Avid 2006 Annual Report Download - page 41

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based on recent (six month trailing) implied volatility calculations. These calculations are performed on exchange
traded options of our stock. We believe that using a forward-looking market-driven volatility assumption will result
in the best estimate of expected volatility. Prior to adoption of SFAS 123(R), the expected volatility was based on the
historical volatility of the underlying stock. The assumed risk-free interest rate is the U.S. Treasury security rate with
a term equal to the expected life of the option. The assumed expected life is based on company-specific historical
experience. With regard to the estimate of the expected life, we consider the exercise behavior of past grants and
model the pattern of aggregate exercises. Based on our historical turnover rates, an annualized estimated forfeiture
rate of 6.5% has been used in calculating the estimated compensation cost for the year ended December 31, 2006.
Additional expense will be recorded if the actual forfeiture rates are lower than estimated, and a recovery of prior
expense will be recorded if the actual forfeitures are higher than estimated. Prior to the adoption of SFAS 123(R),
forfeitures were not estimated at the time of award.
If factors change and we employ different assumptions for estimating stock-based compensation expense in future
periods, or if we decide to use a different valuation model, the stock-based compensation expense we recognize
in future periods may differ significantly from what we have recorded in the current period and could materially
affect our operating income, net income and earnings per share. It may also result in a lack of comparability with
other companies that use different models, methods and assumptions. The Black-Scholes option-pricing model
was developed for use in estimating the fair value of traded options that have no vesting restrictions and are
fully transferable. These characteristics are not present in our option grants. Existing valuation models, including
the Black-Scholes model, may not provide reliable measures of the fair values of our stock-based compensation.
Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the
grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination
or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee
stock options, may expire with little or no intrinsic value compared to the fair values originally estimated on the
grant date and reported in our financial statements. Alternatively, the value realized from these instruments may
be significantly higher than the fair values originally estimated on the grant date and reported in our financial
statements. The guidance in SFAS 123(R) is relatively new and the application of these principles may be subject to
further interpretation and refinement over time. See Footnote L to our Consolidated Financial Statements in Item 8
for further information regarding our adoption of SFAS 123(R).
During 2006, we granted restricted stock units, rather than stock options, as part of our annual stock-based
compensation program. Also during 2006, we granted restricted stock and stock options to new hires and for other
purposes. In the future, we may grant either stock awards, options, or other equity-based instruments allowed by
our stock-based compensation plans, or a combination thereof, as part of our overall compensation strategy.
Allowance for Bad Debts and Reserves for Recourse under Financing Transactions
We maintain allowances for estimated bad debt losses resulting from the inability of our customers to make
required payments for products or services. When evaluating the adequacy of the allowances, we analyze accounts
receivable balances, historical bad debt experience, customer concentrations, customer credit worthiness and
current economic trends. If the financial condition of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances could be required.
We provide third-party lease financing options to certain customers. We are not generally a party to the leases;
however, during the terms of these leases, which are generally three years, we remain liable for any unpaid principal
balance upon default by the end-user, but such liability is limited in the aggregate. We record revenue from these
transactions upon the shipment of our products because we believe that our collection experience with similar
transactions supports our assessment that the fee is fixed or determinable. We have operated these programs for
over ten years and to date defaults under the program have consistently ranged between 2% and 4%. We maintain
reserves for estimated recourse losses under this financing program based on these historical default rates. While
we have experienced insignificant losses from defaults to date under this program, deterioration in the financial
condition of our customers who participate in the program could require additional reserves. See Footnote J to our
Consolidated Financial Statements in Item 8 for further information regarding third-party lease financing.