Avid 2009 Annual Report Download - page 29

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The fair values of restricted stock awards with time-based vesting, including restricted stock and restricted stock units,
are generally based on the intrinsic values of the awards at the date of grant. As permitted under ASC topic 718, we
generally 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.
Our expected stock-price volatility assumption is based on recent (six-month trailing) implied volatility calculations.
These calculations are performed on exchange-traded options of our common stock. We believe that using a forward-
looking market-driven volatility assumption will result in the best estimate of expected volatility. 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.
In December 2007, we began issuing options to purchase shares of our common stock that had vesting based on market
conditions, specifically Avid’s stock price, 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 factored for the estimated probability of achieving the performance goals, and
compensation costs for these grants are recorded based on the higher estimate for each vesting tranche.
We estimate forfeiture rates at the time awards are made based on historical and estimated future turnover rates and
apply these rates in the calculation of estimated compensation cost. The estimation of forfeiture rates includes a
quarterly review of historical turnover rates and an update of the estimated forfeiture rates to be applied to employee
classes for the calculation of stock-based compensation. During 2009, forfeiture rates for the calculation of stock-based
compensation were estimated and applied based on three classes, non-employee directors, executive management staff
and other employees. At December 31, 2009, our annualized estimated forfeiture rates were 0% for non-employee
director awards and 10% for both executive management staff and other employee awards. Then-current estimated
forfeiture rates are also applied quarterly to all outstanding stock options and non-vested restricted stock awards, which
may result in a revised estimate of compensation costs related to these stock-based grants.
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. See Note B to our Consolidated Financial Statements in Item 8 for
further information regarding stock-based compensation.
Business Combinations
When we acquire new businesses, we allocate the purchase price to the acquired assets, including intangible assets, and
the liabilities assumed based on their estimated fair values, with any amount in excess of such allocations designated as
goodwill. Significant management judgments and assumptions are required in determining the fair value of acquired
assets and liabilities, particularly acquired intangible assets. For example, it is necessary to estimate the portion of
development efforts that are associated with technology that is in process and has no alternative future use. The
valuation of purchased intangible assets is based on estimates of the future performance and cash flows from the
acquired business. The use of different assumptions could materially impact the purchase price allocation and our
financial position and results of operations.