Adobe 2010 Annual Report Download - page 119

ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
119
NOTE 16. 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 2008 through fiscal 2010 were as follows (in thousands):
2010
2009
2008
Rent expense ................................................................................
$
109,114
$
93,921
$
101,202
Less: sublease income ..................................................................
3,929
5,563
11,421
Net rent expense .....................................................................
$
105,185
$
88,358
$
89,781
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 equity balance 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, and are recorded as investments in lease receivables on our Consolidated Balance Sheets. As of December
3, 2010, the fair value of the lease receivables related to all three towers approximated carrying value. 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 December 3, 2010, we were in compliance with all of the 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 Sheets. 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.
In June 2010, we entered into a sale-leaseback agreement to sell equipment totaling $32.2 million and leaseback the
same equipment over a period of 43 months. This transaction was classified as a capital lease obligation and recorded at fair
value. See Note 17 for further discussion of our capital lease obligation.
Unconditional Purchase Obligations
Our purchase obligations consist of agreements to purchase goods and services entered in the ordinary course of
business.