We adjust our marketing spend levels continually in an attempt to align spending levels with consumer demand. We are continuing to work to develop more efficient marketing techniques and expand local initiatives as a means to attract patients. Our future operating profitability will depend in large part on the success of our efforts in this regard.

Depreciation expense in 2012 decreased by $967,000, or 17.0%, compared to 2011. Depreciation expense in 2011 decreased by $3.7 million, or 39.4%, compared to 2010. The decline in depreciation expense continues to reflect a lower depreciable asset base as a result of reduced capital expenditures since 2008 and the disposal of certain equipment and leasehold improvements from closed vision centers.

In 2012, we recorded impairment charges to reduce the carrying amount of long-lived assets by approximately $617,000 compared to charges of $104,000 and $1.7 million in 2011 and 2010, respectively. The 2012 impairment charge resulted from of our decision to close one under-performing vision center in December 2012, convert another center into a satellite vision center and consolidate our call center into the primary corporate headquarters during January of 2013. The 2011 impairment charge reduced the carrying value of certain assets held for use in a laser vision correction center. The 2010 impairment charge resulted from our decision to consolidate vision center operations in four markets and close vision centers in six underperforming markets (including one licensed facility) in order to preserve cash.

Restructuring charges in 2012 of $1.1 million resulted primarily from our decision to close one under-performing vision center, convert one into a satellite vision center and to reduce our workforce in our continued efforts to reduce costs and increase operational efficiencies. Restructuring charges in 2011 were $36,000, comprised primarily of adjustments to previous estimates for contract termination costs for previously closed vision centers and additional severance costs. Restructuring charges in 2010 of $3.8 million resulted primarily from the consolidation of vision center operations, closure of underperforming vision centers, and workforce reductions in our continued efforts to reduce costs and increase operational efficiencies.

We sold lasers and other assets held for sale for a gain of approximately $239,000 in 2012 compared to $618,000 in 2011 and $2.0 million in 2010. The decreases are due to limited vision center closures in 2011 and 2012, which resulted in a decline in assets held for sale.

We recorded net investment income of $656,000 in 2012 compared to $470,000 in 2011. The increase was due primarily to increases in patient financing interest income of $199,000 on higher average accounts receivable and a reduction in interest expense of $138,000 due to the payoff of all outstanding debt in 2012, in advance of the original maturity date. Partially offsetting these increases is a loss on sale of investment securities related to the disposal of our auction rate securities during 2012.

We recorded net investment income of $470,000 in 2011 compared to $1.4 million in 2010. The decrease was due primarily to the gain on sale of equity investments of $993,000 that occurred in 2010 compared to a gain of $52,000 that was recognized on the redemption of various securities in 2011. Patient financing interest income declined $119,000 on lower average accounts receivable, and interest expense declined by $223,000 due to a favorable state sales tax audit settlement and lower borrowing levels in 2011 compared to 2010.

Our effective income tax rate was (1.6%) during 2012 compared to 2.1% during 2011 and 0.2% during 2010. Our effective tax rate was impacted significantly by a valuation allowance against all of our net deferred tax assets during these years. We maintain a full valuation allowance on our net deferred tax assets due to increased uncertainty with respect to our ability to realize the net deferred tax assets in future periods. The impact of the valuation allowance on our effective tax rate was 38.5%, 36.2% and 37.4%, respectively. Our provision for income taxes in 2012 included a benefit of lapsed statutes related to uncertain tax positions and the interest previously recorded on these positions. The benefit was partially offset by interest on uncertain tax positions and state taxes in one jurisdiction. Our provision for income taxes in 2011 included interest on uncertain tax positions and state taxes in one jurisdiction.

The following table summarizes our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows (in thousands).

Cash flows used in operating activities were $5.1 million in 2012 compared to $3.5 million in 2011 and $1.4 million provided by operations in 2010. Our 2012 cash flow from operations includes a $2.0 million investment in developing our cataract business expansion, $2.1 million in changes to working capital and $1.4 million in cash uses from our LASIK operations. In 2010 cash from operations included a federal tax refund of $11.8 million. We did not receive a federal tax refund in 2011 or 2012 because we are in a net operating loss carryforward position. Our cash flow from operations depends primarily on procedure volume.

Cost control and cash conservation efforts have continued to provide significant savings in discretionary areas. We continue to closely manage working capital with particular focus on ensuring timely collection of outstanding patient receivables and management of our trade payable obligations. Working capital at December 31, 2012 amounted to $21.1 million compared to $29.7 million at the end of 2011 (excluding debt obligations due within one year). Liquid assets (cash and cash equivalents, short-term investments, and accounts receivable) amounted to 188.8% of current liabilities at December 31, 2012, compared to 187.1% at December 31, 2011.

We believe that available cash and short-term investments will provide sufficient cash reserves and liquidity to fund our working capital needs, capital expenditures and other obligations for at least the next 12 months. In the current challenging economic environment, we are seeking to balance cash conservation against our longer-term objective of managing to profitability and growth as the economy improves. The average number of procedures required company-wide to reach breakeven cash flow, after capital expenditures, is approximately 58,000 per year compared to 70,000 per year at December 31, 2011. The number of procedures that we will perform in 2013 or thereafter is uncertain.

We continue to offer our own sponsored patient financing. As of December 31, 2012, we held $3.9 million in patient receivables, net of allowance for doubtful accounts, which was an increase of $734,000, or 23.4%, from December 31, 2011, due primarily to continued investment in our “guaranteed financing” advertising program. We continually monitor the allowance for doubtful accounts and adjust our lending criteria or require greater down payments if our experience indicates it is necessary. However, our ability to collect patient accounts depends in part on overall economic conditions. Bad debt expense was approximately 1% of revenue in 2012, 2011 and 2010.

During 2012, we purchased $39.7 million of investment securities and received proceeds from the sale of investment securities of $62.9 million as a result of maintaining greater cash liquidity in money market funds. Our investment portfolio at December 31, 2012 consists of certificates of deposit with initial maturities greater than 90 days.

During 2012 we redeemed our remaining auction rate securities with par value of $1.1 million at 75% of par value. At December 31, 2011, we held at par value $1.1 million, of various auction rate securities. The assets underlying the auction rate instruments were primarily municipal bonds. In 2011, issuers called at par $25,000 of the related securities, and we redeemed an additional $1.1 million at 81% of original par value. We no longer hold any auction rate securities.

In April 2008, we entered into a five-year loan agreement with PNC Equipment Finance, LLC to finance the majority of the femtosecond lasers which we purchased. In June 2012, we paid off all outstanding debt in advance of the original maturity date, reducing our total debt to zero. Our outstanding debt was $4.0 million as of December 31, 2011, of which $3.0 million was due within 12 months.

In March and April 2009, we entered into five-year lease agreements with Alcon and AMO, respectively, for new excimer lasers which allowed us to standardize our excimer treatment platforms. As part of the transactions, we disposed of our Bausch & Lomb lasers and related capital lease obligations. We received cash payments from the lessors and have deferred these amounts and are recognizing them ratably over the lease terms. We include the unrecognized portion in “Accrued liabilities and other” for the current portion and in “Deferred license fees” for the long-term portion in our Consolidated Balance Sheets at December 31, 2012 and 2011. The AMO laser lease qualified as a capital lease, and the Alcon laser lease qualified as an operating lease.

We had assets held for sale of $24,000 and $46,000 at December 31, 2012 and 2011, respectively, related to unused lasers and other equipment from our closed vision centers. During 2012, we sold some of our assets held for sale with a combined net book value of $88,000 for total proceeds of approximately $327,000, resulting in a gain of approximately $239,000, before tax.

We did not open any new full service vision centers in 2012 or 2011. Capital expenditures of $1.2 million in 2012 declined from $1.5 million in 2011 as we curtailed vision center relocations. The following is a list of the full service vision centers that we closed, indicated in parenthesis, and satellite vision centers which we opened in the last two fiscal years:

The following table aggregates our obligations and commitments to make future payments under existing contracts at December 31, 2012 (dollars in thousands).

Note 1 to the Consolidated Financial Statements more fully describes our accounting policies. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial position and results of operations and require management’s most difficult, subjective and complex judgments.

We recognize revenues as services are performed and persuasive evidence of an arrangement for payment exists. Additionally, revenue is recognized when the price is fixed and determinable and collectability is reasonably assured. We deferred revenues associated with separately priced acuity programs and recognize them over the period in which future costs of performing post-surgical enhancement procedures are expected to be incurred because we have sufficient experience to support the costs associated with future enhancements that will be incurred on other than a straight-line basis. Effective June 15, 2007, we changed our pricing model and no longer offer separately priced acuity options. We report all revenues net of tax assessed by applicable governmental authorities.

A significant percentage of our patients finance some or all of the cost of their procedure. We provide financing to some of our patients, including those who could not otherwise obtain third-party financing. We derive approximately 6% of our revenues from patients to whom we have provided direct financing. The terms of our direct financing 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 checking account over a period of 12 to 36 months. Our direct financing program exposes us to significant credit risks, particularly given that patients who participate in the program generally have not been deemed creditworthy by third-party financing companies. To ensure that collectability is reasonably assured at the time of the service offering, we actively monitor our bad debt experience and adjust underwriting standards as necessary. In addition to increasing underwriting standards in 2009, which included an increase in the minimum down payment required, we took steps in 2011 and 2010 to continue to improve collection results from internally financed patients through the use of credit scores to qualify patients for appropriate financing options.

Based upon our own experience with patient financing, we have established an allowance for doubtful accounts as of December 31, 2012 of $1.7 million against patient receivables of $5.5 million, compared to an allowance of $1.7 million against patient receivables of $4.8 million at December 31, 2011. We reserve for all patient receivables that remain open past the 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. Any excess in our actual allowance for doubtful account write-offs over our estimated bad debt reserve, would adversely impact our results of operations and cash flows. To the extent that our actual allowance for doubtful account write-offs are less than our estimated bad debt reserve, it would favorably impact our results of operations and cash flows. We have established an allowance for doubtful accounts as of December 31, 2012 of $340,000 against other accounts receivables of $783,000. At December 31, 2011, there was an allowance for doubtful accounts of $298,000 against other accounts receivables of $2.3 million.

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 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. Our captive insurance company is subject to a number of pending claims. 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 represent 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. The $603,000 decrease in the overall reserve was driven principally by favorable claim experience and claim payments in 2012, partially offset by reserves for new claims. 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.

Our actuaries determine our loss reserves based on our historical claim experience, comparable industry experience and recent trends that would impact the ultimate settlement of claims. We believe that the recorded loss reserves are reasonable based on this analysis. However, due to the uncertainties inherent in the determination of these liabilities, the ultimate settlement of claims incurred through December 31, 2012 could differ from the amounts recorded. We will record any adjustment to these estimates in the period determined.

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 reasonably estimate such costs based on historical trends and the satisfaction of all other revenue recognition criteria.

We record the 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.

The key assumption we used to determine our enhancement accrual is the rate at which enhancements are likely to occur. We determine the rate based on an analysis of historical enhancements performed compared to the original procedure date. An incremental 1.0% change in our enhancement rate would have resulted in an approximate $769,000 change to the enhancement accrual at December 31, 2012.

We assess the impairment of property and equipment whenever events or circumstances indicate that the carrying value might not be recoverable. We write down recorded values of property and equipment that are not expected to be recovered through undiscounted future net cash flows to fair value, which is generally determined from estimated discounted cash flows for assets held for use. In evaluating the recoverability of our recorded values and property and equipment, we analyzed the future undiscounted net cash flows for each of our laser vision correction centers, the lowest level for which there are identifiable cash flows. We assumed a cash flow period of three years to determine the cash flow forecasts, which corresponds to the remaining useful life of the primary assets within the laser vision correction centers.

During 2012, we recognized $617,000 in impairment charges due to reducing the carrying amount of long-lived assets held for use because we relocated our patient communication center to our corporate headquarters and closed one under-performing vision center. Based on current estimates, we believe the carrying amount for our remaining property and equipment is recoverable through future undiscounted cash flows. Because of market conditions, it is reasonably possible that our estimate of discounted cash flows may change in the near term resulting in the need to adjust our determination of fair value or recoverability.

U.S. GAAP requires a company to establish a valuation allowance for deferred tax assets when it is more-likely-than-not that the deferred tax asset will not be realized. Deferred tax assets may be realized through future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback year(s) if carryback is permitted, and tax planning strategies.

We considered all positive and negative evidence in determining whether or not the deferred tax assets are more-likely-than-not to be realized, including the current economic conditions. After considering all of the evidence, we believe that reliance on future projections of income is no longer sufficient to support realization of our deferred tax assets. Accordingly, we maintain a valuation allowance against our net deferred tax assets because we believe that it is not more-likely-than-not that our net deferred tax assets will be utilized. The valuation allowance was $26.4 million and $23.4 million at December 31, 2012 and 2011, respectively.

The carrying values of financial instruments including cash and cash equivalents, patient and other accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments. We record investments at fair value.

We record short-term investments at market value. Due to the short-term nature of our investments in certificates of deposit, we believe that there is little risk to the valuation of investment securities.

We have a low exposure to changes in foreign currency exchange rates and, as such, have not used derivative financial instruments to manage foreign currency fluctuation risk. In addition, because our secured indebtedness bears interest at a fixed rate, we have limited interest-rate risk.

We have audited the accompanying consolidated balance sheets of LCA-Vision Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ investment, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of LCA-Vision Inc.’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LCA-Vision Inc. at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LCA-Vision Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2013 expressed an unqualified opinion thereon.

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.

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.

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.

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.

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

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.

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).

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.

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.

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:

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.

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.

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.

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.

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).

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.

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.

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.

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.”

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):

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

We have 27.5 million authorized shares of common stock with $0.001 per share par value and 5.0 million authorized shares of preferred stock. The holders of the common stock may cast one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared from time to time by our Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up, the holders of common stock share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.

On August 21, 2007, our Board of Directors authorized a share repurchase plan under which we are authorized to purchase up to an additional $50.0 million of our common stock. Through December 31, 2008, we repurchased 588,408 shares of our common stock under this program at an average price of $16.99 per share, for a total cost of approximately $10.0 million. We have not purchased any shares of our common stock under this program since 2008. At December 31, 2012, we held 6.2 million shares of our common stock in treasury.

The following table summarizes unrealized gains and losses related to our investments designated as available-for-sale (dollars in thousands):

The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position aggregated by investment category and the length of time that individual securities have been in a continuous loss position (dollars in thousands):

There were no investments that were in an unrealized loss position for greater than 12 months at December 31, 2012 or 2011.

We realized gains of $3,000 and losses of $60,000 on sales of our marketable securities during the year ended December 31, 2012. We had realized gains of $52,000 and no losses and gains of $1.1 million and losses of $51,000 on the sale of marketable securities during the years ended December 31, 2011 and 2010, respectively.

We recognized $11,000 of other-than-temporary impairments to certain of our auction rate securities in 2012, $10,000 in 2011 and $86,000 in 2010. When evaluating investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer of the investment securities and any changes thereto, and our intent to sell, or whether it is more-likely-than-not we would be required to sell the investment before recovery of the investment’s amortized cost basis.

The net carrying value and estimated fair value of debt and equity securities available for sale at December 31, 2012, by contractual maturity, are shown below (dollars in thousands). Expected maturities may differ from contractual maturities because the issuers of the securities may have the right or obligation to prepay obligations without prepayment penalties.

During 2012 we redeemed our remaining auction rate securities with par value of $1.1 million at 75% of par value. At December 31, 2011, we held at par value $1.1 million of various auction rate securities. The assets underlying the auction rate instruments were primarily municipal bonds. In 2011, issuers called at par $25,000 of the related securities, and we redeemed an additional $1.1 million at 81% of original par value. We no longer hold any auction rate securities.

In April 2008, we entered into a bank loan agreement for $19.2 million to finance medical equipment. The loan agreement provided for repayment in equal monthly installments over a five-year period at a fixed interest rate of 4.96%. The loan agreement contained no financial covenants. The bank loan was secured by certain medical equipment. Our outstanding debt was $4.0 million as of December 31, 2011, of which $3.0 million was due within 12 months. In June 2012, we paid our outstanding bank loan in full, reducing our total debt to zero.

U.S. GAAP establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value.

When applying the fair value principles in valuation of assets and liabilities, we are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.

The following table summarizes fair value measurements by level at December 31, 2012 and 2011 for assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

The valuation technique used to measure fair value of certificates of deposit was based on quoted market prices or corroborated by observable market data.

The fair values of some investment securities previously held within our investment portfolio were based on quoted market prices from various stock and bond exchanges. Certain of our debt securities were classified at fair value utilizing Level 2 inputs. For these securities, fair value was measured using observable market data that includes dealer quotes, live trading levels, trade execution data, credit information and the bond’s terms and conditions. The fair values of our auction rate investment instruments were classified in Level 3 because they were valued using a trinomial discounted cash flow model.

There were no transfers between Level 1 and Level 2 measurements in 2012 or 2011. The following table sets forth a reconciliation of beginning and ending balances for each major category for assets measured at fair value using significant unobservable inputs (Level 3) during 2012 and 2011 (dollars in thousands).

We had assets held for sale of $24,000 and $46,000 at December 31, 2012 and 2011, respectively, comprised of excimer and femtosecond lasers. Assets held for sale are recorded as a component of “Prepaid expenses and other” on the Consolidated Balance Sheets. During 2012, we sold some of our excimer and femtosecond lasers held for sale with a combined net book value of $46,000 for total cash proceeds of $90,000, resulting in a gain of $44,000 before tax. During 2011, we sold some of our excimer and femtosecond lasers held for sale with a combined net book value of $416,000 for total cash proceeds of approximately $917,000, resulting in a gain of approximately $501,000, before tax. We measured assets held for sale at December 31, 2012 and 2011 at the lower of cost or fair value less cost to sell. We based the fair value and cost to sell estimates on corroborative market data, which is a Level 2 input under U.S. GAAP.

The following table presents the components of income tax (benefit) expense (dollars in thousands):

The following table reconciles the U.S. statutory federal income tax rate and the tax (benefit) expense shown in our Consolidated Statements of Operations and Comprehensive Loss (dollars in thousands):

We have made no provision for U.S. income taxes on undistributed earnings of approximately $4.7 million from our Canadian subsidiary because it is our intention to reinvest those earnings in that operation. If those earnings are distributed in the form of dividends, we may be subject to both foreign withholding taxes and U.S. income taxes net of allowable foreign tax credits. The amount of additional tax that might be payable upon repatriation of these foreign earnings is approximately $326,000.

In 2009, we considered all positive and negative evidence in determining whether or not the net deferred tax assets were more-likely-than-not to be realized, including the current economic conditions and our 2010 operating projections completed during 2009. After considering all of the evidence, we concluded that reliance on future projections of income was no longer sufficient to support realization of our deferred tax assets. Accordingly, in 2009 we established a valuation allowance against all of our net deferred tax assets in the amount of $12.2 million as we believed it was not more-likely-than-not that our net deferred tax assets would be utilized. After undertaking a similar analysis again in 2010, 2011 and 2012, we still believe that we cannot support the realization of our deferred tax assets.

As of December 31, 2012, we had net operating loss carryforwards for federal and state income taxes of approximately $39.3 million and $68.3 million, respectively, which will be available to offset future taxable income. Approximately $8.6 million of state net operating loss is subject to an annual IRC Section 382 limitation of $5.3 million. If not used, these carryforwards will expire between 2013 and 2032. To the extent net operating loss carryforwards, when realized, relate to non-qualified stock option deductions, the resulting benefits will be credited to stockholders’ investment.

Deferred taxes arise because of temporary differences in the book and tax basis of certain assets and liabilities. The following table shows the significant components of our deferred taxes (dollars in thousands):

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $380,000. It is reasonably possible that the amount of the unrecognized tax benefits may increase or decrease within the next 12 months. However, we do not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the Consolidated Financial Statements. We record unrecognized tax benefits as a component of “Accrued liabilities and other” in our Consolidated Balance Sheets.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Consolidated Statements of Operations. During the year ended December 31, 2012, we recognized tax expense of approximately $24,000 in interest and penalties, offset by $105,000 benefit related to interest expense previously recognized on unrecognized tax benefits whose statute expired in 2012. We have accrued approximately $90,000 and $171,000 in interest and penalties related to unrecognized tax benefits as of December 31, 2012 and 2011, respectively, recorded as a component of “Accrued liabilities and other” in our Consolidated Balance Sheets.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and Canada. We are subject to audit by taxing authorities for fiscal years ending after 2010. Our federal and state income tax return filings generally are subject to a three-year statute of limitations from date of filing. During 2012, the Internal Revenue Service began, and completed, an audit for the 2010 tax year without audit adjustments.

We lease office space for our vision centers under lease arrangements that qualify as operating leases. For leases that contain pre-determined fixed escalations of the minimum rentals and/or rent abatements subsequent to taking possession of the leased property, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rental expense and amounts payable under the leases as deferred lease credits. We used capitalized leases to finance certain excimer lasers used in the laser vision correction procedures. We included capital lease assets in property and equipment.

The following table displays our aggregate minimal rental commitments, net of guaranteed sub-lease income under noncancellable leases for the periods shown (dollars in thousands):

Total rent expense under operating leases amounted to $6.3 million in 2012, $6.7 million in 2011 and $8.1 million in 2010.

We sponsor a savings plan under Internal Revenue Code Section 401(k) to provide an opportunity for eligible employees to save for retirement on a tax-deferred basis. Under this plan, we may make discretionary contributions to the participants’ accounts. We have not made any employer contributions since 2008.

We have five 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”), the 2006 Stock Incentive Plan (“2006 Plan”) and the 2011 Stock Incentive Plan (“2011 Plan”). With the adoption of the 2011 Plan, we froze all prior plans, and we have not made any new grants from prior plans. Under the stock incentive plans, at December 31, 2012, we reserved approximately 855,000 shares of our common stock for issuance upon the exercise of outstanding stock options and the vesting of outstanding restricted stock units, including 17,000 shares under the 1995 Plan, 102,000 shares under the 1998 Plan, 54,000 shares under the 2001 Plan, 341,000 shares under the 2006 Plan and 342,000 shares under the 2011 Plan. At December 31, 2012, a total of 1.2 million shares were available for future awards under the 2011 Plan. The Compensation Committee of the Board of Directors administers all of our stock incentive plans.

The 2011 Plan permits us to issue incentive or non-qualified 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.

The components of our pre-tax stock-based compensation expense, net of forfeitures, and associated income tax benefits are as follows (dollars in thousands):

Our stock incentive plans permit certain employees to receive grants of fixed-price stock options. The option price is equal to the fair value of a share of the underlying stock at the date of grant. Option terms are generally 10 years, with options generally becoming exercisable between one and five years from the date of grant.

We estimated the fair value of each stock option on the date of the grant using a Black-Scholes option pricing model that used assumptions noted below. We based expected volatility on a blend of implied and historical volatility of our common stock. We used historical data on exercises of stock options and other factors to estimate the expected term of the share-based payments granted. We based the risk-free rate on the U.S. Treasury yield curve in effect at the date of grant. We based the expected life of the options on historical data and it is not necessarily indicative of exercise patterns that may occur. The dividend yield reflected the assumption that the current dividend payout in effect at the time of grant.

The following table summarizes the status of options granted under the stock incentive plans:

The total intrinsic value (market value on date of exercise less exercise price) of options exercised during 2012, 2011 and 2010 was approximately $30,000, $24,000 and $17,000, respectively. As of December 31, 2012, outstanding stock options, options vested and expected to vest, and options exercisable had no intrinsic value because the exercise price was greater than the stock price.

We received approximately $57,000 for 2012, $24,000 for 2011 and $13,000 for 2010 in cash from option exercises under all share-based payment arrangements. We recognized actual tax expense for the tax deductions from option exercises under all share-based payment arrangements for 2012, 2011 and 2010 of approximately $44,000, $81,000 and $153,000, respectively. U.S. GAAP requires the cash flows resulting from income tax deductions in excess of compensation costs to be classified as financing cash flows.

At December 31, 2012, there was $6,000 of total unrecognized, pre-tax compensation cost related to non-vested stock options. We expect to recognize this cost over a weighted-average period of approximately 0.17 years.

The following table summarizes information about the stock options granted under the stock incentive plans that were outstanding at December 31, 2012:

The weighted-average fair value of options granted was $6.43 per share during 2009.

Our stock incentive plans permit certain employees and non-employee directors to be granted restricted share unit awards in common stock. We value awards of restricted share units by reference to shares of common stock. Awards entitle a participant to receive, upon the settlement of the unit, one share of common stock for each unit. The awards vest annually, typically over a three year period from the date of the award, and do not have voting rights. Our restricted stock unit awards include both time-based awards that vest ratably over three years and restricted stock units that are tied to the achievement of certain financial targets and stock performance criteria and cliff-vest in three years. The financial targets include revenue and operating income measurements. Total stockholder return is considered a market condition and the fair value of those awards was calculated using a Monte Carlo simulation valuation model.

We granted 414,076 restricted stock awards to employees and non-employee directors during 2012, of which 192,320 related to performance-based restricted stock units (“PRSUs”). We did not grant any restricted stock awards prior to January 1, 2006. We expense the fair value of the time-based awards at the grant date over the applicable vesting periods. We recognize stock-based compensation associated with all non-market-condition PRSUs, if it is probable that the performance condition will be satisfied. For market-condition PRSUs, we recognize expense whether the market condition is satisfied or not. We recognize the stock-based compensation expense for PRSUs over the requisite service period for each vesting tranche. Actual payment under the PRSU’s granted in 2012 were dependent upon achievement of certain financial targets and total stockholder return goal. The financial targets were not achieved at December 31, 2012. The total stockholder return goal is a two-year measurement which will not be determined until the beginning of 2014. Actual payment under the PRSUs granted in 2011 was dependent upon achievement of various financial targets and total stockholder return goals. Some of the various financial targets were achieved at December 31, 2011. The total stockholder return goal was not met. Actual payment under the PRSU’s granted in 2010 were dependent upon achievement of various financial targets which were achieved at December 31, 2010.

The following table summarizes the restricted stock award activity for the years ended December 31, 2012, 2011 and 2010:

As of December 31, 2012, there was $1.5 million of total unrecognized pre-tax compensation cost related to non-vested restricted stock. We expect this cost to be recognized over a weighted-average period of approximately 1.42 years. The aggregate intrinsic value of RSUs and PRSUs outstanding at December 31, 2012 was $1.8 million.

In 2012, we announced a restructuring plan to close vision centers, reduce costs and increase operational efficiencies. As a result, we incurred restructuring charges totaling $1.1 million for 2012, which included $327,000 of contract termination costs and vision center closing costs and $803,000 of employee separation benefits.

Restructuring charges in 2011 were $36,000, comprised primarily of adjustments to previous estimates for laser contract termination costs for previously closed vision centers, and additional severance costs. The restructuring charges in 2011 were principally the result of adjustments to previous estimates for laser contract termination costs for previously closed vision centers, and additional severance costs.

In 2010, we announced a restructuring plan to close vision centers, reduce costs and increase operational efficiencies. As a result, we incurred restructuring charges totaling $3.8 million for 2010, which included $3.6 million of contract termination costs and vision center closing costs and $195,000 of employee separation benefits.

Under all restructuring plans, the fair value measurements utilized internal discounted cash flow analysis in determining fair value, which is a Level 3 input under U.S. GAAP.

The following table summarizes the restructuring liability activities (dollars in thousands):

At December 31, 2012 and 2011, we included current restructuring reserves of $1.8 million and $1.3 million, respectively, in “Accrued liabilities and other” in the Consolidated Balance Sheets. Long-term restructuring reserves, comprised of contract termination costs, were $327,000 and $1.0 million at December 31, 2012 and 2011, respectively, and were included in “Other long-term liabilities.”

Our business results in a number of medical malpractice lawsuits. Claims reported to us on or prior to December 17, 2002 were generally covered by external insurance policies and to date have not had a material financial impact on our business other than the cost of insurance and our deductibles under those policies. Effective in December 2002, we established a captive insurance company to provide coverage for claims brought against us after December 17, 2002. 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. Since the inception of the captive insurance company in 2002, total claims and expense payments of approximately $7.7 million have been disbursed.

Our actuaries determine our loss reserves based on our historical claim experience, comparable industry experience and recent trends that would impact the ultimate settlement of claims. We believe that the recorded loss reserves are reasonable based on this analysis. However, due to the uncertainties inherent in the determination of these liabilities, the ultimate settlement of claims incurred through December 31, 2012 could differ from the amounts recorded. We record any adjustment to these estimates in the period determined.

We maintained insurance reserves of $6.6 million and $7.2 million at December 31, 2012 and 2011, respectively, of which $871,000 and $951,000 have been classified as current within the caption “Accrued liabilities and other” in the Consolidated Balance Sheets. Although our insurance reserve reflects our best estimate of the amount of probable loss, we believe the range of loss that is reasonably possible to have been incurred to be approximately $5.1 million to $13.2 million at December 31, 2012.

The tables below provide additional financial information related to our Consolidated Financial Statements (all dollars in thousands):

Financial results for interim periods do not necessarily indicate trends for any 12-month period. Quarterly results can be affected by the number of procedures performed and the timing of certain expense items (dollars in thousands, except per share amounts):

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic filings with the SEC is (a) accumulated and communicated by our management in a timely manner and (b) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of December 31, 2012, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of that date.

In addition, our Chief Executive Officer and Chief Financial Officer concluded that, during the quarter ended December 31, 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We, the management of LCA-Vision Inc., are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act Rules 13a-15(f) and 15d-15(f), and for the preparation and integrity of the consolidated financial statements and the information contained in this Annual Report. We prepared the accompanying consolidated financial statements in accordance with U.S. generally accepted accounting principles. In addition to selecting appropriate accounting principles, we are responsible for the way information is presented and its reliability. To report financial results we must often make estimates based on currently available information and judgments of current conditions and circumstances.

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. As a result of this assessment, management believes that, as of December 31, 2012, our internal control over financial reporting is effective based on the criteria described above.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Ernst & Young LLP, our independent registered public accounting firm, has audited and reported on our consolidated financial statements and the effectiveness of our internal control over financial reporting. The reports of the independent auditors are included herein.

We have audited LCA-Vision Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LCA-Vision Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, LCA-Vision Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LCA-Vision Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ investment, and cash flows for each of the three years in the period ended December 31, 2012 of LCA-Vision Inc., and our report dated March 13, 2013 expressed an unqualified opinion thereon.

The information required by this Item 10 is incorporated by reference from “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Election of Directors,” and “Information about the Board of Directors and its Committees” to be included in our definitive Proxy Statement which will be filed with the SEC in connection with the 2013 Annual Meeting of Stockholders.

The complete mailing address of each director is c/o LCA-Vision Inc., 7840 Montgomery Road, Cincinnati, OH 45236.

The information required by this Item 11 is incorporated by reference from “Compensation Committee Report on Executive Compensation,” “Compensation Discussion and Analysis” and “Executive Compensation” to be included in our definitive Proxy Statement which will be filed with the SEC in connection with the 2013 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information called for by Item 403 of Regulation S-K and required by this Item 12 is incorporated by reference from “Security Ownership of Certain Beneficial Owners and Management” to be included in our definitive Proxy Statement to be filed with the SEC in connection with the 2013 Annual Meeting of Stockholders.

The information called for by Item 201(d) of Regulation S-K is presented below as of December 31, 2012.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 is incorporated by reference, if any, from “Information about the Board of Directors and its Committees” and “Certain Transactions” to be included in our definitive Proxy Statement which will be filed with the SEC in connection with the 2013 Annual Meeting of Stockholders.

The information required by this Item 14 is incorporated from “Ratification of Appointment of Independent Auditors” to be included in our definitive Proxy Statement which will be filed with the SEC in connection with our 2013 Annual Meeting of Stockholders.

The following are the consolidated financial statements of LCA-Vision Inc. and its subsidiaries appearing elsewhere herein:

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2012, 2011, and 2010

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010

Consolidated Statements of Stockholders’ Investment for years ended December 31, 2012, 2011, and 2010

All other financial statement schedules have been omitted because the required information is either inapplicable or presented in the Consolidated Financial Statements.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 13^th day of March, 2013.


LCA-Vision Inc.

By:		/s/ Michael J. Celebrezze
		Michael J. Celebrezze
		Chief Executive Officer

By:		/s/ Amy F. Kappen
		Amy F. Kappen
		Chief Financial Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints each of Michael J. Celebrezze and Amy F. Kappen our true and lawful attorney-in-fact and agent, with full power of substitution and with power to act alone, to sign and execute on behalf of the undersigned any amendment or amendments to this annual report on Form 10-K for the fiscal year ended December 31, 2012, and to perform any acts necessary to be done in order to file such amendment or amendments, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below as of the 13th day of March, 2013


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 registered
Common Stock, $.001 par value		The NASDAQ Stock Market


	2012				2011
	High		Low		High		Low
First Quarter	$	9.24	$	2.96	$	7.79	$	5.66
Second Quarter		7.50		4.00		7.10		4.37
Third Quarter		4.60		3.49		5.52		2.06
Fourth Quarter		4.32		2.80		3.38		1.86


	Year Ended December 31,
	2012			2011			2010			2009			2008
Consolidated Statements of Operations Data:
Revenues	$	101,493		$	102,983		$	99,825		$	129,213		$	205,176
Operating loss		(9,311	)		(6,538	)		(21,967	)		(36,100	)		(8,212	)
Net loss		(8,517	)		(6,198	)		(20,577	)		(33,244	)		(6,635	)
Net loss per common share
Basic	$	(0.45	)	$	(0.33	)	$	(1.10	)	$	(1.79	)	$	(0.36	)
Diluted		(0.45	)		(0.33	)		(1.10	)		(1.79	)		(0.36	)
Cash dividends per common share	$	—		$	—		$	—		$	—		$	0.24
Selected Operating Data:
Procedure volume		58,525			59,587			56,720			72,776			115,153


		Page
Part I
Item 1.	Business		3
Item 1A.	Risk Factors		11
Item 1B.	Unresolved Staff Comments		16
Item 2.	Properties		16
Item 3.	Legal Proceedings		17
Item 4.	Mine Safety Disclosures		17
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		17
Item 6.	Selected Financial Data		18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 8.	Financial Statements and Supplementary Data		27
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		48
Item 9A.	Controls and Procedures		48
Item 9B.	Other Information		50
Part III
Item 10.	Directors, Executive Officers and Corporate Governance		50
Item 11.	Executive Compensation		50
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		50
Item 13.	Certain Relationships and Related Transactions, and Director Independence		50
Item 14.	Principal Accountant Fees and Services		50
Part IV
Item 15.	Exhibits, Financial Statement Schedules		51
	Signatures		53


	At December 31,
	2012			2011			2010			2009			2008
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	34,457		$	43,879		$	51,297		$	52,983		$	57,328
Working capital		21,052			26,701			33,921			50,587			55,404
Total assets		48,968			66,433			80,481			112,598			157,343
Debt obligations maturing within one year		—			2,978			3,039			3,998			6,985
Long-term debt obligations (less current portion)		—			1,026			4,245			9,145			14,120
Accumulated (deficit) earnings		(49,053	)		(38,720	)		(31,134	)		(9,729	)		23,515
Total stockholders’ investment		19,797			26,265			31,130			51,027			82,985


	Twelve Months Ended December 31,
	2012			2011			2010
Revenues
Reported U.S. GAAP	$	101,493		$	102,983		$	99,825
Adjustments
Amortization of prior deferred revenue		(2,516	)		(4,376	)		(6,151	)

Adjusted revenues	$	98,977		$	98,607		$	93,674

Operating Loss
Reported U.S. GAAP	$	(9,311	)	$	(6,538	)	$	(21,967	)
Adjustments
Impact of prior deferred revenue		(2,516	)		(4,376	)		(6,151	)
Amortization of prior professional fees		252			438			615

Adjusted operating loss	$	(11,575	)	$	(10,476	)	$	(27,503	)


									Decrease/							Decrease/
	2012				2011				(Increase)			2010				(Increase)
Medical professional and license fees	$	23,715	23.4	%	$	24,628	23.9	%	$	913		$	24,161	24.2	%	$	(467	)
Direct costs of services		44,348	43.7	%		43,048	41.8	%		(1,300	)		46,631	46.7	%		3,583
General and administrative expenses		13,442	13.2	%		13,942	13.5	%		500			13,956	14.0	%		14
Marketing and advertising		23,055	22.7	%		22,678	22.0	%		(377	)		24,114	24.2	%		1,436
Depreciation		4,736	4.7	%		5,703	5.5	%		967			9,408	9.4	%		3,705
Impairment and restructuring charges		1,747	1.7	%		140	0.1	%		(1,607	)		5,484	5.5	%		5,344


2012	2011
Annapolis, MD		(Naperville, IL	)
Naperville, IL
Tempe, AZ
Woodstock, GA
(Annapolis, MD)
(Chandler, AZ)
(Seattle, WA)


Contractual Obligations (a)(b)	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Operating lease obligations	$	23,766	$	8,097	$	8,926	$	5,482	$	1,261
Purchase commitments		1,039		397		642		—		—
Other obligations		365		225		140		—		—

Total	$	25,170	$	8,719	$	9,708	$	5,482	$	1,261


	Page
Report of Independent Registered Public Accounting Firm		28
Consolidated Balance Sheets as of December 31, 2012 and 2011		29
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2012, 2011 and 2010		30
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010		31
Consolidated Statements of Stockholders’ Investment as of and for the years ended December 31, 2012, 2011 and 2010		32
Notes to Consolidated Financial Statements		33


	For the Years Ended December 31,
	2012			2011			2010
Revenues	$	101,493		$	102,983		$	99,825
Operating costs and expenses
Medical professional and license fees		23,715			24,628			24,161
Direct costs of services		44,348			43,048			46,631
General and administrative		13,442			13,942			13,956
Marketing and advertising		23,055			22,678			24,114
Depreciation		4,736			5,703			9,408
Impairment charges		617			104			1,694
Restructuring charges		1,130			36			3,790

		111,043			110,139			123,754
Gain on sale of assets		239			618			1,962

Operating loss		(9,311	)		(6,538	)		(21,967	)
Net investment income and other		656			470			1,433

Loss before income taxes		(8,655	)		(6,068	)		(20,534	)
Income tax (benefit) expense		(138	)		130			43

Net loss	$	(8,517	)	$	(6,198	)	$	(20,577	)

Loss per common share
Basic and diluted	$	(0.45	)	$	(0.33	)	$	(1.10	)
Dividends declared per share	$	—		$	—		$	—
Weighted average shares outstanding
Basic and diluted		18,982			18,811			18,680
Other comprehensive income (loss), net of tax:
Foreign currency translation	$	105		$	(90	)	$	214
Unrealized investment (loss) gain		(11	)		11			(626	)

Total other comprehensive income (loss), net of tax	$	94		$	(79	)	$	(412	)

Comprehensive loss	$	(8,423	)	$	(6,277	)	$	(20,989	)


	Years Ended December 31,
	2012						2011						2010
	Shares			Amount			Shares			Amount			Shares			Amount
Common Stock
Balance at beginning of year		25,291,637		$	25			25,291,637		$	25			25,287,387		$	25
Employee stock plans		—			—			—			—			4,250			—

Balance at end of year		25,291,637		$	25			25,291,637		$	25			25,291,637		$	25

Common Stock in Treasury, at cost
Balance at beginning of year		(6,433,490	)	$	(112,910	)		(6,580,272	)	$	(114,033	)		(6,668,202	)	$	(114,668	)
Shares repurchased		(57,661	)		(301	)		(34,817	)		(265	)		(22,055	)		(193	)
Employee stock plans		250,018			1,816			181,599			1,388			109,985			828

Balance at end of year		(6,241,133	)	$	(111,395	)		(6,433,490	)	$	(112,910	)		(6,580,272	)	$	(114,033	)

Contributed Capital
Balance at beginning of year				$	177,287					$	175,610					$	174,325
Employee stock plans					196						1						13
Stock-based compensation					2,060						1,676						1,272

Balance at end of year				$	179,543					$	177,287					$	175,610

Accumulated Deficit
Balance at beginning of year				$	(38,720	)				$	(31,134	)				$	(9,729	)
Net loss					(8,517	)					(6,198	)					(20,577	)
Treasury stock changes					(1,816	)					(1,388	)					(828	)

Balance at end of year				$	(49,053	)				$	(38,720	)				$	(31,134	)

Accumulated Other Comprehensive Income
Balance at beginning of year				$	583					$	662					$	1,074
Foreign currency translation adjustments					105						(90	)					214
Unrealized investment (loss) gain					(11	)					11						(626	)

Balance at end of year				$	677					$	583					$	662

Total Stockholders’ Investment				$	19,797					$	26,265					$	31,130


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


	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


	As of December 31, 2012
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Certificates of deposit	$	2,804	$	—	$	—	$	2,804

Total investments	$	2,804	$	—	$	—	$	2,804


	As of December 31, 2011
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate obligations	$	11,260	$	—	$	(1	)	$	11,259
U.S. Government notes		14,049		7		(4	)		14,052
Auction rate municipal securities		893		9		—			902

Total investments	$	26,202	$	16	$	(5	)	$	26,213


	As of December 31, 2012				As of December 31, 2011
	Less than 12 Months				Less than 12 Months
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Corporate obligations	$	—	$	—	$	3,810	$	(1	)
U.S. Government notes		—		—		6,758		(4	)

	$	—	$	—	$	10,568	$	(5	)


	Amortized Cost		Estimated Fair Value
Due in one year or less	$	2,804	$	2,804
Due after one year through three years		—		—
Due after three years		—		—

Total investment securities	$	2,804	$	2,804


Description	Level 1				Level 2				Level 3				Total
	2012		2011		2012		2011		2012		2011		2012		2011
Assets:
Investments	$	—	$	—	$	2,804	$	25,311	$	—	$	902	$	2,804	$	26,213

Total assets at fair value	$	—	$	—	$	2,804	$	25,311	$	—	$	902	$	2,804	$	26,213


	As of December 31,
	2012			2011
Deferred tax assets:
Deferred revenue	$	336		$	1,217
Allowance for doubtful accounts		775			765
Accrued enhancement expense		1,101			1,349
Insurance reserves		1,159			1,281
Deferred lease credits		319			441
Share-based compensation		986			929
Vendor rebates		662			1,192
Investments		—			72
Property and equipment		1,549			778
Net operating and capital loss carryforward		17,563			13,749
Other		2,596			2,245
Valuation allowance		(26,377	)		(23,405	)

Total deferred tax assets	$	669		$	613

Deferred tax liabilities:
Deferred lease incentives	$	566		$	486
Prepaid service		103			124
Other		—			3

Total deferred tax liabilities	$	669		$	613

Net deferred tax assets	$	—		$	—


	2012			2011
Balance, beginning of year	$	614		$	539
Additions based on tax positions related to the current year		52			50
Additions for tax positions of prior years		1			49
Reductions for tax positions of prior years		—			—
Reductions due to statute expiration		(155	)		(24	)
Settlements		(4	)		—

Balance, end of year	$	508		$	614


Year	Operating Lease Obligations
2013	$	8,097
2014		5,127
2015		3,799
2016		3,225
2017		2,257
Beyond 2017		1,261

Total minimum rental commitment	$	23,766


	Stock Options			Weighted Average Exercise Price
Outstanding at January 1, 2010		349,726		$	19.64
Granted		—			—
Exercised		(3,750	)		3.55
Cancelled/forfeited		(88,260	)		25.08

Outstanding at December 31, 2010		257,716			18.01
Granted		—			—
Exercised		(6,375	)		3.63
Cancelled/forfeited		(7,629	)		22.43

Outstanding at December 31, 2011		243,712			18.25
Granted		—			—
Exercised		(11,520	)		4.92
Cancelled/forfeited		(19,584	)		19.11

Outstanding at December 31, 2012		212,608			18.89
Options exercisable, December 31, 2012		208,932			18.97
Options expected to vest, December 31, 2012		212,595			18.89


					Stock Options Outstanding						Stock Options Exercisable
	Range of exercise prices				Number outstanding as of December 31, 2012		Weighted- average remaining contractual term		Weighted- average exercise price		Number exercisable as of December 31, 2012		Weighted- average exercise price
	$	5.92	$	10.65		23,820		0.54	$	7.41		23,820	$	7.41
		11.84		11.84		18,750		0.05		11.84		18,750		11.84
		12.19		12.19		29,401		0.93		12.19		29,401		12.19
		12.94		12.94		21,663		0.25		12.94		21,663		12.94
		14.28		14.31		25,881		4.15		14.29		22,205		14.29
		17.27		22.81		19,251		1.95		21.55		19,251		21.55
		27.05		27.05		55,508		2.08		27.05		55,508		27.05
		28.59		37.25		8,334		2.51		33.79		8,334		33.79
		37.72		37.72		5,000		2.72		37.72		5,000		37.72
		44.60		44.60		5,000		2.56		44.60		5,000		44.60

Cumulative	$	5.92	$	44.60		212,608		1.67	$	18.89		208,932	$	18.97


	Number of Share Unit Awards			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2010		226,703		$	6.40
Granted		411,130			8.60
Released		(110,485	)		9.31
Forfeited		(73,773	)		6.49

Outstanding at December 31, 2010		453,575			7.67
Granted		334,485			5.73
Released		(181,599	)		6.51
Forfeited		(54,487	)		7.44

Outstanding at December 31, 2011		551,974			6.90
Granted		414,076			6.32
Released		(238,498	)		6.61
Forfeited		(96,085	)		6.44

Outstanding at December 31, 2012		631,467			6.70


	Employee Separation					Contract Termination
	Employees		Dollars			Costs			Total
Balance at January 1, 2010			$	237		$	1,092		$	1,329
Liabilities recognized		30		195			3,595			3,790
Utilized				(325	)		(1,046	)		(1,371	)

Balance at December 31, 2010				107			3,641			3,748
Liabilities recognized		2		26			10			36
Utilized				(113	)		(1,353	)		(1,466	)

Balance at December 31, 2011				20			2,298			2,318
Liabilities recognized		14		803			327			1,130
Utilized				(219	)		(1,100	)		(1,319	)

Balance at December 31, 2012			$	604		$	1,525		$	2,129


	At December 31,
Balance Sheet Information	2012			2011
Property and equipment
Land	$	354		$	354
Building and improvements		5,906			5,815
Leasehold improvements		14,504			17,283
Furniture and fixtures		4,008			4,114
Equipment		40,173			42,869

		64,945			70,435
Accumulated depreciation		(58,584	)		(60,123	)
Construction in progress		19			325

	$	6,380		$	10,637


	December 31,
	2012		2011
Accumulated other comprehensive income
Foreign currency translation	$	677	$	572
Unrealized investment gain, net of tax		—		11

Accumulated other comprehensive income	$	677	$	583


	For the Year Ended December 31,
Income Statement Information	2012			2011			2010
The components of net investment income and other:
Interest income	$	964		$	765		$	1,066
Interest expense		(240	)		(378	)		(601	)
Other-than-temporary impairment on securities		(11	)		(10	)		(86	)
Realized gains on investments		3			52			1,080
Realized losses on investments		(60	)		—			(51	)
Equity in earnings of unconsolidated affiliates		—			41			25

Net investment income and other	$	656		$	470		$	1,433


	2012 Quarters											2011 Quarters
	First		Second			Third			Fourth			First		Second			Third			Fourth
Revenues	$	36,138	$	25,152		$	20,009		$	20,194		$	32,282	$	24,416		$	21,790		$	24,495
Operating income (loss)		3,754		(3,328	)		(3,747	)		(5,990	)		1,980		(2,767	)		(4,102	)		(1,649	)
Income (loss) before income taxes		3,870		(3,166	)		(3,527	)		(5,832	)		2,060		(2,690	)		(3,768	)		(1,670	)
Net income (loss)		3,846		(3,190	)		(3,549	)		(5,624	)		2,019		(2,765	)		(3,800	)		(1,652	)
Income (loss) per share
Basic and Diluted	$	0.20	$	(0.17	)	$	(0.19	)	$	(0.29	)	$	0.11	$	(0.15	)	$	(0.20	)	$	(0.09	)


Plan Category	Number of securities to be issued upon exercise of outstanding awards, options, warrants and rights A		Weighted-average exercise price of outstanding options, warrants and rights B		Number of securities remaining for future issuance under equity compensation plans (excluding securities reflected in column A) C
Equity compensation plans approved by security holders		855,409	$	18.89		1,164,339
Equity compensation plans not approved by security holders		—		—		—

Total		855,409	$	18.89		1,164,339


Description	Balance at Beginning of Period		Charges to Cost and Expenses		Deductions		Balance at End of Period
Year ended December 31, 2012
Allowance for doubtful accounts	$	1,967	$	914	$	888	$	1,993
Insurance reserves		7,215		1,097		1,700		6,612
Valuation allowance deferred tax assets		23,405		2,972		—		26,377
Year ended December 31, 2011
Allowance for doubtful accounts	$	2,010	$	746	$	789	$	1,967
Insurance reserves		7,406		854		1,045		7,215
Valuation allowance deferred tax assets		21,118		2,287		—		23,405
Year ended December 31, 2010
Allowance for doubtful accounts	$	2,319	$	1,061	$	1,370	$	2,010
Insurance reserves		9,154		679		2,427		7,406
Valuation allowance deferred tax assets		13,344		7,774		—		21,118


Exhibit #		Description of Exhibit

*3.1		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)

*3.2		Amended Bylaws of Registrant (Exhibit 3(b) to Current Report on Form 8-K filed January 6, 2009)

*10.1		Loan and Security Agreement between the Registrant and PNC Equipment Finance, LLC dated April 24, 2008 (Exhibit 10.1 to Current Report on Form 8-K filed April 30, 2008)

		Executive Compensation Plans and Arrangements

*10.2		LCA-Vision Inc. 2006 Stock Incentive Plan (definitive Proxy Statement for 2006 Annual Meeting of Stockholders, filed April 28, 2006)

*10.3		LCA-Vision Inc. 2011 Stock Incentive Plan (definitive Proxy Statement for 2011 Annual Meeting of Stockholders, filed April 16, 2011)

*10.4		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)

*10.5		Form of Stock Option Agreement with outside directors (Exhibit 10.3 to Current Report on Form 8-K filed February 24, 2006)

*10.6		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)

*10.7		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)

*10.8		Form of Indemnification Agreement between the Registrant and its directors (Exhibit 10.1 to Current Report on Form 10-K filed July 24, 2008)

*10.9		Form of Agreement between the Registrant and certain of its executive officers (Exhibit 10.1 to Current Report on Form 8-K filed July 1, 2008)

*10.10		Employment Agreement between LCA-Vision Inc. and Rhonda Sebastian dated September 8, 2009 (Exhibit 10.1 to Quarterly Report on Form 10-Q filed October 27, 2009)

10.11		Employment Agreement between LCA-Vision Inc. and Michael Celebrezze dated January 7, 2013

10.12		Employment Agreement between LCA-Vision Inc. and Amy Kappen dated January 7, 2013

10.13		Employment Agreement between LCA-Vision Inc. and Bharat Kakar dated January 7, 2013

10.14		Separation Agreement and General Release of All Claims between LCA-Vision Inc. and David Thomas dated December 31, 2012

21		Subsidiaries of the Registrant

23		Consent of Ernst & Young LLP

24		Powers of Attorney (contained on signature page)

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Operating Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32		Section 1350 Certifications

**101.INS		XBRL Instance Document

**101.SCH		XBRL Taxonomy Extension Schema Document

**101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

**101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

**101.LAB		XBRL Taxonomy Extension Label Linkbase Document

**101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document