Avid 2005 Annual Report Download - page 70

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Advertising Expenses
All advertising costs are expensed as incurred and are classified as selling and marketing expenses. Advertising expenses during
2005, 2004 and 2003 were $12.6 million, $8.1 million and $6.0 million, respectively.
As part of its advertising initiatives, the Company maintains a cooperative marketing program for certain resellers in the Professional
Video segment. Under this program, participating resellers can earn reimbursement credits of up to 1% of qualified purchases from
Avid. Consideration given to these resellers is included in selling and marketing expense in accordance with EITF Issue 01-09, as the
Company receives an identifiable benefit that is sufficiently separable from the sale of the Company’s products and can reasonably
estimate the fair value of that benefit. The Company records the cooperative marketing credit earned by the reseller at the date the
related revenue is recognized based on an estimate of claims to be made. To date, actual claims have not differed materially from
management’s estimates.
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. Development costs for software to be sold that are incurred subsequent to the establishment
of technological feasibility, but prior to the general release of the product, are capitalized. Upon general release, these costs are
amortized using the straight-line method over the expected life of the related products, generally 12 to 36 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 at each balance sheet date, considering a number of business and economic factors. Unamortized capitalized software
development costs were $2.0 million, $0.8 million and $0.1 million at December 31, 2005, 2004 and 2003, respectively.
Income taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for
Income Taxes.” SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
Computation of Net Income (Loss) Per Common Share
Net income (loss) 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,
excluding unvested restricted stock held by employees. Diluted EPS is based upon the weighted-average number of common and
potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding
stock options and warrants as well as unvested restricted stock, the proceeds of which are then assumed to have been used to
repurchase outstanding common stock using the treasury stock method. For periods that the Company reports a net loss, all
potential common shares are considered anti-dilutive and are excluded from calculations of diluted net loss per common share. For
periods when the Company reports net income, only potential common shares with purchase prices in excess of the Company’s
average common stock fair value for the related period are considered anti-dilutive and are excluded from calculations of diluted
net income per common share (see Note O).
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss), which includes foreign currency translation
adjustments and unrealized gains and losses on certain investments. For the purposes of comprehensive income disclosures, the
Company does not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as the
Company intends to permanently reinvest undistributed earnings in its foreign subsidiaries. Accumulated other comprehensive
income at December 31, 2005 and 2004 is comprised of cumulative translation adjustments of $1.2 million and $4.8 million,
respectively and net unrealized gains (losses) on debt securities of ($0.1) million and ($0.2) million, respectively.
Accounting for Stock-Based Compensation
The Company has several stock-based employee compensation plans, which are described more fully in Note J. The Company
accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation
expense is recorded for options issued to employees in fixed amounts and with fixed exercise prices at least equal to the fair market
value of the Company’s common stock at the date of grant. When the exercise price of stock options granted to employees is less