LCAV (MM)

Item 1. Business

Background and History of Company

We are a provider of fixed-site laser vision correction services at our Lasik Plus ^® 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 1.3 million laser vision correction procedures in our vision centers in the United States and Canada since 1995.

As of December 31, 2013, we operated 61 Lasik Plus ^® fixed-site laser vision correction centers generally located in metropolitan markets in the United States: 52 full-service Lasik Plus ^® fixed site laser vision correction centers and nine pre- and post-operative Lasik Plus ^® satellite vision centers. Included in the 52 full-service vision centers are five vision centers owned and operated by ophthalmologists who license our trademarks. Beginning in 2011, we began offering refractive lens and cataract services in certain of our existing markets. 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 historically have been highly correlated with the Consumer Confidence Index and have 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, improved slightly in 2011 and 2012, but declined again in 2013.

On February 13, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with PhotoMedex, Inc. (“PhotoMedex”) pursuant to which PhotoMedex will acquire all of our common stock for $5.37 per share in cash, or approximately $106.4 million, resulting in our becoming a subsidiary of PhotoMedex (the “Merger”). The Merger is subject to customary closing conditions including receipt of the approval of our stockholders and regulatory approvals, and is subject to a 30-day “go shop” period. Our Board of Directors has voted unanimously in favor of the transaction, which is expected to close in the second quarter of 2014. There are no assurances that the merger will be consummated.

Laser Vision Correction Procedures

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”).

We provide primarily two types of procedures in our vision centers:

LASIK

In 1995, we began performing laser vision correction, including 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.

PRK

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.

The Laser Vision Correction Market

More than 192 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 16.6 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 592,000 laser vision correction procedures performed in 2013, a decrease of approximately 5% from 2012. An industry report on the U.S. refractive market forecasts that the number of 2014 laser vision correction procedures will increase by less than 1% compared to 2013, and the potential market for laser vision correction procedures in the United States is approximately 152 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

Source: Market Scope, February 2014

(f) = 2014 data forecasted by Market Scope, February 2014

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

Our Business Strategy

Our business strategy is to transform lives by providing quality 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 “ Lasik Plus Advantage Plan ^® ”.

We strive to achieve high patient satisfaction and have established the “Lasik Plus 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 patient communication center personnel to answer questions regarding procedures and we provide potential patients access to an optometrist or ophthalmologist to address more difficult inquiries. In the vision center, we provide potential patients a free vision 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, when medically appropriate, 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.

Providing attractive patient financing alternatives.

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 provide for payments over a 6-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 down payment, 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 2014 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.

Developing and implementing innovative direct-to-consumer marketing campaigns.

Our marketing programs seek to reinforce the Lasik Plus ^® 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 patient communication center representatives answer initial questions that potential patients may have, and attempt to schedule eye evaluation appointments with a local vision center to determine whether the prospective patient is a candidate for laser vision correction. With the support of advertising agencies, we continue to refine our branding to differentiate Lasik Plus ^® from our competitors and to continually develop more compelling messages.

Establishing and maintaining a partner network of independent optometrists to share patients.

We have developed a partner network with independent 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, for either laser vision correction or refractive lens and cataract services.

Adding complementary products and services.

We began expanding our patient care model in 2011 to include other medical and surgical eye services and products.  We desire to diversify 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.

During the third quarter of 2011 we began offering standard cataract and premium intraocular lens (“IOL”) services in two of our Lasik Plus ^® markets. As of December 31, 2013, we offered a full range of refractive services in nine markets. Expansion into refractive lens and 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 experience vision problems related to their natural lens. Industry analysts estimate the cataract market is currently five times as large as the laser vision correction market. This expansion into refractive lens and cataract services is a change from our model of operating solely in a self-pay environment and into services partially 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 refractive lens and cataract services was not significant in 2013 and we do not anticipate it to represent a significant portion of our operations in 2014. Attracting new patients remains the most significant challenge with growing our refractive lens and cataract business.

We are also offering implantable collamer lens (“ICL”) surgery in the nine markets that offer refractive lens and cataract services. 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.

Competition

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 service approximately 70% of the laser vision correction market. Corporate laser vision correction providers, such as Lasik Plus® , 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 has historically correlated 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.

Employees

As of December 31, 2013, we had approximately 363 employees, 305 of whom were full-time. The number of employees included 87 optometrists and independent ophthalmologists employed by professional corporations with which we have management contracts. None of our employees are subject to a collective bargaining agreement nor have we experienced any work stoppages. We believe that our relations with our employees are good.

Trademarks

We have several registered trademarks in the United States, including the name Lasik Plus ^® . 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.

Suppliers of Equipment

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 laser 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 that we would be able to enter into alternative supplier arrangements.

Government Regulation

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.

Restrictions on medical devices

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.

FDA LASIK Review

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 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.

Federal and state laws on “kickbacks”

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 that is 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 (the “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 refractive lens and cataract services 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.

“Stark” Law Prohibition on Physician Referrals  

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, the 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 the 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.

Advertising restrictions

Our business is heavily dependent on advertising, which is subject to regulation by the Federal Trade Commission (the “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.

Fee-splitting

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.

Corporate practice of medicine and optometry

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.

Facility licensure and certificates of need

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.

Health Insurance Portability and Accountability Act

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.

Available Information

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 (the “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.