Adobe 2003 Annual Report Download - page 52

52
building. The construction of the building was completed in December 2003. Due to lower than expected financing
and construction costs, the final lease balance was lowered to $103.0 million. As part of the agreement, we entered
into a five-year lease that began upon the completion of the building. At the end of the lease term, we can purchase
the building for the lease balance, remarket or relinquish the building. If we choose to remarket or are required to do
so upon relinquishing the building, we are bound to arrange the sale of the building to an unrelated party and will be
required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the
maximum recourse amount of $90.8 million (“residual value guarantee”). See Note 14 in our Notes to Consolidated
Financial Statements for further information.
In August 1999, we entered into a five-year lease agreement for our other two office buildings that currently
serve as our corporate headquarters in San Jose, California. Under the agreement, we have the option to purchase the
buildings at any time during the lease term for the lease balance, which is approximately $142.5 million. We are in
the process of evaluating alternative financing methods at expiration of the lease in fiscal 2004 and believe that
several suitable financing options will be available to us. At the end of the lease term, we can purchase the buildings
for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon
relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be
required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the
maximum recourse amount of $132.6 million (“residual value guarantee”). For further information, see Note 14 in
our Notes to Consolidated Financial Statements.
The two lease agreements discussed above are subject to standard financial covenants. The agreements limit the
amount of indebtedness we can incur. A leverage covenant requires us to keep our debt to EBITDA ratio less than
2.5:1.0. As of November 28, 2003, our debt to EBITDA ratio was 0.53:1.0, well within the limit. We also have a
liquidity covenant which requires us to maintain a quick ratio equal to or greater than 1.0. As of November 28, 2003,
our quick ratio was 2.2, well above the minimum. We expect to remain within compliance in the next 12 months.
We are comfortable with these limitations and believe they will not impact our cash or credit in the coming year or
restrict our ability to execute our business plan.
The following table summarizes our contractual commitments as of November 28, 2003:
Less than Ove
r
Total 1 year 1 – 3 years 3-5
y
ears 5
y
ears
Non-cancelable operating leases,
net of sublease income ................. $ 83.9 $ 23.6 $ 25.9 $ 16.3 $ 18.1
Indemnifications
In the normal course of business, we provide indemnifications of varying scope to customers against claims of
intellectual property infringement made by third parties arising from the use of our products. Historically, costs
related to these indemnification provisions have not been significant and we are unable to estimate the maximum
potential impact of these indemnification provisions on our future results of operations.
We have commitments to make certain milestone and/or retention payments typically entered into in
conjunction with various acquisitions, for which we have made accruals in our consolidated financial statements. In
connection with our purchases of technology assets during fiscal 2003, we entered into employee retention
agreements totaling $2.2 million. We are required to make payments upon satisfaction of certain conditions in the
agreements.
As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for
certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The
maximum potential amount of future payments we could be required to make under these indemnification
agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and
enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these
indemnification agreements in excess of applicable insurance coverage is minimal.