Avid 2008 Annual Report Download - page 31

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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.
We estimate forfeiture rates at the time awards are made based on historical turnover rates and apply these rates in the
calculation of estimated compensation cost. For all stock-based awards for the year ended December 31, 2006 and for
most stock-based awards for the year ended December 31, 2007, we applied a 6.5% estimated forfeiture rate. We review
historical turnover rates quarterly and update estimated forfeiture rates to be applied to employee classes for the
calculation of stock-based compensation. In 2007, based on historical turnover rates, we segregated our non-employee
directors into a separate class, and in 2008, we determined that the executive management staff should be segregated
from the rest of our employees into a separate class for the calculation of stock-based compensation. As of December
31, 2008, our annualized estimated forfeiture rates were 0% for non-employee director awards, 9% for executive
management staff and 10% for all other employee awards. Then-current revised 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. As a result of the application of the changes in forfeiture rates
in 2008, we recorded in our results of operations cumulative adjustments that reduced previously recorded stock-based
compensation expense of approximately $1.9 million.
In December 2007, we granted a stock option to purchase 625,000 shares of our common stock to our chief executive
officer that has vesting based on market conditions or a combination of performance and market conditions. During
2008, we issued to executives additional stock options to purchase 830,000 shares of our common stock and 27,200
restricted stock units, which also have vesting based on market conditions or a combination of performance and market
conditions. The compensation costs and derived service periods for all grants with vesting based on market conditions
or a combination of performance and market conditions were 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
were also estimated using the Black-Scholes valuation method. For restricted stock grants with vesting based on a
combination of performance and market conditions, the compensation costs were also estimated using the intrinsic
value on the date of grant factored for probability. Compensation costs for these stock option and restricted stock unit
grants were recorded based on the higher estimate for each vesting tranche.
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 and Monte
Carlo models, may not provide reliable measures of the fair values of our stock-based compensation. See Note B to our
Consolidated Financial Statements in Item 8 for further information regarding stock-based compensation.
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 some of our customers. We are not generally a party to the leases;
however, during the terms of these leases, which are generally three years, we may remain liable for any unpaid
principal balance upon default by the customer, but such liability is limited in the aggregate. We record revenues from
these transactions upon the shipment of our products because we believe that our collection experience with similar