Adobe 2006 Annual Report Download - page 103

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103
market value of our stock of $35.32, $30.33, and $22.23, respectively, were not included in the calculation
because the effect would have been anti-dilutive.
Note 15. Commitments and Contingencies
Lease Commitments
We lease certain of our facilities and some of our equipment under noncancelable operating lease
arrangements that expire at various dates through 2025. We also have one land lease that expires in 2091.
Rent expense and sublease income for these leases for fiscal 2004 through fiscal 2006 were as follows:
2006 2005 2004
Rent expense ................................................
.
$ 74,629 $ 58,215 $55,333
Sublease income...........................................
.
3,556 4,995 5,681
Net rent expense...........................................
.
$ 71,073 $ 53,220 $49,652
We occupy three office buildings in San Jose, California where our corporate headquarters are located.
We reference these office buildings as the “Almaden tower” and the “East and West towers.”
In December 2003, upon completion of construction, we began a five year lease agreement for the
Almaden tower. Under the agreement, we have the option to purchase the building at any time during the
lease term for the lease balance, which is approximately $103.0 million. The maximum recourse amount
(“residual value guarantee”) under this obligation is $90.8 million. we have put in place for the East and
West Towers.
In August 2004, we extended the lease agreement for our East and West towers for an additional five
years with an option to extend for an additional five years solely at Adobe’s election. As part of the lease
extension, we purchased a portion of the lease receivable of the lessor for $126.8 million, which is recorded
as an investment in lease receivable on our consolidated balance sheet. This purchase may be credited
against the residual value guarantee if we purchase the properties or repaid from the sale proceeds if the
properties are sold to third parties. Under the agreement for the East and West towers, we have the option
to purchase the buildings at any time during the lease term for the lease balance, which is approximately
$143.2 million. The maximum recourse amount (“residual value guarantee”) under this obligation is $126.8
million.
These two leases are both subject to standard covenants including liquidity, leverage and profitability
ratios that are reported to the lessors quarterly. As of December 1, 2006, we were in compliance with all
covenants. In the case of a default, the lessor may demand we purchase the buildings for an amount equal
to the lease balance, or require that we remarket or relinquish the buildings. Both leases qualify for
operating lease accounting treatment under Statement of Financial Accounting Standards No. 13,
“Accounting for Leases,” and, as such, the buildings and the related obligations are not included on our
consolidated balance sheet. We utilized this type of financing in order to access bank-provided funding at
the most favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At
the end of the lease term, we can extend the lease for an additional five year term (for the East and West
towers lease only), 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.