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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 1 – Summary of Significant Accounting Policies

Business

We are a global medical device company engaged in research, development, manufacturing and distribution of proprietary light-based systems for medical and cosmetic treatments. We conduct business in two segments, professional medical and cosmetic products and services (“Professional Product segment”) and consumer medical and cosmetic products and services (“Consumer Product segment”).

Basis of Presentation

The accompanying consolidated financial statements reflect the consolidated financial position, results of operations and cash flows of Palomar and all of its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Correction of Immaterial Error

Our financial statements reflect a correction of an immaterial error in our consolidated balance sheet as of December 31, 2010 and our consolidated statement of cash flows for the year ended December 31, 2010 contained in our Form 10-K for the fiscal year ended December 31, 2010 filed on March 9, 2011.

The effect of this correction on the consolidated balance sheet as of December 31, 2010 is summarized in the following table:

	As of December 31, 2010
	Previously Reported		Adjustments			As Restated
Assets:
Cash and cash equivalents	$	77,102,618	$	(22,003,299	)	$	55,099,319
Short-term investments		12,013,707		22,003,299			34,017,006
Total cash, cash equivalents and short-term investments	$	89,116,325	$	-		$	89,116,325

The effects of this correction on the Consolidated Statement of Cash Flow for the year ended December 31, 2010 are summarized in the following table:

	For the Year Ended December 31, 2010
	Previously
	Reported			Adjustments			As Restated
Cash Flows used in operating activities:
Amortization of investments	$	-		$	348,061		$	348,061
Changes in assets and liabilities - Other Current Assets		1,333,033			(92,142	)		1,240,891
Other cash flows used in operating activity items		(5,792,939	)		-			(5,792,939	)
Net cash used in operating activities	$	(4,459,906	)	$	255,919		$	(4,203,987	)

Cash Flows used in investing activities:
Purchases of property and equipment	$	(3,840,846	)	$	-		$	(3,840,846	)
Purchases of marketable securities		(12,032,241	)		-			(12,032,241	)
Purchases of short-term investments		(12,013,707	)		(22,259,218	)		(34,272,925	)
Proceeds from sale of marketable securities		2,125,000			-			2,125,000
Proceeds from sale of short-term investments		25,000,000			-			25,000,000
Net cash used in investing activities	$	(761,794	)	$	(22,259,218	)	$	(23,021,012	)

Net cash from financing activities	$	267,323		$	-		$	267,323

Effects of exchange rates on cash and cash equivalents	$	108,513			-		$	108,513

Net decrease in cash and cash equivalents	$	(4,845,864	)	$	(22,003,299	)	$	(26,849,163	)
Cash and cash equivalents, beginning of the period	$	81,948,482					$	81,948,482
Cash and cash equivalents, end of the period	$	77,102,618		$	(22,003,299	)	$	55,099,319

This correction to the 2010 presentation of approximately $22.0 million reflects the change in classification of a U.S. Treasury note with a maturity date of May 31, 2011 from cash and cash equivalents to short-term investments. This $22.0 million U.S. Treasury note could have been sold without penalty at any time during the applicable period and the correction would have had no effect on our liquidity position during the period indicated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the ordinary course of accounting for the items discussed above, we make changes in estimates as appropriate, and as we become aware of circumstances surrounding those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the notes to the consolidated financial statements.

Cash, Cash Equivalents and Short-term Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair value of these investments approximates their carrying value. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments.

At December 31, 2011, we held $24.7 million of short-term investments classified as held-to-maturity which included $18.7 million in commercial paper, $4.0 million in U.S agency bonds, and $2.0 million in corporate bonds. As of December 31, 2011, the maturity dates for commercial paper, U.S agency bonds, and corporate bonds range from 9 days to 0.6 years, 13 days to 0.7 years, and 0.6 years, respectively. At December 31, 2010, we held $34.0 million of short-term investments which included $24.0 million in U.S. Treasuries, $6.0 million in commercial paper, and $4.0 million in U.S. agency bonds. As of December 31, 2010, the maturity dates for U.S. Treasuries, commercial paper, and U.S. agency bonds range from 0.4 to 0.6 years, 0.1 to 0.5 years, and 0.9 to 1.0 years, respectively. The amortized cost of these investments approximates fair market value.

The components of our cash and cash equivalents and short-term investments as of December 31, 2011 and 2010 are as follows:

			Restated
	December 31,		December 31,
	2011		2010
Cash and cash equivalents:
Cash	$	63,077,178	$	55,099,319
Total cash and cash equivalents	$	63,077,178	$	55,099,319

Short-term investments:
Held-to-maturity (less than one year to maturity)	$	24,739,998	$	34,017,006
Total short-term investments	$	24,739,998	$	34,017,006

Marketable Securities and Other Investments

Marketable securities, which primarily consist of auction-rate preferred securities and auction-rate municipal securities are classified as “marketable securities” under Debt and Equity Securities Topic of the FASB Accounting Standards Codification and are recorded at fair market value. Any unrealized gains and losses, net of income tax effects, would be computed on the basis of specific identification and reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. We evaluate unrealized losses to determine if the loss is other-than-temporary. If the loss is other-than-temporary, it is separated into two amounts, one amount representing a credit loss and the other representing an impairment due to all other factors. The amount representing a credit loss is recorded in earnings, while the remaining impairment is recorded as a component of accumulated other comprehensive income (loss), as we do not have the intent to sell the impaired investments, nor do we believe that it is more likely than not that we will be required to sell these investments before the recovery of their cost basis. We determined that the fair value of our auction-rate securities (“ARS”) was temporarily impaired as of December 31, 2011 and 2010. We recorded an unrealized gain of $69,000, unrealized loss of $55,000, and unrealized gain of $381,000, net of tax effects, in accumulated other comprehensive income (loss) in stockholders’ equity for the years ended December 31, 2011, 2010, and 2009, respectively.

In the first quarter of 2008, several of our ARS failed at auction due to a decline in liquidity in the ARS and other capital markets. In the years ended December 31, 2011, 2010, and 2009, we sold $0.9 million, $2.1 million, and $0.7 million, respectively. The amortized cost basis of our holdings of ARS at December 31, 2011 was $1.3 million. We will not be able to access our investments in ARS until future auctions are successful, ARS are called for redemption by the issuers, or until sold in a secondary market, if any. As our investments in ARS currently lack short-term liquidity, we have classified these investments as non-current marketable securities as of December 31, 2011 and 2010.

To value our ARS, we determined the present value of the ARS at the balance sheet date by discounting the estimated future cash flows based on a fair value rate of interest and an expected time horizon to liquidity. We have also evaluated the credit rating of the issuer and found them all to be investment grade securities. There was no change in our valuation method during the year ended December 31, 2011. Our valuation analysis showed that our ARS have nominal credit risk. The impairment is due to liquidity risk. Additionally, as of December 31, 2011, we do not intend to sell the ARS and, it is not more likely than not that we will be required to sell the ARS before recovery of their amortized cost bases, which may be at maturity, and we expect to recover the entire cost basis of these securities. As a result of our valuation analysis, our investment strategy, recurring dividend stream from these investments, and our strong cash and cash equivalents position, we have determined that the fair value of our ARS was temporarily impaired as of December 31, 2011. For the year ended December 31, 2011, we marked to market our ARS and recorded an unrealized gain of $69,000, net of taxes, in accumulated other comprehensive (loss) income in stockholders’ equity to reflect the cumulative temporary impairment of approximately $0.2 million, net of taxes, on our ARS as of December 31, 2011.

In addition to the auction-rate preferred securities and auction-rate municipal securities discussed above, at December 31, 2011, we had $20.3 million of other investments classified as held-to-maturity securities which included $10.2 million in corporate bonds, $8.1 million in U.S. agency bonds, and $2.0 million in U.S. Treasuries. These other investments are recorded at amortized cost. As of December 31, 2011, the maturity dates for the corporate bonds, U.S. agency bonds, and U.S. Treasuries range from 1.1 to 1.6 years, 1.2 to 1.9 years, and 1.6 years, respectively. At December 31, 2010, we had $12.0 million of other investments classified as held-to-maturity securities which included $10.0 million in U.S. agency bonds and $2.0 million in corporate bonds. As of December 31, 2010, the maturity dates for U.S. agency bonds range from 1.0 to 1.7 years and for corporate bonds is 1.6 years. The amortized cost of these investments approximates fair market value.

The components of our marketable securities and other investments as of December 31, 2011 and 2010 are as follows:

	December 31,		December 31,
	2011		2010
Marketable securities and other investments:
Auction-rate securities	$	997,823	$	1,814,720
Held-to-maturity other investments		20,270,954		12,035,477
Total marketable securities and other investments	$	21,268,777	$	13,850,197

Accounts Receivable Reserve

We maintain an allowance for losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectability of our trade receivables based on a combination of factors, which may include dialogue with the customer to determine the cause in delay of payments, the use of collection agencies, and/or the use of litigation. In the event that it is determined that the customer may not be able to meet its full obligation to us, we record a specific allowance to reduce the related receivable to the amount that we expect to recover given all information present. If the data we use to calculate these estimates do not properly reflect reserve requirements, then we would make a change in the allowances in the period in which such a determination is made and revenues in that period could be affected. Accounts receivable allowance activity consisted of the following for the years ended December 31, 2011, 2010, and 2009, respectively.

At December 31,	2011			2010			2009

Balance at beginning of year	$	833,199		$	786,797		$	1,235,005
Additions		308,302			407,961			-
Write-offs/deductions		(344,891	)		(361,559	)		(448,208	)
Balance at end of year	$	796,610		$	833,199		$	786,797

Inventories

We value inventories at the lower of cost (first in, first-out method) or market, and include material, labor and manufacturing overhead. At December 31, 2011 and 2010, inventories consisted of the following:

At December 31,	2011		2010

Raw materials	$	10,068,589	$	5,420,609
Work in process		1,217,968		1,471,285
Finished goods		9,889,197		6,129,378
	$	21,175,754	$	13,021,272

Our policy is to establish inventory reserves when conditions exist that suggest that inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for products and market conditions. Included in our finished goods inventory are $2.7 million in 2011 and $1.4 million in 2010 of demonstration products that are used by our sales organization. We regularly evaluate the ability to realize the value of inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. Assumptions used in determining our estimates of future product demand may prove to be incorrect, in which case the provision required for excess and obsolete inventory would have to be adjusted in the future. If inventory is determined to be overvalued, we would be required to recognize such costs as cost of goods sold at the time of such determination. Although we perform a detailed review of our forecasts of future product demand, any significant unanticipated changes in this demand could have a significant impact on the value of our inventory and our reported operating results.

At December 31, 2011 and 2010, we had $0.8 million and $0.6 million, respectively of consumer product inventory held on consignment in finished goods. Please see Note 2 for further information about our consumer inventory.

Property and Equipment

Property and equipment are recorded at cost. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of property and equipment. Land is not depreciated. At December 31, 2011 and 2010, property and equipment consisted of the following:

			Estimated
At December 31,	2011	2010	Useful Life

Land	$ 10,680,000	$ 10,680,000
Building	24,505,574	24,505,574	39 years
Machinery and equipment	3,231,920	2,700,264	3 - 7 years
Furniture and fixtures	5,836,744	5,455,054	7 years
Leasehold improvements	99,243	40,612	Shorter of estimated useful life or term of lease

	44,353,481	43,381,504

Less accumulated depreciation	7,639,903	6,216,198

Total	$ 36,713,578	$ 37,165,306

Revenue Recognition

We recognize revenue in accordance with Securities and Exchange Commission (“SEC”) guidance on revenue recognition. The SEC’s guidance requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. We generally recognize product revenues upon shipment. If a product sale does not meet all of the above criteria, the revenue from the sale is deferred until all criteria are met. Provisions are made at the time of revenue recognition for any estimated return and applicable warranty costs expected to be incurred.

In our consumer products business, customer returns are recorded on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. We generally estimate customer returns based upon the time lag that historically occurs between the date of the sale and the date of the return, while also factoring in any new business conditions that might impact the historical analysis, such as a new consumer product introduction. We believe that our procedures for estimating such return amounts are reasonable.

Periodically, we sell products together with a product upgrade option that requires that the customer pay an upgrade fee at the time of exercise, has no refund provisions, and includes an expiration date on the upgrade option. In accordance with Accounting Standards Update No. 2009-13, Multiple-Delivery Revenue Arrangement (“ASU 2009-13”), we defer estimated selling price ascribed to the upgrade option until the expiration of the upgrade option or the exercise of the upgrade option and shipment of the product upgrade.

Revenues from the sale of service contracts are deferred and recognized on a straight-line basis over the life of the service contract. Revenues from services administered by us that are not covered by a service contract are recognized as the services are provided. In certain instances, we sell products together with service contracts. We recognize revenue on such multiple-element arrangements in accordance with ASU 2009-13, based on the estimated selling price of each element. In accordance with ASU 2009-13, we use vendor-specific objective evidence or VSOE, if available, to determine the selling price of each element. If VSOE is not available, we use third-party evidence, or TPE to determine the selling price. If TPE is not available, we use our best estimate to develop the estimated selling price.

We generally recognize royalty revenue from licensees upon receipt of cash payments since the royalty amounts are not determinable at the end of a quarter. Licensees are obligated to make payments between 30 and 45 days after the end of each quarter. If at the end of a quarter royalty revenue from licensees are determinable, we record royalty revenue during the period earned. Periodically, as we sign on new licensees, we recognize back-owed royalties in the period in which it is determinable and earned. We have the right under our license agreements to engage independent auditors to review the royalty calculations. The amounts owed as a result of these audits may be higher or lower than previously recognized.

We have other revenues which consist of quarterly technology transfer payments (“TTP Quarterly Payment” as defined in the License Agreement with Proctor & Gamble). TTP Quarterly Payments are being made by P&G during the term of the License Agreement up to and including the quarter in which P&G launches the first Licensed Product (as defined in the License Agreement). Thereafter, TTP and royalty payments will be based on product sales as set forth in the License Agreement. TTPs, including the TTP Quarterly Payments, are non-creditable and non-refundable and there is no right of offset. On December 9, 2010, we announced an amendment to the License Agreement with P&G and Gillette. The amendment provides additional funding from each company to meet the common goal of a successful product launch. The amendment does not change the scope of P&G's non-exclusive license to Palomar's broad patent portfolio as well as its non-exclusive license to the extensive technology developed by Palomar prior to February 28, 2008 for home-use, light-based hair removal devices for women. Under the amended License Agreement, the parties agreed to reduce pre-commercial launch calendar quarterly payments from $1.25 million to $1.0 million for the calendar quarter ending December 31, 2010 and thereafter to $2.0 million per year for an agreed period, after which the payments return to $1.25 million per calendar quarter if no product has been launched. P&G will apply the savings, together with agreed minimum overall program funding, to accelerating product readiness and commercialization while Palomar will be paid an increased percentage of sales after commercial launch. The payments under the amended license agreement are being recognized ratably through the expected launch term.

In the past, we received funded product development revenue from the development agreements with Johnson & Johnson Consumer Companies, Inc., a Johnson & Johnson Company (“Johnson & Johnson”) and The Procter & Gamble Company (“P&G”) and its wholly owned subsidiary, The Gillette Company (“Gillette”). For both Johnson & Johnson and Gillette, we received payments in accordance with the work plans that were developed with both Johnson & Johnson and Gillette. We recognized revenue under the contracts as costs were incurred and services were rendered. We record any amounts received in advance of costs incurred and services rendered as deferred revenue. Payments were not refundable if the development was not successful.

We include reimbursed shipping and handling costs in revenue with the offsetting expense included in selling and marketing expense. Included in revenues are $288,000, $260,000 and $222,000 of reimbursed shipping and handling costs during the years ended December 31, 2011, 2010, and 2009, respectively. For the years ended December 31, 2011, 2010, and 2009, $465,000, $207,000, and $265,000 of shipping and handling costs are included in selling and marketing expense.

Product Warranty Costs

We typically offer a one year warranty for our base professional and consumer products. Warranty coverage provided is for labor and parts necessary to repair systems during their warranty period. We account for the estimated warranty cost of the standard warranty coverage as a charge to cost of revenue when revenue is recognized. Factors that affect our warranty reserves include the number of units sold, historical and anticipated product performance and the cost per repair. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our estimated warranty obligation is affected by ongoing product failure rates, specific product class failures outside of our baseline experience, material usage, and service delivery costs incurred in correcting a product failure. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. Assumptions and historical warranty experience are evaluated to determine the appropriateness of such assumptions. We assess the adequacy of the warranty provision and we may adjust this provision if necessary.

The following table provides the detail of the change in our product warranty accrual, which is a component of accrued liabilities on the consolidated balance sheets for the years ended December 31, 2011 and 2010.

At December 31,	2011			2010

Warranty accrual, beginning of year	$	529,374		$	596,210
Charged to costs and expenses relating to new sales		1,226,017			955,198
Costs of product warranty claims\change in estimate		(969,979	)		(1,022,034	)

Warranty accrual, end of year	$	785,412		$	529,374

Research and Development Expenses

We charge research and development expenses to operations as incurred.

Advertising costs

Advertising costs are included as part of selling and marketing expense and are expensed as incurred. Advertising expense for the years ended December 31, 2011, 2010, and 2009 were $480,000, $361,000 and $530,000, respectively.

Net Income (Loss) per Common Share

Basic net income (loss) per share was determined by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted net income (loss) per share was determined by dividing net income (loss) by the diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options, stock appreciation rights, and restricted stock awards (RSAs) based on the treasury stock method.

The reconciliation of basic and diluted weighted average shares outstanding is as follows:

At December 31,	2011		2010		2009

Basic weighted average common shares outstanding		18,695,612		18,548,548		18,094,914
Potential common shares pursuant to stock options, SARs and RSAs		246,404		-		-

Diluted weighted average common shares outstanding		18,942,016		18,548,548		18,094,914

For the years ended December 31, 2011, 2010, and 2009, 2.4 million, 2.6 million, and 3.6 million, respectively, weighted average stock options, stock-settled stock appreciation rights, warrants, and restricted stock awards to purchase shares of our common stock were excluded from the computation of diluted earnings per share because the effect of including the options, stock-settled stock appreciation rights, and warrants would have been antidilutive.

Stock-based compensation

We recognize stock-based compensation expense in accordance with the revised share-based payment guidance. This guidance requires share-based payments to employees, including grants of employee stock options, stock-settled stock appreciation rights (“SARs”), restricted stock awards, and restricted stock units to be recognized in the statement of operations based on their fair values at the date of grant.

In October 2009, our board of directors reviewed our outstanding equity compensation arrangements and determined to provide our management, employees and directors with appropriate incentives to achieve our business and financial goals while at the same time minimizing the accounting costs of these incentives and reducing the overhang caused by stock options that are significantly underwater. As a result of this review and determination, in October 2009, our board approved a stock option exchange program for some of our significantly underwater options. As part of this program, during the fourth quarter of 2009 we provided certain employees, officers and directors who were previously granted stock options for the purchase of a total of 650,500 shares of our common stock with exercise prices of $24.63 and $26.00 per share with the opportunity to exchange those options to (i) reduce the number of shares that were the subject of those options based on a conversion ratio which will not create (or will minimize to the maximum extent possible) any incremental stock-based compensation expense on the date of amendment (the “Amendment Date”), (ii) reduce the exercise price to an amount equal to the closing price of our common stock on The Nasdaq Global Select Market on the Amendment Date and (iii) extend the expiration date until 10 years from the Amendment Date. In addition, certain participants in this program were granted a total of 382,402 fully vested shares of restricted common stock under our 2004 Stock Incentive Plan which was equal to the difference between the number of shares of common stock that was the subject of the stock option initially granted under the 2004 Stock Incentive Plan and the number of shares evidenced by the option following the amendment. In the fourth quarter of 2009, we incurred a one-time stock-based compensation charge of $3.5 million as a result of these restricted stock awards.

During the years ended December 31, 2011, 2010, and 2009, we recognized $0.2 million, $0.2 million, and $0.4 million, respectively, of stock-based compensation expense as cost of professional product revenues, we recognized $0.2 million, $0.2 million, and $0.4 million, respectively, of stock-based compensation expense as cost of service revenues, we recognized $1.5 million, $1.8 million, and $2.5 million, respectively, of stock-based compensation expense as research and development expense, $1.0 million, $0.9 million, and $1.7 million, respectively, of stock-based compensation expense as selling and marketing expense, and $0.7 million, $0.7 million, and $2.1 million, respectively, of stock-based compensation expense as general and adminstrative expense.

During the years ended December 31, 2011, 2010, and 2009, we granted SARs to employees and directors totaling 0, 8,000, and 198,500, respectively. The SARs become exercisable over a four year period with one-third vesting on the second, third, and fourth anniversaries of the date of grant. We are recognizing related compensation expense on a straight-line basis over the four year period.

During the years ended December 31, 2011, 2010, and 2009, we granted 470,250, 307,000, and 0, respectively restricted stock awards to employees and directors at a fair market value of our common stock on the date of grant and which become vested over a four year period with one-quarter vesting on each of the next four anniversaries of the date of grant. We are recognizing related compensation expense on a straight-line basis over the four year period.

During the years ended December 31, 2011, 2010, and 2009, we granted 45,000, 0, and 0, respectively restricted stock units to employees at a fair market value of our common stock on the date of grant and which become vested over a four year period with one-quarter vesting on each of the next four anniversaries of the date of grant. We are recognizing related compensation expense on a straight-line basis over the four year period.

We use the Black-Scholes option pricing model to estimate the fair value of stock option and SAR grants. Key input assumptions used to estimate the fair value of stock options and SARs include the exercise price of the award, the expected option term, the expected volatility of our stock over the option or SARs expected term, the risk-free interest rate over the option or SARs expected term and our expected annual dividend yield. Expected volatilities are based on historical volatilities of our common stock; the expected life represents the weighted average period of time that options or SARs granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option or SAR. Our assumed dividend yield of zero is based on the fact that we have never paid cash dividends and currently have no intention to pay cash dividends. The fair value of each award, including options granted under the stock option exchange program, was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Year ended December 31,	2011	2010	2009

Risk-free interest rate	-	1.66%	1.73%
Expected dividend yield	-	-	-
Expected lives	-	3.0 years	4.1 years
Expected volatility	-	60%	57%
Grant date fair value of awards granted during period	-	$6.17	$5.23

In 2011, we had no fair value assumptions as the only equity awards granted were restricted stock awards and restricted stock units.

Based on our historical turnover rates, we assumed an annual estimated forfeiture rate of 3% when we calculated the estimated compensation cost for the year ended December 31, 2011. A recovery of prior expense will be recorded if the actual forfeitures are higher than estimated and vice versa. Ultimately, we will only recognize compensation expense for those awards that actually vest.

The cash flows from the tax benefits resulting from tax deductions in excess of compensation cost recognized for those options are classified as financing cash flows and recorded as a credit to additional paid-in-capital.

Concentration of Credit Risk

The FASB requires disclosure of any significant off-balance-sheet and credit risk concentrations. Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents, short-term investments, marketable securities and other investments, and accounts receivable. We place cash and cash equivalents, short-term investments, and marketable securities and other investments in established financial institutions. We have no significant off-balance-sheet risk or concentration of credit risk, such as foreign exchange contracts, options contracts, or other foreign hedging arrangements. Our trade accounts receivable are primarily from sales to end users and distributors servicing the medical and beauty industry, and reflect a broad domestic and international base. We maintain an allowance for potential credit losses. Our accounts receivable credit risk is not concentrated within any one geographic area or customer group. We have not experienced significant losses related to receivables from any individual customers or groups of customers in any specific industry or by geographic area. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be inherent in our accounts receivable.

Contingencies

The medical device market in which we participate is largely technology driven. As a result, intellectual property rights, particularly patents, play a significant role in product development and differentiation. However, intellectual property litigation is inherently complex and unpredictable. Furthermore, appellate courts can overturn lower court patent decisions.

In addition, competing parties may file suits to balance risk and exposure between the parties. Adverse outcomes in proceedings against us could limit our ability to sell certain products in certain jurisdictions, or reduce our operating margin on the sale of these products and could have a material adverse effect on our financial position, results of operations or liquidity.

In addition, although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the trial court proceedings and can be modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify.

We are not insured with respect to intellectual property infringement and maintain an insurance policy providing limited coverage against securities claims and product liability claims. The absence of significant third-party insurance coverage increases our potential exposure to unanticipated claims or adverse decisions.

We continually assess litigation to determine if an unfavorable outcome would lead to a probable loss or reasonably possible loss which could be estimated. In accordance with the FASB’s guidance on accounting for contingencies, we accrue for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range. In the cases where we believe that a reasonably possible loss exists, we disclose the facts and circumstances of the litigation, including an estimable range, if possible. In management’s opinion, we are not currently involved in any legal proceedings, which, individually or in the aggregate, could have a material effect on our financial statements. Losses associated with any of our current litigation were remote at the time of the filing and as such, we have not recorded any material loss contingencies related to such litigation.

We expense patent defense costs, costs for pursuing patent infringements, and external legal costs related to intangible assets in the period which they are incurred.

Disclosures About Fair Value of Financial Instruments

In September 2006, the FASB issued new guidance on fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The guidance applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. This guidance was effective for financial statements issued for fiscal years beginning after November 15, 2007, and we adopted this guidance on January 1, 2008. In February 2008, the FASB issued an update to the fair value measurement guidance. This guidance permitted the delayed application of the fair value measurement guidance for all non-recurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. The adoption of this guidance had no impact on the Company’s consolidated financial statements. In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) – Improving Disclosures About Fair Value Measurements. The ASU requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The new disclosures and clarifications of existing disclosures were effective for our first quarter of 2010, except for the disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which were effective for our first quarter of fiscal year 2011. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The adoption of ASU No.2010-06 did not have a material impact on our consolidated results of operations and financial position.

We performed an analysis of our investments held at December 31, 2011 and December 31, 2010 to determine the significance and character of all inputs to their fair value determination. The standard requires additional disclosures about the inputs used to develop the measurements and the effect of certain measurements on changes in fair value for each reporting period.

The FASB’s fair value measurement guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.

·	Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

·	Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

·	Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations. The following table presents our assets measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010.

Assets	Fair Value as of December 31, 2011
(in thousands)	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	63,077	$	-	$	-	$	63,077
Short-term investments*		24,740		-		-		24,740
Other investments*		20,271		-		-		20,271
Auction-rate municipal securities		-		-		998		998
Total	$	108,088	$	-	$	998	$	109,086

* The amortized cost of these investments approximates fair market value.

Assets	Fair Value as of December 31, 2010
(in thousands)	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	55,099	$	-	$	-	$	55,099
Short-term investments*		34,017		-		-		34,017
Other investments*		12,036		-		-		12,036
Auction-rate preferred securities		-		-		848		848
Auction-rate municipal securities		-		-		966		966
Total	$	101,152	$	-	$	1,814	$	102,966

* The amortized cost of these investments approximates fair market value.

At December 31, 2011, the par value of the auction-rate preferred securities and municipal securities were $0 and $1.3 million, respectively. At December 31, 2010, the par value of the auction-rate preferred securities and auction-rate municipal securities were $0.9 million and $1.3 million, respectively. As described in more detail below, all of our ARS have unrealized losses which have been recorded in accumulated other comprehensive loss. The maturity date for our auction-rate municipal securities is in December 2045.

In addition to the auction-rate preferred securities and auction-rate municipal securities discussed above, at December 31, 2011, we had $20.3 million of other investments classified as held-to-maturity securities which included $10.2 million in commercial paper, $8.1 million in U.S. agency bonds, and $2.0 million in U.S. Treasuries. These other investments are recorded at amortized cost. As of December 31, 2011, the maturity dates for the commercial paper, U.S. agency bonds, and U.S. Treasuries range from 1.1 to 1.6 years, 1.2 to 1.9 years, and 1.6 years, respectively. At December 31, 2010, we had $12.0 million of other investments classified as held-to-maturity securities which included $10.0 million in U.S. agency bonds and $2.0 million in corporate bonds. As of December 31, 2010, the maturity dates for U.S. agency bonds range from 1.0 to 1.7 years and for corporate bonds is 1.6 years. The amortized cost of these investments approximates fair market value.

Level 3 Gains and Losses

The table presented below summarizes the change in balance sheet carrying values associated with Level 3 financial instruments for the year ended December 31, 2011.

	Auction-rate			Auction-rate
(In thousands)	preferred securities			municipal securities		Total
Balance at December 31, 2010	$	848		$	966	$	1,814
Net transfers in/(out) of Level 3		-			-		-
Purchases		-			-		-
Settlements (at par)		(925	)		-		(925	)
Gains
Realized		-			-		-
Unrealized		77			32		109
Losses
Realized		-			-		-
Unrealized		-			-		-
Balance at December 31, 2011	$	-		$	998	$	998

All of the above ARS have been in a continuous unrealized loss position for 12 months or longer. We continue to receive regular dividends from each of our ARS at current market rates.

Historically, the ARS market was an active and liquid market where we could purchase and sell our ARS on a regular basis through auctions. As such, we classified our ARS as Level 1 investments in accordance with the FASB’s guidance at December 31, 2007. Beginning in February 2008, several of our ARS failed at auction due to a decline in liquidity in the ARS and other capital markets. We will not be able to access our investments in ARS until future auctions are successful, ARS are called for redemption by the issuers, or until sold in a secondary market. As all of our investments in ARS currently lack short-term liquidity, we have classified these investments as non-current investments as of December 31, 2011 and 2010.

The estimated fair value of our holdings of ARS at December 31, 2011 was $1.0 million. To value our ARS, we determined the present value of the ARS at the balance sheet date by discounting the estimated future cash flows based on a fair value rate of interest and an expected time horizon to liquidity. We also evaluated the credit rating of the issuer and found them all to be investment grade securities. There was no change in our valuation method during the year ended December 31, 2011 as compared to prior reporting periods. Our valuation analysis showed that our ARS have nominal credit risk. The impairment is due to liquidity risk. Additionally, as of December 31, 2011, we do not intend to sell the ARS, it is not more likely than not that we will be required to sell the ARS before recovery of their amortized cost bases, which may be at maturity, and we expect to recover the full amortized cost basis of these securities. As a result of our valuation analysis, our investment strategy, recurring dividend stream from these investments, and our strong cash and cash equivalents position, we have determined that the fair value of our ARS was temporarily impaired as of December 31, 2011.

We continue to monitor the market for ARS and consider its impact, if any, on the fair value of our investments. If current market conditions deteriorate further, we may be required to record additional unrealized losses in accumulated other comprehensive (loss) income. If the credit rating of the security issuers deteriorates, the anticipated recovery in market values does not occur, or we stop receiving dividends, we may be required to adjust the carrying value of these investments through impairment charges in our Consolidated Statements of Operations.

Foreign Currencies

In accordance with the FASB’s guidance on foreign currency translation, the financial statements of subsidiaries outside the United States are measured using the foreign subsidiary’s local currency as the functional currency. We translate the assets and liabilities of our foreign subsidiaries at the exchange rate in effect at the end of the reporting period. Revenues and expenses are translated using the average exchange rate in effect during the reporting period. Gains and losses from foreign currency translation are recorded in accumulated other comprehensive income (loss) included in stockholders’ equity. Transaction gains and losses and remeasurement of foreign currency denominated assets and liabilities are included in other income (expense). For the year ended December 31, 2011, we recognized a foreign currency transaction loss of $299,000. In 2010 and 2009, we recognized foreign currency transaction gains of $298,000 and $534,000, respectively. The foreign currency transaction (loss) gains were included in other (expense) income.

Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss

Comprehensive income (loss) is the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners.

The components of accumulated other comprehensive loss as of December 31, 2011 and 2010 are as follows:

At December 31,	2011			2010

Unrealized loss on marketable securities, net of taxes	$	(192,861	)	$	(262,051	)
Foreign currency translation adjustment		(70,988	)		(228,755	)
Total accumulated other comprehensive loss	$	(263,849	)	$	(490,806	)

Income Taxes

We provide for income taxes under the liability method in accordance with the FASB’s guidance on accounting for income taxes. Under this guidance, we only recognize a deferred tax asset for the future benefit of our tax losses, temporary differences and tax credit carry forwards to the extent that it is more likely than not that these assets will be realized. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance.

Recently issued accounting standards

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments intend to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The new amendments will be effective for interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact of this guidance on our financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. In this ASU, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The provisions of this new guidance are effective for interim and annual periods beginning after December 15, 2011. We retroactively adopted this guidance during the third quarter of 2011 and the impact on our financial statements was not material. ASU 2011-05 addresses the presentation of comprehensive income (loss) in consolidated financial statements and footnotes. The adoption impacts presentation only and had no effect on the Company’s financial condition, results of operations or cash flows. The Company did not adopt the provisions of the reclassification requirements, which were deferred by ASU 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, in December 2011.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

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