Fair Value Measurement

9 Months Ended

Sep. 29, 2012

Fair Value Measurement [Abstract]

Fair Value Measurement

5. Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

• Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

• Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, and accounts payable at September 29, 2012 and December 31, 2011, approximate fair value because of the short maturity of these instruments.

As of September 29, 2012 and December 31, 2011, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

	September 29, 2012								December 31, 2011
	Fair Value Measurements								Fair Value Measurements
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	12,838		0		0	$	12,838	$	10,133		0		0	$	10,133
Liabilities:
Earn-out-cash	$	0		0		719	$	719	$	0		0		765	$	765

The Company’s Level 1 financial assets are money market funds whose fair values are based on quoted market prices. The Company does not have any Level 2 financial assets or liabilities. The Company’s Level 3 financial liabilities are related to the fair value of the contingent consideration (the earn-out to be paid in cash) in connection with the RetinaLabs and Ocunetics, Inc. acquisitions. At September 29, 2012, observable market information was not available to determine the fair value of the Company’s liability. Therefore, the fair value is based on valuation models that relied on Level 3 inputs including those that are based on probability of outcomes, expected cash flow streams, market discount rates and overall capital market liquidity. The valuation of the earn-out liability related to the RetinaLabs and Ocunetics, Inc. acquisitions is subject to uncertainties that are difficult to predict.

A reconciliation of the changes in the Company’s earn-out – cash (Level 3 liabilities) balance for the nine months ended September 29, 2012 and October 1, 2011 is as follows (in thousands):

	Nine Months Ended
	September 29, 2012			October 1, 2011
Balance at the beginning of the period	$	765		$	380
Addition of earn-out - cash related to Ocunetics, Inc. acquisition		0			105
Payment made on earn-out - RetinaLabs		(241	)		0
Change in fair value of contingent consideration		195			55
Balance at the end of the period	$	719		$	540

The earn-out liability is recorded in accrued expenses and other long-term liabilities on the accompanying condensed consolidated balance sheets. At September 29, 2012 and December 31, 2011, accrued expenses included $175 thousand and $197 thousand, respectively, and other long-term liabilities included $544 thousand and $568 thousand, respectively, related to the earn-out liability. The change in the fair value of the earn-out liability is recorded in other income (expense).