Avid 2006 Annual Report Download - page 40

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of contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we consider the
payment terms of the transaction, our collection experience in similar transactions without making concessions,
and our involvement, if any, in third-party financing transactions, among other factors. If the fee is not fixed or
determinable, revenue is recognized only as payments become due from the customer, provided that all other
revenue recognition criteria are met. If a significant portion of the fee is due after our normal payment terms, which
are generally 30 days, but can be up to 90 days, after the invoice date, we evaluate whether we have sufficient
history of successfully collecting past transactions with similar terms. If that collection history is successful, then
revenue is recognized upon delivery of the products, assuming all other revenue recognition criteria are satisfied.
We record as revenue all amounts billed to customers for shipping and handling costs and record the actual
shipping costs as a component of cost of revenues. We record reimbursements received from customers for out-of-
pocket expenses as revenue, with related costs recorded as cost of revenues.
Stock-Based Compensation
On January 1, 2006, we adopted the provisions of, and started to account for stock-based compensation in
accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,”
which is a revision of SFAS No. 123, “Accounting for Stock Based Compensation.” SFAS 123(R) requires employee
stock-based compensation awards to be accounted for under the fair value method and eliminates the ability to
account for these instruments under the intrinsic value method as prescribed by Accounting Principles Board, or
APB, Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. We adopted SFAS
123(R) using the modified prospective application method as permitted under SFAS 123(R). Under this method, we
are required to record compensation cost, based on the fair value estimated in accordance with SFAS 123(R), for
stock-based awards granted after the date of adoption over the requisite service periods for the individual awards,
which generally equals the vesting period. We are also required to record compensation cost for the unvested
portion of previously granted stock-based awards outstanding at the date of adoption over the requisite service
periods for the individual awards based on the fair value estimated in accordance with the original provisions of
SFAS No. 123 adjusted for forfeitures as required by SFAS 123(R).
Prior to the adoption of SFAS 123(R), we accounted for stock-based compensation under the recognition and
measurement principles of APB Opinion No. 25 and related interpretations. Accordingly, no compensation expense
was recorded for options issued to employees and non-employee directors in fixed amounts and with fixed
exercise prices at least equal to the market price of our common stock at the date of grant. In connection with our
acquisition of M-Audio in August 2004, we assumed options to certain M-Audio employees at exercise prices that
were less than the market price of our common stock at the date of grant. We recorded as deferred compensation
a portion of the difference between the exercise prices and the fair value of the options at the date of completion
of the acquisition, determined under the Black-Scholes method, multiplied by the number of shares underlying
the options. The resulting deferred compensation is being expensed over the vesting period of the options.
Additionally, deferred compensation was recorded for restricted stock granted to employees based on the market
price of our common stock at the date of grant, which was being expensed over the period in which the restrictions
lapse. In connection with the adoption of SFAS 123(R) on January 1, 2006, we reversed the remaining deferred
compensation of $1.8 million, with the offset to additional paid-in capital.
In anticipation of the adoption of SFAS 123(R), on October 26, 2005, our board of directors approved a partial
acceleration of the vesting of all outstanding options to purchase our common stock that were granted on February
17, 2005. Vesting was accelerated for options to purchase 371,587 shares of our common stock with an exercise
price of $65.81 per share, including options to purchase 157,624 shares of our common stock held by our executive
officers. The decision to accelerate vesting of these options was made to avoid recognizing compensation cost
related to these out-of-the-money options in our future statements of operations upon the adoption of SFAS 123(R).
It is estimated that the maximum future compensation expense that would have been recorded in our statements of
operations had the vesting of these options not been accelerated is approximately $4.4 million.
The fair values of restricted stock awards, including restricted stock and restricted stock units, are based on the
intrinsic values of the awards at the date of grant. As permitted under SFAS No. 123 and SFAS 123(R), we use the
Black-Scholes option pricing model to estimate the fair value of stock option grants. The Black-Scholes model relies
on a number of key assumptions to calculate estimated fair values. Our assumed dividend yield of zero is based
on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Since
adoption of SFAS 123(R) on January 1, 2006, the expected stock-price volatility assumption used by us has been