Adobe 2009 Annual Report Download - page 115

ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
115
For fiscal 2009, 2008 and 2007, options to purchase approximately 27.0 million, 16.5 million and 10.4 million shares,
respectively, of common stock with exercise prices greater than the annual average fair market value of our stock of $27.30,
$37.07 and $41.77, respectively, were not included in the calculation because the effect would have been anti-dilutive.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease certain of our facilities and some of our equipment under non-cancellable operating lease arrangements that
expire at various dates through 2028. We also have one land lease that expires in 2091. Rent expense includes base
contractual rent and variable costs such as building expenses, utilities, taxes, insurance and equipment rental. Rent expense
and sublease income for these leases for fiscal 2007 through fiscal 2009 were as follows (in thousands):
2009 2008 2007
Rent expense ......................................... $ 93,921 $ 101,202 $ 90,553
Less: sublease income .................................. 5,563 11,421 9,406
Net rent expense .................................... $ 88,358 $ 89,781 $ 81,147
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 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 our election. In June 2009, we submitted notice to the lessor that we
intended to exercise our option to renew this agreement for an additional five years effective August 2009. As stated in the
original lease agreement, in conjunction with the lease renewal, we were required to obtain a standby letter of credit for
approximately $16.5 million which enabled us to secure a lower interest rate and reduce the number of covenants. As defined
in the lease agreement, the standby letter of credit primarily represents the lease investment balance equity which is callable
in the event of default. In March 2007, the Almaden Tower lease was extended for five years, with a renewal option for an
additional five years solely at our election. As part of the lease extensions, we purchased the lease receivable from the lessor
of the East and West Towers for $126.8 million and a portion of the lease receivable from the lessor of the Almaden Tower
for $80.4 million, both of which are recorded as investments in lease receivables on our Consolidated Balance Sheets. This
purchase may be credited against the residual value guarantee if we purchase the properties or will be repaid from the sale
proceeds if the properties are sold to third parties. Under the agreement for the East and West Towers and the agreement for
the Almaden Tower, we have the option to purchase the buildings at anytime during the lease term for approximately $143.2
million and $103.6 million, respectively. The residual value guarantees under the East and West Towers and the Almaden
Tower obligations are $126.8 million and $89.4 million, respectively.
These two leases are both subject to standard covenants including certain financial ratios that are reported to the lessors
quarterly. As of November 27, 2009, 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 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, 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 residual value guarantee amount.