Avid 2011 Annual Report Download - page 66

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excluding non-vested restricted stock held by employees. Diluted EPS is based on 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 non-vested restricted stock and restricted stock units, the proceeds and
remaining unrecorded compensation expense of which are then assumed to have been used to repurchase outstanding common
stock using the treasury stock method. For periods when the Company reports a loss, all potential common stock is considered
anti-dilutive. For periods when the Company reports net income, potential common shares with combined purchase prices and
unamortized compensation cost in excess of the Company's average common stock fair value for the related period or that are
contingently issuable are considered anti-dilutive. The contingently issuable potential common shares result from certain stock
options and restricted stock units granted to the Company's executive officers that vest based on performance and market
conditions (see Note C).
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) 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 consisted of the following at December 31, 2011 and 2010 (in thousands):
Cumulative translation adjustments
Net unrealized losses on defined benefit plan and marketable securities
Accumulated other comprehensive income
2011
$ 4,807
—
$ 4,807
2010
$ 7,717
(449)
$ 7,268
Accounting for Stock-Based Compensation
The Company's stock-based employee compensation plans, which are described more fully in Note N, allow the Company to
grant stock awards, options, or other equity-based instruments, or a combination thereof, as part of its overall compensation
strategy. For stock-based awards granted, the Company records stock-based compensation cost based on the fair value estimated
in accordance with ASC Topic 718, Compensation - Stock Compensation, over the requisite service periods for the individual
awards, which generally equals the vesting period. The vesting of stock-based award grants may be based on time, performance,
market conditions, or a combination of performance or market conditions.
The fair values of restricted stock and restricted stock unit awards with time-based vesting are based on the intrinsic values of the
awards at the date of grant. As permitted under ASC Topic 718, the Company uses the Black-Scholes option pricing model to
estimate the fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key
assumptions to calculate estimated fair values. The assumed 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 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 ASC Topic 718. The Company believes 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, the Company considers the exercise behavior of past grants
and models the pattern of aggregate exercises.
The Company also issues stock option grants or restricted stock unit awards with vesting based on market conditions, specifically
the Company's stock price, or a combination of performance, generally the Company's return on equity, or market conditions.
The fair values and derived service periods for all grants that have vesting based on market conditions are estimated using the
Monte Carlo valuation method. For stock option grants with vesting based on a combination of performance or market
conditions, the fair values are also estimated using the Black-Scholes valuation method, and compensation costs for these grants
are recorded based on the higher estimated fair value for each vesting tranche and factored for the estimated probability of
achieving the performance goals. For restricted stock unit awards with vesting based on a combination of performance or market
conditions, the fair values are also estimated based on the intrinsic values of the awards at the date of grant, and compensation
costs for these grants are also recorded based on the higher estimated fair value for each vesting tranche and factored for the