Avid 2008 Annual Report Download - page 68

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63
The following table sets forth the weighted-average key assumptions and fair value results for stock options with time-
based vesting granted during the years ended December 31, 2008, 2007 and 2006:
2008 2007 2006
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 2.49% 4.48% 4.84%
Expected volatility 41.0% 32.8% 34.1%
Expected life (in years) 4.47 4.26 4.39
Weighted-average fair value of options granted $7.95 $10.76 $14.16
The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present
intention to pay cash dividends. The expected stock-price volatility assumption used by the Company is based on
recent (six-month trailing) implied volatility calculations. These calculations are performed on exchange-traded
options of the Company’s common stock, based on the implied volatility of long-term (9- to 39-month term)
exchange-traded options, which is consistent with the requirements of SFAS 123(R) and Securities and Exchange
Commission Staff Accounting Bulletin No. 107. The Company believes that using a forward-looking, market-driven
volatility assumption will result in the best estimate of expected volatility. The risk-free interest rate is the U.S.
Treasury security rate with a term equal to the expected life of the option. The expected life is based on company-
specific historical experience. With regard to the estimate of the expected life, the Company considers the exercise
behavior of past grants and models the pattern of aggregate exercises.
In December 2007, the Company issued a stock option to purchase 625,000 shares of Avid common stock to the
Company’s chief executive officer that has vesting based on market conditions or a combination of performance and
market conditions. The compensation costs and derived service periods for stock option grants with vesting based on
market conditions or a combination of performance and market conditions are estimated using the Monte Carlo
valuation method. For stock option grants with vesting based on a combination of performance and market conditions,
the compensation costs are also estimated using the Black-Scholes valuation method, and compensation costs for
these grants are recorded based on the higher estimate for each vesting tranche. The compensation cost and derived
service periods for this option were recorded based on a Monte Carlo valuation with an assumed volatility of 32.80%
and a risk-free interest rate of 3.93%. The weighted-average fair value of this grant is $6.60 and the expected lives
range from 3.25 to 4.98 years with a weighted average of 4.44 years.
During 2008, the Company issued stock options to purchase 830,000 shares of Avid common stock to executives of
the Company that have vesting based on market conditions or a combination of performance and market conditions.
The compensation cost and derived service periods for these options were recorded based on a Monte Carlo valuation
with a weighted-average volatility of 40.35% and a risk-free interest rate of 3.53%. The weighted-average fair value
of these grants is $6.44 and the expected lives range from 2.81 to 5.09 years with a weighted average of 4.33 years.
Also during 2008, the Company issued 27,200 restricted stock units to executives as part of the Company’s annual
grant program that have vesting based on market conditions or a combination of performance and market conditions.
The compensation cost and derived service periods for these restricted stock units were estimated using the Monte
Carlo valuation method using a volatility of 38.95% and a risk-free interest rate of 3.29%. For restricted stock units
with vesting based on a combination of performance and market conditions, compensation costs were also estimated
using the intrinsic value on the date of grant factored for probability. Compensation costs for each vesting tranche
were recorded based on the higher estimate. The weighted-average fair value of these restricted stock units is $18.61
and the derived service periods range from 3.04 to 4.75 years with a weighted average of 4.17 years.
The Company estimates forfeiture rates at the time awards are made based on historical turnover rates and applies
these rates in the calculation of estimated compensation cost. For all stock-based awards for the year ended December
31, 2006 and for most of the stock-based awards for the year ended December 31, 2007, the Company applied a 6.5%
estimated forfeiture rate. In 2007, based on historical turnover rates, the Company segregated non-employee directors
into a separate class, and during 2008, the Company determined that the executive management staff should be
segregated from the rest of its employees into a separate class for the calculation of stock-based compensation. The
Company reviews historical turnover rates quarterly and updates estimated forfeiture rates to be applied to different
classes for the calculation of stock-based compensation. As of December 31, 2008, the Company’s annualized