Avid 1998 Annual Report Download - page 39

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34
revenue on software transactions. SOP 97-2 requires that revenue recognized from software transactions be allocated to
each element of the transaction based on the relative fair values of the elements, such as software products, specified
upgrades, enhancements, post contract customer support, installation or training. The determination of fair value is based
upon vendor specific objective evidence. If evidence of fair value for each element of the transaction does not exist, all
revenue from the transaction is generally deferred until evidence of each element’ s fair value does exist or until all elements
of the transaction are delivered. According to the guidelines, revenue allocated to software products, specified upgrades
and enhancements is generally recognized upon delivery of each of the related products, upgrades or enhancements.
Revenue allocated to post contract customer support is generally recognized ratably over the term of the support, and
revenue allocated to service elements is generally recognized as the services are performed.
The Company recognizes revenue from sales of software or products including proprietary software upon product shipment
to distributors and end users and upon receipt of a signed purchase order or contract, provided that collection is probable
and all other revenue recognition criteria of SOP 97-2 are met. The Company’ s products do not require significant
production, modification or customization of software. Installation of the products is generally routine, requires
insignificant effort and is not essential to the functionality of the product. The Company recognizes revenue from
maintenance ratably and from training or other related services as the services are performed. Revenue from services has
been insignificant in relation to product revenue for all periods presented.
Included in accounts receivable allowances are sales allowances provided for expected returns and credits and an allowance
for bad debts. Actual returns have not differed materially from management’ s estimates and have not been significant. In
addition, the Company offers from time to time rebates on purchases of certain products or rebates based on purchasing
volume, which are accounted for as offsets to revenue upon shipment of related products or expected achievement of
purchasing volumes. When telephone support is provided at no additional charge during the product’ s initial warranty
period and no other product enhancements or upgrades are provided, the revenue allocated to the telephone support is
recognized at time of product shipment, with the costs of providing the support being accrued.
Warranty Expense
The Company provides a warranty reserve at the time of sale for the estimated cost to repair or replace defective hardware
products.
Research and Development Costs
Research and development costs are expensed as incurred except for costs of internally developed or externally purchased
software that qualify for capitalization. Capitalized costs are amortized using the straight-line method upon general release,
over the expected life of the related products, generally 12 to 24 months. The straight-line method generally results in
approximately the same amount of expense as that calculated using the ratio that current period gross product revenues bear
to total anticipated gross product revenues. The Company evaluates the net realizable value of capitalized software on an
ongoing basis, relying on a number of business and economic factors which could result in shorter amortization periods.
Computation of Net Income (Loss) Per Common Share
Net income per common share is presented for both basic earnings per share (“Basic EPS”) and diluted earnings per share
(“Diluted EPS”). Basic EPS is based upon the weighted average number of common shares outstanding during the period.
Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the
period. Common stock equivalent shares are included in the Diluted EPS calculation where the effect of their inclusion
would be dilutive. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants,
the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock
method. Net loss per common share, both basic and dilutive, is based upon the weighted average number of common shares
outstanding during the period.
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (“SFAS 130”),
“Reporting Comprehensive Income”. SFAS 130 requires the reporting of comprehensive income in addition to net income.
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of net income (loss). The adoption of SFAS 130 had