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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission file number: 0-15175

ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (408) 536-6000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES /x/  NO / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.  / /

    The aggregate market value of the common stock held by non-affiliates of the registrant as of December 31, 1999 was $7,869,021,358.

    The number of shares outstanding of the registrant's common stock as of December 31, 1999 was 119,501,643.

DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Notice of Annual Meeting of Stockholders to be held on April 26, 2000 are incorporated by reference into Part III.

TABLE OF CONTENTS

Forward-Looking Statements

    In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results of Operations." You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed in 2000. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

PART I

Item 1. Business

    Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") is a provider of graphic design, publishing, and imaging software for Web and print production. We offer a market-leading line of application software products for creating, distributing, and managing information of all types. We license our industry-standard technologies to major hardware manufacturers, software developers, and service providers, and offer integrated software solutions to businesses of all sizes. Our software runs on Microsoft Windows, Apple Macintosh, Linux, and UNIX platforms.

    Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a World Wide Web site at www.adobe.com.

    On September 16, 1999, Adobe's Board of Directors announced a two-for-one stock split, effected in the form of a stock dividend of our common stock for stockholders of record on October 4, 1999. The stock dividend was paid on October 26, 1999. All share and per share amounts referred to in this Form 10-K have been adjusted to reflect the stock split.

BUSINESS OVERVIEW

    In 1984, Adobe developed the software that initiated desktop publishing. Today, we continue to be uniquely positioned to make dramatic changes not only to how society creates visually rich information for print and the Web, but also as to how it distributes and accesses that information electronically.

    In the simplest of terms, Adobe helps people communicate better. By delivering powerful graphic design, publishing, and imaging software for print and Web production, we help people express, share, and manage their ideas in imaginative and meaningful new ways.

    Our strategy is to address the needs of professional publishers, Web publishers, business publishers, and consumers, as well as document intensive companies that are transitioning from paper to digital-based processes and workflows. We execute on this strategy by delivering products that support industry standards and that can be deployed on multiple computing environments, including Microsoft Windows, Apple Macintosh, Linux, and UNIX.

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PRODUCTS AND MARKETS OVERVIEW

    We categorize our products into four principal business segments:

WEB PUBLISHING

Web Publishing Market Opportunity

    Professional Web designers use Adobe's Web page layout, digital video, and digital imaging software to enable the virtual presentation of products and services on the Web, allowing companies to create brand differentiation and a satisfying Web browsing and online shopping experience for customers. Web page content, which includes graphics, video, digital photograph images, animation, navigational buttons, banners, and textual items, are created with our software tools and integrated into dynamic, visually appealing web pages. Web design professionals use our tools to make their Web pages stand out and differentiate their companies' Web sites from their competitors'.

    As use of the Web expands, we believe businesses throughout the world will continue to build and enhance their online presence on the Web. We also believe that the number of Web design professionals who create Web pages will grow to meet the increased online needs of these companies.

    In addition, companies will need easier-to-use methods for dynamically populating Web pages with information stored in databases, or data that changes rapidly and comes from multiple sources. Companies will also turn to Web page elements that use motion to convey messages, such as animation and digital movies.

    We have responded to these growing Internet trends with several new releases of our Web Publishing software applications. In March of fiscal 1999, we released a new version of Adobe GoLive, which is a professional Web design and publishing tool. In July of fiscal 1999, we released version 5.5 of Adobe Photoshop, which includes enhanced capabilities for Web image and graphic production. And in September of fiscal 1999, we released Adobe After Effects version 4.1, which offers a rich environment for compositing, animation, and effects capabilities for film and the Web.

    We also developed and released a new plug-in for Adobe GoLive called DynamicLink in December of 1999. DynamicLink is a module that automatically generates Active Server Page ("ASP") code using content from databases and allows Web page designers to create data-driven Web pages.

    We expect to increase our worldwide presence in Web page layout, digital video, and digital imaging software markets with new software releases and updates as these markets continue to grow. We will also work to integrate our products more seamlessly with each other, providing Web design professionals a complete and creative working environment.

Web Publishing Products

    Adobe ActiveShare—software that allows consumers to share photos over the Web. Includes virtually everything needed to import, edit, manage and send photos either in an e-mail message or directly to Adobe Activeshare.com for sharing on the Web.

    Adobe After Effects—software used to create sophisticated animation, motion compositing, and special effects found in multimedia, broadcast, film and the Web.

    Adobe Dynamic Media Collection—suite of four integrated application products that allows users to produce professional-quality video, film, multimedia, and Web projects. Suite includes Adobe After Effects, Adobe Premiere, Adobe Photoshop, and Adobe Illustrator.

    Adobe GoLive—professional Web design and publishing software which provides innovative tools Web authors require to design, layout, and produce cutting-edge Web sites without the need for complex multimedia programming.

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    Adobe ImageReady—now found in Adobe Photoshop, this tool provides a comprehensive environment to refine and prepare web graphics, which enables a user to quickly and easily assess and balance the trade-offs between size and quality before posting images to a web site.

    Adobe ImageStyler—a software tool that allows users to quickly add graphics and special effects to Web sites without being a design professional.

    Adobe PageMill—a tool used to create full-featured Web pages without requiring user knowledge of hypertext mark-up language ("HTML"); it employs easy drag-and-drop techniques to simplify operation, from creating or importing text and images to adding audio, video, and animation.

    Adobe PhotoDeluxe—software that allows consumers and small businesses to easily enhance and personalize their photos for a wide variety of applications in print and electronic media.

    Adobe Photoshop—provides photo design enhancement capabilities for print, the Internet, and multimedia; used by graphic designers, Internet content creators, Webmasters, and digital photographers.

    Adobe Photoshop Limited Edition—provides a smaller, basic set of the image-editing tools found in Adobe Photoshop.

    Adobe Premiere—professional digital video-editing software used to create broadcast-quality movies for video, film, multimedia, and the Web.

    Adobe Web Collection—a comprehensive, integrated software suite that allows users to design still and interactive Web graphics, optimize those graphics for efficient downloading, and build dynamic Web sites that support the latest technology and standards. Suite includes three award-winning Adobe applications: Adobe GoLive, Adobe Photoshop, and Adobe Illustrator.

PRINT PUBLISHING

Print Publishing Market Opportunity

    Graphic designers, production artists, technical writers, and prepress professionals use Adobe's solutions for professional page layout, illustration, business publishing, and printing visually rich information. Our software tools are used to create much of the printed information people see and read every day, including magazines, newspapers, catalogs, advertisements, brochures, product documentation, technical manuals, books, memos, reports, and banners. Consequently, we have significant market share in the technical publishing, illustration, typeface, and business publishing/layout markets.

    We expect to maintain and grow our worldwide presence in the professional publishing markets in which we compete and increase our market share in the professional page layout market through licensing and adoption of our InDesign product, our new professional page layout product that shipped in the third quarter of fiscal 1999. We will also work to integrate our products more seamlessly with each other, providing print professionals a complete and creative working environment.

Print Publishing Products

    Adobe Design Collection—suite of four award-winning application products that allows consumers to create and produce professional images, illustrations, and layouts, and to publish documents across media. Suite includes Adobe InDesign, Adobe Photoshop, Adobe Illustrator, and Adobe Acrobat.

    Adobe Dimensions—a 3D rendering tool for life-like modeling and visualization. Brings 2D structures into 3D and applies textured surfaces, custom lighting effects and more.

    Adobe Font Folio—contains the entire Adobe Type Library of more than 2,500 typefaces on two CD-ROMs, unlocked and ready to use.

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    Adobe FrameMaker—an application for authoring and publishing long, structured, content-rich documents including books, documentation, technical manuals, and reports; provides users a way to publish their content to multiple output formats, including print, Adobe Portable Document Format ("PDF"), HTML, Extensible Markup Language ("XML"), and Microsoft Word.

    Adobe FrameMaker+SGML—integrates all of the capabilities of FrameMaker with additional features designed to simplify the SGML and XML authoring and publishing processes.

    Adobe Illustrator—an illustration design tool used to create compelling artwork for print publications and the Web.

    Adobe InCopy—a powerful editorial tool for seamless collaboration between editors and designers; InCopy is a companion to Adobe InDesign and is sold through Adobe's system integrator partners.

    Adobe InDesign—an innovative, new page-layout application for graphics professionals. Based on a new, open, object-oriented architecture that is highly extensible, it enables Adobe and its industry partners to deliver powerful publishing solutions.

    Adobe PageMaker Plus—software used to create high-quality business documents simply and reliably with robust page layout tools, templates, and stock art.

    Adobe PressReady—powerful printing software used by professionals and based on Adobe PostScript 3. PressReady turns color inkjet printers into high-quality proofing devices.

    Adobe Publishing Collection—suite of four award-winning application products that allows consumers to create visually compelling print and online communication. Suite includes Adobe PageMaker Plus, Adobe Photoshop, Adobe Illustrator, and Adobe Acrobat.

    Adobe Streamline—converts scanned bitmap images and shapes into smooth PostScript line art.

    Adobe Type Library—contains over 2,500 Roman and almost 100 Japanese high-quality outline typefaces used by graphics professionals and Internet content creators worldwide.

    Adobe Type Manager—provides powerful, easy management of all Type 1 and TrueType fonts.

ePAPER SOLUTIONS

ePaper Solutions Market Opportunity

    An opportunity exists to enable intelligent integration of paper and digital document communications with fidelity and reliability. In the second quarter of fiscal 1999, we released Adobe Acrobat 4.0 software, which contained new and enhanced annotation, collaboration, digital signature, Web capture, and security features. As the cornerstone of Adobe's ePaper Solutions platform, we believe Acrobat 4.0 delivers functionality and capabilities that are needed in several markets.

    Adobe ePaper Solutions, which also include Adobe Acrobat Reader and Adobe PDF, enable users to transition from paper to digital-based processes and workflows. Companies in markets such as aerospace, financial services, government, insurance, legal, and pharmaceutical—those with paper-intensive processes—use Adobe ePaper Solutions to ensure that their electronic documents are delivered reliably and securely and can be viewed by the recipient in the exact form that the originator intended. Companies can reduce paper and storage costs through the use of our ePaper Solutions and can realize productivity gains.

    We have distributed more than 110 million copies of Acrobat Reader from our Web site. Its widespread use and the adoption of the PDF format by industries and many worldwide government bodies have contributed to a dramatic increase in revenue from Adobe ePaper Solution products in 1999.

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    We expect to continue to add new features and new products to the ePaper Solutions platform, including document encryption and transactional unlocking capabilities that address the growing eBooks marketplace. We also believe that new versions of ePaper products will help companies integrate legacy paper documents, output from office and database applications, and other paper-based communication devices (such as faxes, letters, and e-mails) so that companies and even governments can use the Internet, intranets, and extranets as a communication and collaboration platform.

ePaper Solutions Products

    Adobe Acrobat—software that allows users to publish and distribute business documents using corporate e-mail and intranets, the Internet, or CD-ROM. Enables users to easily convert files from any application to Adobe PDF, a compact cross-platform electronic format that generally preserves layout fonts, colors, and images. Adobe Acrobat software includes everything needed to create and distribute rich electronic documents that can be viewed seamlessly within leading Web browsers.

    Adobe Acrobat Business Basics—software which enables business users to collaborate on documents with review, mark-up, search, digital signature, electronic form, document compare, and Web capture tools.

    Adobe Acrobat Capture—enables conversion of legacy paper-based documents into indexable, searchable, platform-independent electronic PDF files for archiving and distribution purposes.

    Adobe Acrobat Document Server—server-based tool lets workgroups view and navigate PDF files in a Web browser without the need for Acrobat Reader or other client software.

    Adobe PDF Merchant—server-based technology designed to be integrated into existing e-commerce and transaction servers; it manages encryption of Adobe PDF files and the distribution of keys to unlock the encryption and access them.

    Acrobat Reader with Web Buy—free software that allows users to view, search, and print PDF files. The free Web Buy plug-in provides consumers with a mechanism for purchasing and viewing electronic Adobe PDF content produced using Adobe PDF Merchant.

OEM POSTSCRIPT AND OTHER

OEM PostScript and Other Market Opportunity

    Graphics professionals and professional publishers require quality, reliability, and efficiency in production printing, and we believe our printing technology provides state-of-the-art functionality to meet the sophisticated requirements of this marketplace. As high-end printing systems evolve and transition to fully digital, composite workflows, Adobe is uniquely positioned to be a supplier of software and technology based on the Adobe PostScript, Adobe Postscript 3, and PDF standards that it has developed, and which are extensively used by hardware manufacturers in this industry.

OEM PostScript and Other Products

    Adobe PostScript—a page description language that delivers high quality output, cross-platform compatibility, and top performance for graphically-rich printing output from corporate desktop printers to high-end publishing printers.

    Adobe PostScript 3—a page description language that takes digital printing to a new level, providing an optimized printing environment connected to corporate networks, the Internet, and digital document distribution systems.

    Adobe PostScript Extreme—the innovative new production printing architecture that integrates Adobe PostScript and Adobe PDF. This architecture has been endorsed by the printing industry as the new

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standard for high-performance print-on-demand, direct-to-press, and high-resolution imagesetter printing systems.

    Adobe PrintGear—a printing architecture that redefines the standards for high-throughput, low-cost, high-quality printing for the small office/home office and small corporate workgroup environments.

    For more information on our market segments and information about geographic areas, please refer to Note 16 of Notes to Consolidated Financial Statements.

COMPETITION

    The markets for Adobe products are characterized by intense competition, evolving industry standards, rapid technology developments, and frequent new product introductions. Our future success will depend on our ability to enhance our existing products, introduce new products on a timely and cost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate or respond to emerging standards and other technological changes.

Web Publishing

    The Internet market is a constantly evolving and highly volatile market, characterized by rapid technology developments and frequent new product introductions. The needs of the graphics professional are rapidly changing to encompass on-line publishing as well as print-based publishing. Adobe's tools in this market, including Adobe GoLive, Adobe Photoshop, and Adobe ImageStyler, face significant competition from companies offering similar products and will continue to face competition from emerging products and technologies. Some of these competitors include Corel, Jasc Software, Macromedia, and Microsoft.

    The consumer software market, which is focused on digital imaging and Web publishing, is characterized by intense competition, price sensitivity, brand awareness, and strength in retail distribution. We face direct and indirect competition in these markets from a number of companies, including Jasc Software, MGI Software, and Microsoft. We believe that we compete favorably with our Adobe Photoshop LE and Adobe PhotoDeluxe products due to consumer awareness of our brand in digital imaging, our strong relationships with critical original equipment manufacturer ("OEM") customers and market influencers, and our ability to leverage core competencies from our other established products.

    The dynamic media market is an increasingly competitive market as professional, enthusiast, and home users migrate away from analog video tools towards the use of digital camcorders and digital video production. Adobe After Effects and Adobe Premiere face increased competition from companies such as Apple Computer, in-sync Corporation, Media 100, MGI Software, Avid, and Ulead Systems. We believe we compete favorably with our products in these markets due to OEM customer relationships and our ability to leverage core competencies and integration from our other products which are used by customers in these markets.

Print Publishing

    In the print publishing market, we offer several products including Adobe InDesign, Adobe PageMaker, Adobe Illustrator, and Adobe Type Library. We believe these individual products compete favorably on the basis of features and functionality, large installed base, ease of use, product reliability, and price and performance characteristics. In addition, the products increasingly work well together, providing broader functionality and shortening product learning time for the individual who uses multiple applications to complete a project.

    In the technical authoring and publishing market, Adobe FrameMaker products face competition from large-scale electronic publishing systems developed by several companies, including Interleaf. Participants in this market compete based on the quality and features of their products, the level of customization

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and integration with other publishing system components, the number of hardware platforms supported, service, and price. We believe we can successfully compete in this market based upon the quality and features of the Adobe FrameMaker product, our extensive application programming interface, the large number of platforms supported, and other factors.

    A number of companies currently offer one or more products that compete directly or indirectly with one or more of Adobe's publishing products. These companies include Corel, Interleaf, Macromedia, Microsoft, and Quark.

ePaper Solutions

    In the document exchange and archive area, our Adobe ePaper product family faces competition from entrenched office applications, internet content creation/management tools that use Cascading Style Sheets ("CSS"), XML, HTML, Tagged Information File Format ("TIFF") formats, and new emerging electronic book formats which are not based on Adobe PDF. We feel the Adobe ePaper product family competes favorably in terms of the combined benefits of compression, visual fidelity, transmittal time, and security of documents expressed using Adobe PDF.

    Emerging standards such as XML and new standards such as Scalable Vector Graphics ("SVG"), Extensible Stylesheet Language ("XSL"), and the Open eBook ("OEB") standard are being developed and adopted, and Adobe is working to ensure that compatibility exists between these formats and the Adobe PDF format, as well as our Acrobat software products and other Adobe applications.

    Competitors for Adobe ePaper Solutions products include Microsoft, Corel, and ScanSoft.

OEM PostScript and Other

    We believe that the principal competitive factors for OEM customers in selecting a page description language or a printing technology are product capabilities, market leadership, reliability, support, engineering development assistance, and price. We believe that our competitive advantages include our technology competency, OEM customer relationships, and intellectual property portfolio. Adobe PostScript and Adobe PrintGear software face competition from Hewlett-Packard's proprietary PCL page description language and from developers of page description languages based on the PostScript language standard, including Xionics and Harlequin.

OPERATIONS

Marketing and Sales

    We market and distribute our products through sales channels which include distributors, retailers, systems integrators, software developers, and value-added resellers ("VARs"), as well as through OEM and hardware bundle customers. We also market and sell our products directly using our sales force, Adobe call centers, and through e-commerce methods via our Adobe.com Web site.

    We support our worldwide distribution network and end-user customers with international offices around the world, including locations in Australia, Belgium, Brazil, Canada, China, Denmark, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, the Netherlands, New Zealand, Norway, Scotland, Singapore, Spain, Sweden, Switzerland, Taiwan, and the United Kingdom.

    We license our Adobe PostScript software and other printing systems technology to computer and printer manufacturers, who in turn distribute their products worldwide. We derive a significant portion of Adobe PostScript royalties from international sales of printers, imagesetters, and other output devices by our OEM customers.

    For information regarding our significant customers, please refer to Note 16 of Notes to Consolidated Financial Statements.

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Order Fulfillment

    The procurement of the various components of packaged products, including CDs and printed materials, and the assembly of packages for retail and other applications products is controlled by order fulfillment operations. We outsource all of our order fulfillment activities to third parties in the United States, Europe, and Asia.

    To date, we have not experienced significant difficulties in obtaining raw materials for the manufacture of our products or in the replication of CDs, printing, and assembly of components, although an interruption in production by a supplier could result in a delay in shipment of Adobe's products. The backlog of orders as of December 31, 1999 was approximately $33.5 million.

Technical Support and Education

    For application software, a technical support and services staff responds to customer queries by phone, on-line, via e-mail and user-to-user forums. Free technical phone support is provided to customers; for customers in Europe, until our release of the second new full version after the version purchased by the customer, and for customers in the rest of the world, up to a maximum of 90 days upon the customer's first call. We have also invested in improving self-help and on-line technical support capabilities so that customers can find answers to their support questions via Adobe's Web site and have also outsourced our initial levels of technical support to provide a consistent standard for customer support on a worldwide basis.

    We inform customers through our Adobe Magazine and through a growing series of how-to books published by Adobe Press pursuant to a joint publishing agreement with Macmillan Computer Publishing. In addition, we prepare and authorize independent trainers to teach Adobe software classes in person or increasingly via computer-based and internet-based training programs. We sponsor workshops led by our own graphics staff, interact with independent user groups, and conduct regular beta-testing programs.

Investment in New Markets

    We own a majority interest in three venture capital limited partnerships, Adobe Ventures L.P.; Adobe Ventures II, L.P.; and Adobe Ventures III, L.P., that invest in early stage companies with innovative technologies. These companies may create new market opportunities for us or enhance our existing business.

    The investments in Adobe Ventures L.P.; Adobe Ventures II, L.P.; and Adobe Ventures III, L.P. are accounted for using the equity method of accounting, and accordingly, the investments are adjusted to reflect the Company's share of Adobe Ventures L.P.; Adobe Ventures II, L.P.; and Adobe Ventures III, L.P.'s investment income (loss) and dividend distributions. Adobe Ventures L.P.; Adobe Ventures II L.P.; and Adobe Ventures III, L.P. carry their investments in equity securities at estimated fair market value and unrealized gains and losses are included in investment income (loss). The stock of substantially all of the technology companies held by the limited partnerships at December 3, 1999 is not publicly traded, and, therefore, there is no established market for these investments. As such, these investments are valued based on the most recent round of financing involving new non-strategic investors and estimates made by the general partner, a third party. When investments held by the limited partnerships are publicly traded, the fair value of such investments is based on quoted market prices, and mark-to-market adjustments are included in investment income. In general, as a matter of policy of the limited partnerships, the investments in the technology companies held by the limited partnerships will be distributed to the partners prior to the investee company's initial public offering.

    In March 1997, as part of our venture investing program, we established an internal limited partnership, Adobe Incentive Partners, L.P. ("AIP"), which allows certain of the Company's executive officers to participate in cash or stock distributions from Adobe's venture investments. Assets held by AIP

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include Adobe's entire interests in Adobe Ventures L.P. and Adobe Ventures II, L.P. and certain equity securities of privately-held companies. Adobe is both the general partner and a limited partner of AIP. Other limited partners are executive officers of the Company who are involved in Adobe's venture investing activities and whose participation is deemed critical to the success of the program.

    Adobe's Class A senior limited partnership interest in AIP includes both a liquidation preference and a preference in recovery of the cost basis of each specific investment. The executives' Class B junior limited partnership interest qualifies for partnership distributions only after (a) Adobe has fully recovered the cost basis of its investment in the specific investee company for which a distribution is made; and (b) the participating executive has vested in his or her distribution rights. The distribution rights generally vest on a monthly basis over three years, such that the rights are 25% vested after one year, 50% vested after two years and fully vested at the end of three years. The limited partnership investments are restricted to investments in companies that were private at the time of the establishment of AIP or when the investment is made, whichever is later. Partnership interests may be allocated to designated officers only while the investee company is still private. In fiscal 1999, the participating officers received aggregate distributions of $7.5 million. The distribution to the officers represents their vested portion of nonmarketable securities that became marketable as a result of a public offering, as well as their vested portion of cash resulting from investments that were liquidated by AIP. At December 3, 1999, the minority interest held by the participating officers was $17.7 million and is included in accrued expenses on the consolidated balance sheet.

    Our portfolio of equity investments, including those held by AIP on December 3, 1999, had a cost basis of $114.2 million and a recorded fair market value of $205.4 million. In fiscal 1999, AIP recorded net income of $96.4 million. Gross proceeds from the sale of equity securities during fiscal 1999 were $63.9 million. Our equity investments and Adobe Ventures L.P.; Adobe Ventures II L.P.; and Adobe Ventures III, L.P.'s investments in equity securities at December 3, 1999 consisted of the following companies:

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    We intend to continue investing in new markets, through limited partnerships as well as through direct investments, although we currently do not anticipate investing further through AIP.

PRODUCT DEVELOPMENT

    Since the personal computer software industry is characterized by rapid technological change, a continuous high level of expenditures is required for the enhancement of existing products and the development of new products. We primarily develop our software internally. We occasionally acquire products developed by others by purchasing the stock or assets of the business entity that held ownership rights to the technology. In other instances, we have licensed or purchased the intellectual property ownership rights of programs developed by others with license or technology transfer agreements that may obligate us to pay royalties, typically based on a percentage of the revenues generated by those programs.

    During the fiscal years ended December 3, 1999, November 27, 1998, and November 28, 1997, our research and development expenses, including costs related to contract development, were $197.5 million, $188.3 million, and $165.9 million, respectively. During fiscal 1999, we acquired substantially all of the assets of two software companies, through separate purchase transactions, for an aggregate consideration of approximately $3.6 million. All of the purchase price was allocated to in-process research and development and expensed at the time of acquisition. Additionally, during fiscal year 1997, we acquired, through purchase transactions, three software companies, in which $6.0 million of the purchase price was allocated to in-process research and development and expensed at the time of the acquisition. See Management's Discussion and Analysis for further information.

PRODUCT PROTECTION

    We regard our software as proprietary and protect it with copyrights, patents, trademarks, trade secret laws, internal and external nondisclosure precautions, and restrictions on disclosure and transferability that are incorporated into our software license agreements. We protect the source code of our software programs as trade secrets, and make source code available to OEM customers only under limited circumstances and specific security and confidentiality constraints.

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    Our products are generally licensed to end users on a "right to use" basis pursuant to a license that is nontransferable and restricts the use of the products to the customer's internal purposes on a designated number of printers or computers. We also rely on copyright laws and on "shrink wrap" and electronic licenses that are not signed by the end user. Copyright protection may be unavailable under the laws of certain countries. The enforceability of "shrink wrap" and electronic licenses has not been conclusively determined. We have obtained many patents and have registered numerous copyrights, trademarks, domain names, and logos in the United States and foreign countries.

    Policing unauthorized use of computer software is difficult, and software piracy is a persistent problem for the software industry. This problem is particularly acute in international markets. We conduct vigorous anti-piracy programs. Our products do not contain copy protection, except on copies for international distribution in certain countries. Many products, including Adobe PageMaker, Adobe Photoshop, and Adobe Illustrator, incorporate network copy-detection features. These capabilities help encourage compliance with our license agreements by alerting customers about certain concurrent usage problems over a given network.

    We believe that, because computer software technology changes and develops rapidly, patent, trade secret, and copyright protection are less significant than factors such as the knowledge, ability, and experience of our personnel, brand recognition, contractual relationships, and ongoing product development.

EMPLOYEES

    As of December 31, 1999, we employed 2,760 people, none of whom are represented by a labor union. We have not experienced work stoppages and believe our employee relations are good. Competition in recruiting personnel in the software industry, especially highly skilled engineers, is intense. We believe our future success will depend in part on our continued ability to recruit and retain highly skilled technical, management and marketing personnel.

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EXECUTIVE OFFICERS

    The executive officers of the Company as of February 16, 2000 are as follows:

    A biography, including the principal occupations for the past five years of each of the executive officers, is provided below.

    Dr. Warnock was a founder of the Company and has been its Chairman of the Board since April 1989. Since September 1997, he has shared the position of Chairman of the Board with Charles M. Geschke. Dr. Warnock has been Chief Executive Officer since 1982. He will assume the title of President in April 2000 upon Dr. Geschke's retirement. Dr. Warnock is Chairman of Octavo Corporation. Dr. Warnock received a Ph.D. in electrical engineering from the University of Utah.

    Dr. Geschke was a founder of the Company and has been its President since April 1989. In September 1997, Dr. Geschke assumed the position of Chairman of the Board, sharing that office with John E. Warnock. He was Chief Operating Officer of the Company from December 1986 until July 1994. He is a member of the Board of Directors of Rambus Incorporated. Dr. Geschke has announced his retirement as President of the Company commencing in April 2000. He will continue to serve as co-Chairman of the Board. Dr. Geschke received a Ph.D. in computer science from Carnegie Mellon University.

    Mr. Chizen joined the Company upon the closing of the acquisition of Aldus in August 1994 as Vice President and General Manager, Consumer Products Division. In December 1997, he was promoted to Senior Vice President and General Manager, Graphic Products Division, and in August 1998, Mr. Chizen was promoted to Executive Vice President, Products and Marketing. Prior to joining the Company, Mr. Chizen was Vice President and General Manager, Consumer Division of Aldus Corporation from February 1994 to August 1994, and from November 1992 to February 1994, he was Vice President and General Manager, Claris Clear Choice for Claris Corp., a wholly owned subsidiary of Apple Computer, Inc., a manufacturer of computers and software. Mr. Chizen is a member of the Board of Directors of eCircles, Inc.

    Mr. Covert joined the Company in April 1998 as Vice President Finance and Operations for Worldwide Field Operations. In August 1998, Mr. Covert was appointed Senior Vice President and Chief Financial Officer, and in April 1999 was appointed Executive Vice President. From July 1997 to April 1998, Mr. Covert was Vice President and Chief Financial Officer of Philips Components NAFTA, an operating entity of Philips Electronics NV. From January 1991 to June 1997 Mr. Covert was a Partner in the firm of DHJ & Associates, Inc., Consultants and Certified Public Accountants. During the last two and a half years of this period he acted in a full time capacity as Chief Financial Officer for two companies. Prior to that time Mr. Covert held senior financial management positions with ISC Systems Corporation and Northern Telecom Inc.

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    Mr. Freeman joined the Company upon the closing of the acquisition of Aldus in August 1994 as General Manager of Asia-Pacific and Latin America ("APL") and became Vice President of APL in June 1996. In April 1999, he was promoted to Senior Vice President of Worldwide Sales and Support. Before joining the Company, Mr. Freeman was Aldus' General Manager for the Pacific region from July 1991 to August 1994. Prior to that time, Mr. Freeman served as Marketing and Sales Director for Compaq Computer Corporation helping in the establishment of its operations in the Pacific. Prior to joining Compaq, Mr. Freeman held a variety of sales and marketing positions with IBM.

    Ms. Pouliot joined the Company in July 1988 as Associate General Counsel and became the Corporate Secretary in April 1989. In December 1990, she was promoted to General Counsel. In December 1992, she was promoted to Vice President and in December 1997, to Senior Vice President. Ms. Pouliot was an associate at the law firm of Ware & Freidenrich from November 1983 until she joined the Company.

Item 2. Properties

    The following table sets forth the location, approximate square footage, and use of each of the principal properties used by Adobe. We lease or sublease all of these properties. Such leases expire at various times through January 2014. The annual base rent expense for all facilities (including operating expenses, property taxes, and assessments) is currently approximately $26.0 million and is subject to annual adjustment.

    In general, all facilities are in good condition and are operating at capacities that range from 75% to 100%.

    We also lease office space in the United States and various other countries under operating leases.

    We have one leased office building in San Jose, California that was vacated in connection with the restructuring program implemented in the third quarter of fiscal 1998. We have subleased the building but still have a commitment under this lease agreement.

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Item 3. Legal Proceedings

    On February 6, 1996, a securities class action complaint was filed against Adobe, certain of its officers and directors, certain former officers of Adobe and Frame Technology Corporation ("Frame"), Hambrecht & Quist, LLP ("H&Q"), investment banker for Frame, and certain H&Q employees, in connection with the drop in the price of Adobe stock following its announcement of financial results for the quarter ended December 1, 1995. The complaint was filed in the Superior Court of the State of California, County of Santa Clara. The complaint alleges that the defendants misrepresented material adverse information regarding Adobe and Frame and engaged in a scheme to defraud investors. The complaint seeks unspecified damages for alleged violations of California law. The court granted plaintiffs' motion for class certification on September 22, 1999. We believe that the allegations against us and our officers and directors are without merit and intend to vigorously defend the lawsuit. The case is currently in the discovery phase.

    On October 29, 1998, Heidelberger Druckmaschinen AG, a German company, filed a complaint alleging that Adobe is using Heidelberger's US patent number 4,393,399 for the partial electronic retouching of colors. The complaint was filed in the United States District Court for the District of Delaware, and seeks a permanent injunction and unspecified damages. We believe that the allegations against us are without merit and intend to vigorously defend the lawsuit.

    Management believes that the ultimate resolution of these matters will not have a material impact on our financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

    Not applicable.

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PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

    Our common stock is traded on The Nasdaq National Market under the symbol "ADBE." On December 31, 1999, there were 1,653 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The following table sets forth the high and low sales price per share of our common stock and the cash dividends paid per share, for the periods indicated, all of which are adjusted for the two-for-one stock split in the form of a stock dividend effected October 1999.

    We have paid cash dividends on our common stock each quarter since the second quarter of 1988. In March 1997, we established the venture stock dividend program under which we may, from time to time, distribute as a dividend-in-kind shares of our equity holdings in investee companies to our stockholders.

    On December 1, 1997, we dividended one share of Siebel Systems, Incorporated ("Siebel") common stock for each 600 shares of Adobe common stock held by stockholders of record on October 31, 1997. An equivalent cash dividend was paid for holdings of less than 15,000 Adobe shares and for fractional Siebel shares.

    Under the terms of our line of credit agreement and corporate headquarters lease agreement, we may pay cash dividends unless an event of default has occurred or we do not meet certain financial ratios. The declaration of future dividends, whether in cash or in-kind, is within the discretion of Adobe's Board of Directors and will depend upon business conditions, our results of operations, our financial condition, and other factors.

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Item 6. Selected Financial Data

    The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) are derived from the Company's consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

All share and per share amounts referred to in the above table have been adjusted to reflect the two-for-one stock split in the form of a stock dividend effected October 26, 1999.

(1)

In 1999, includes investment gains of $88.9 million, restructuring and other charges of $23.0 million, and acquired in-process research and development of $3.6 million. In 1998, includes investment gains of $15.0 million and restructuring and other charges of $38.2 million. In 1997, includes investment gains of $34.3 million, other nonrecurring gains of $0.6 million, and acquired in-process research and development of $6.0 million. In 1996, includes investment gains of $68.9 million, acquired in-process research and development of $21.3 million, and restructuring charges related to divested products of $5.0 million. In 1995, reflects restructuring charges of $31.5 million related to the acquisition of Frame Technology Corporation ("Frame") and acquired in-process research and development of $15.0 million.

(2)

Dividends prior to the acquisition of Frame on October 28, 1995 have not been restated to reflect the effects of the poolings of interest.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

    The following discussion (presented in millions, except per share amounts) should be read in conjunction with the consolidated financial statements and notes thereto.

    In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results of Operations." You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed in 2000. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

RESULTS OF OPERATIONS

Overview

    Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") is a provider of graphic design, publishing, and imaging software for Web and print production. We offer a market-leading line of application software products, type products, and content for creating, distributing, and managing information of all types. We license our technology to major hardware manufacturers, software developers, and service providers, and we offer integrated software solutions to businesses of all sizes. We distribute our products through a network of distributors and dealers, value-added resellers ("VARs"), systems integrators, and original equipment manufacturer ("OEM") customers; direct to end users through Adobe call centers; and through our own Web site at www.adobe.com. We have operations in the Americas, EMEA (Europe, Middle East, and Africa), and Asia.

Revenue

    Revenue is categorized into four major operating segments: Web Publishing, Print Publishing, ePaper Solutions, and OEM PostScript and Other. The Web Publishing, Print Publishing, and ePaper Solutions segments include application products revenue that is derived predominantly from shipments of application software programs marketed through retail, VAR, and OEM distribution channels. The OEM PostScript and Other segment includes licensing revenue, which is made up of royalties received from OEM customers who ship products containing Adobe's PostScript technology, and includes revenue from divested businesses.

    Revenue from the Web Publishing segment is derived primarily from the sale of the following application products: Adobe Photoshop, Adobe Premiere, After Effects, GoLive, Adobe PhotoDeluxe, Adobe Web Collection, Adobe Dynamic Media Collection, PageMill, ImageStyler, and ActiveShare. Print Publishing revenue comes primarily from the sale of the following application products: Adobe Illustrator, PageMaker, InDesign, FrameMaker, Adobe Publishing Collection, Adobe Design Collection, Adobe Type Manager, Adobe Type Library, PressReady, Adobe Font Folio, InCopy, Adobe Dimensions, and Streamline. The ePaper Solutions segment is derived from the sale of Adobe Acrobat software and other Acrobat related technologies.

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    For further information regarding our operating segments, see Note 16 of the Notes to Consolidated Financial Statements.

    During fiscal 1999, overall revenue increased 13% compared to fiscal 1998, due to increased licensing of products in the Print Publishing, ePaper Solutions, and Web Publishing segments. Excluding revenue from businesses divested in the third quarter of fiscal 1998, revenue increased 16%. The Print Publishing segment provided the majority of the fiscal 1999 revenue growth, with a 30% increase from $272.2 million in fiscal 1998 to $353.9 million in fiscal 1999. The increase in revenue from this segment was primarily due to increased licensing of our Publishing Collection product and the introduction of InDesign, a new page layout application software product, in the second half of fiscal 1999. The increase in revenue from these products was partially offset by a decline in revenue from PageMaker, Illustrator, and FrameMaker, primarily due to product lifecycle timing.

    Additional revenue growth was achieved through our ePaper Solutions segment, as revenue more than doubled compared to the prior year, from $58.0 million in fiscal 1998 to $129.3 million in fiscal 1999. This increase was due to the release of Acrobat 4.0 in the second quarter of the year, with a higher number of units licensed as a result of growing customer adoption of Adobe Acrobat and Adobe Portable Document Format ("PDF") technology.

    The Web Publishing segment also contributed to the revenue growth as it grew 11% in fiscal 1999 to $394.1 million compared to $354.2 million in fiscal 1998. The increase was primarily due to the release of GoLive, our new Internet application software product introduced in the first half of fiscal 1999. In addition, this segment experienced continued strength in the licensing of our digital imaging and dynamic media products, with the release of Photoshop 5.5, After Effects 4.1, and Adobe Premiere 5.1 in the first half of fiscal 1999, as well as increased revenue from our Adobe Web Collection and Dynamic Media Collection products. The increase in revenue from this segment was partially offset by a decline in revenue from Adobe PhotoDeluxe, due to reduced pricing, and a decline in revenue from PageMill, due to product lifecycle timing.

    The increase in revenue in fiscal 1999 in the above operating segments was partially offset by a decline in revenue from the OEM PostScript and Other segment of $72.2 million, or 34%, compared to fiscal 1998. OEM PostScript licensing revenue has experienced a decline over the past three years, primarily due to the ongoing weakness in the monochrome laser printer market as a result of the following factors: loss of royalty revenue from Hewlett-Packard Company's ("HP") desktop monochrome laser printer division, which has been incorporating a clone version of Adobe PostScript software into its products since the fall of 1997; a decline in the average selling price of monochrome laser printers; and an increase in the use of inkjet printers, resulting in the weakness in the monochrome laser printer market. In addition, in fiscal 1998, we received $20.2 million in revenue in this segment from businesses we divested in the third quarter of fiscal 1998, resulting in a decline of revenue in fiscal 1999 from the absence of these businesses.

    We continue to be cautious about revenue from our OEM PostScript and Other segment because of the continuing weakness in the monochrome laser printer market and the uncertain timing of OEM customer introductions of products incorporating Adobe's latest technologies. Excluding our investments in our high-end color printing technologies, we anticipate that revenue from our OEM PostScript and Other segment will continue to decline in fiscal 2000.

    Total revenue decreased $17.1 million, or 2%, in fiscal 1998 compared to fiscal 1997, primarily due to adverse economic conditions in Japan and a decline in revenue from our Print Publishing and OEM Postscript and Other segments. The Print Publishing segment decreased 15% in fiscal 1998 compared to fiscal 1997, due to a decline in revenue from our PageMaker, FrameMaker, and Adobe Type Manager products, none of which had upgrades released during the year, and a decline in revenue from our Illustrator product as its latest upgrade was not released until late in the fourth quarter. The decrease in this segment from the above products was partially offset by an increase in our Adobe Publishing Collection product, which was introduced in the U.S. and Asia in fiscal 1998. Additionally, the OEM

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Postscript and Other segment experienced a 9% decline in fiscal 1998 compared to fiscal 1997, due to weakness in the Japanese personal computer and printer markets, as well as the reduction in royalty revenue from HP's desktop monochrome laser printer division.

    The decline in revenue in fiscal 1998 was partially offset by an increase in the ePaper Solutions and Web Publishing segments. The ePaper Solutions segment grew 23% from fiscal 1997, due to increased demand for Acrobat 3.0. Additionally, the Web Publishing segment increased 14% in fiscal 1998 compared to fiscal 1997 as a result of the release of our Photoshop 5.0 and Adobe Premiere 5.0 products.

    Overall, revenue from our application products on the Windows platform increased 22% in fiscal 1999 compared to fiscal 1998, and revenue from our application products on the Macintosh platform increased by 21% in fiscal 1999 over fiscal 1998. In fiscal 1998 compared to fiscal 1997, revenue from our application products on the Windows platform increased by 21% while revenue from our application products on the Macintosh platform decreased 10% during the same period. In both fiscal 1999 and fiscal 1998, the Windows and Macintosh platforms accounted for 58% and 42%, respectively, of application products revenue, excluding platform-independent and UNIX products, compared to 51% and 49%, respectively, in fiscal 1997. We expect the platform mix to remain relatively the same in the foreseeable future.

Direct costs

    We reclassified certain direct costs and operating expenses in the fiscal 1998 and 1997 consolidated statements of income to conform to the fiscal 1999 presentation. These reclassifications did not impact total operating profit for fiscal 1998 or 1997.

    Direct costs include product packaging, third-party royalties, amortization related to localization costs and acquired technologies, and reserves for excess and obsolete inventory.

    Direct costs decreased $6.5 million, or 6%, in fiscal 1999 compared to fiscal 1998, due to more effective inventory management, resulting in lower excess and obsolete inventory, as well as lower unit cost of materials as a result of our ongoing cost improvement program.

    Direct costs decreased $15.2 million, or 13%, in fiscal 1998 compared to fiscal 1997, due to lower packaging costs and our full transition from distribution of our products on disk to CD-ROM media. Direct costs also decreased in fiscal 1998 compared to fiscal 1997 as certain acquired technologies became fully amortized and we incurred lower product localization costs.

    As a result of the impact of ongoing cost improvement programs, we have targeted gross margin to be approximately 91% throughout fiscal 2000.

Operating expenses

    We reclassified certain direct costs and operating expenses in the fiscal 1998 and 1997 consolidated statements of income to conform to the fiscal 1999 presentation. These reclassifications did not impact total operating profit for fiscal 1998 or 1997.

Research and development

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    Research and development expenses consist principally of salaries and benefits for software developers, contracted development efforts, related facilities costs, and expenses associated with computer equipment used in software development.

    Research and development expenses increased $9.2 million, or 5%, in fiscal 1999 compared to fiscal 1998, due to higher incentive compensation expenses primarily associated with the improvement in our financial performance in fiscal 1999 over fiscal 1998 and higher incentive compensation targets. This increase was partially offset by a decrease in salaries as a result of lower headcount and decreases in general office expenses and professional fees as a result of our fiscal 1998 restructuring program and other cost reduction efforts implemented at that time.

    Research and development expenses increased $22.4 million, or 14%, in fiscal 1998 compared to fiscal 1997, due to the expansion of our engineering staff and related costs required to support our continued emphasis on developing new products and enhancing existing products. The increase also reflects our increased investments in new technologies, new product development, and the infrastructure to support such activities. The increase in research and development expenses in fiscal 1998 was partially offset by certain cost reduction initiatives related to the restructuring program that was implemented during the third quarter of fiscal 1998. We also reduced outside labor costs and professional fees by discontinuing certain research and development programs.

    We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced products. We will continue to make significant investments in the development of our application software products, including those targeted for the growing Internet market. We expect that research and development expenses for fiscal 2000 will increase in absolute dollars. We have targeted such expenditures to be approximately 20% of revenue in fiscal 2000.

Sales and Marketing

    Sales and marketing expenses include salaries and benefits, sales commissions, travel expenses, and related facilities costs for our sales, marketing, customer support, and distribution personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations, and other market development programs.

    Sales and marketing expenses increased $13.0 million, or 4%, in fiscal 1999 compared to fiscal 1998 as a result of higher incentive compensation expenses primarily associated with the improvement in our financial performance in fiscal 1999 over the prior year and higher incentive compensation targets. In addition, sales and marketing expenses increased year over year, due to increased advertising, promotional, and trade show expenses associated with new product releases. The increase was partially offset by cost reduction initiatives related to the restructuring program implemented during the third quarter of fiscal 1998 that eliminated certain brand advertising campaigns and other marketing activities related to the divestiture of a business.

    Sales and marketing expenses increased $25.4 million, or 9%, in fiscal 1998 compared to fiscal 1997, due to higher employee costs, increased customer support costs, and increased marketing and advertising activities. Higher commissions were also paid as a result of increased headcount and growth in application products revenue compared to fiscal 1997. Additionally, sales and marketing expenses included higher outside labor costs to support user education related to new product releases and for the development of our Web site. These increased expenses were partially offset by cost reduction initiatives related to the restructuring program implemented during the third quarter of fiscal 1998.

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    We expect sales and marketing expenses to increase in absolute dollars in fiscal 2000 to support investments in eBusiness and enhanced marketing activities. For fiscal 2000, our sales and marketing expense target is approximately 32% of revenue.

General and administrative

    General and administrative expenses consist principally of salaries and benefits, travel expenses, and related facilities costs for the finance, human resources, legal, information services, and executive personnel of Adobe. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, and expenses associated with computer equipment and software used in the administration of the business.

    General and administrative expenses decreased $15.0 million, or 13%, in fiscal 1999 compared to the prior year, reflecting the savings related to the restructuring programs implemented in fiscal 1999 and 1998. Additionally, the decrease is attributable to decreased legal fees and lower bad debt expense. These decreases were offset by an increase in incentive compensation expense primarily associated with the improvement in our financial performance in fiscal 1999 over the prior year and higher incentive compensation targets.

    General and administrative expenses increased $17.6 million, or 17%, in fiscal 1998 compared to fiscal 1997, due to increased expenses for outside legal and investment banking services associated with responding to an unsolicited acquisition proposal as well as increased employee costs and related depreciation and building expenses associated with increased staff. Bad debt expense was also higher in fiscal 1998 to reserve for accounts receivable from certain customers that were deemed potentially uncollectible. These increased expenses were partially offset by cost reduction initiatives related to the restructuring program implemented in the third quarter of fiscal 1998 that included a reduction in general office and other administrative expenses.

    We expect that general and administrative spending will remain flat or slightly increase in absolute dollars in fiscal 2000 to support ongoing administrative infrastructure needs. However, we have targeted such expenditures to decrease as a percentage of revenue to approximately 9% in fiscal 2000.

Restructuring and other charges

    During fiscal 1999 and 1998, we implemented three different Board-approved restructuring programs. These unique restructuring programs were directly focused on improving our competitive position as well as enhancing Adobe's allocation of resources. In addition to these three restructurings, we also implemented restructuring programs in fiscal 1994 and 1995 related to the Aldus Corporation ("Aldus") and Frame Technology Corporation ("Frame") acquisitions. As of December 3, 1999, there was no restructuring liability remaining for restructuring programs prior to fiscal 1998.

Fiscal 1999 restructuring programs

    The fourth quarter 1999 restructuring program was implemented to enhance our worldwide customer support activity and to streamline the product distribution and warehouse operations in North America. The program resulted in a reduction in force of 86 positions and the closure of the North American

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distribution warehouse as a result of the decision to outsource our North American distribution and warehousing operations and the majority of our customer support. The reduction in force primarily affected employees in Seattle, Washington and Santa Clara, California. Total charges incurred as a result of the restructuring were $2.1 million, which include severance and related charges associated with the reduction in force and charges for vacating leased facilities.

    The other 1999 restructuring program, implemented in the second and third quarters, was directly related to the centralization of our worldwide sales and administrative organizations and the realignment of our Printing Solutions business. The program included a reduction in force of 198 positions, two of which were executive positions. The reduction in force primarily affected our European headquarters in Edinburgh, Scotland and our North American headquarters in San Jose, California. Total charges incurred as a result of the restructuring were $17.6 million, of which approximately $0.1 million were noncash charges. This restructuring was completed in the third quarter of fiscal 1999.

    In the third and fourth quarters of fiscal 1999, we revised our estimate of the total costs associated with the restructuring program implemented during the second and third quarters described above, resulting in an adjustment to the restructuring accrual of approximately $3.2 million. Approximately $3.0 million of the adjustment reflects lower than estimated severance and related charges primarily attributable to employees impacted by the restructuring who were able to find alternative employment within Adobe. The remaining adjustment was due to lower than expected charges related to vacating leased facilities.

    We also recorded adjustments during the third and fourth quarters of fiscal 1999 related to prior year restructuring programs in the amount of $1.9 million. For detailed information regarding the adjustments and our restructuring programs, see Note 7 of the Notes to Consolidated Financial Statements.

Fiscal 1998 restructuring program

    The 1998 restructuring program was implemented to refocus our product development efforts and to eliminate management redundancies in the organization. As part of the restructuring program, we implemented a reduction in force of 364 positions, four of which were executive positions, primarily in our North American and corporate operations. The reductions came predominantly from overhead areas, divested business units, and redundant marketing activities, and as of August 31, 1998, the majority of these terminations were completed. In addition to severance and related charges associated with the reduction in force of 364 positions, the restructuring program included charges for divesting two business units, vacating leased facilities, and canceling certain contracts. These actions and other nonrestructuring-related items resulted in charges of $38.2 million, of which approximately $9.1 million were noncash charges.

    During fiscal 1999, we experienced savings of approximately $60.0 million from the fiscal 1998 restructuring program as a result of the reductions in force, as well as reductions in marketing, facilities, and other discretionary expenses, such as travel and outside services. We also experienced savings of approximately $15.0 million as a result of the restructuring programs implemented during fiscal 1999, which, on an annualized basis, equate to approximately $25.0 million. We believe that the savings realized under the restructuring programs will be invested in programs and people to enhance revenue growth by significantly increasing our investment in eBusiness and enhanced marketing activities. We also believe that these savings will assist us in achieving our operating model targets of 20%, 32%, and 9% of revenue for research and development, sales and marketing, and general and administrative expenses, respectively, in fiscal 2000.

Other charges

    During the third and fourth quarters of fiscal 1999, we recorded other charges of $8.4 million that were unusual in nature. These charges included $2.0 million associated with the cancellation of a contract,

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and $2.2 million for accelerated depreciation related to the adjustment of the useful life of certain assets as a result of decisions made by management as part of the restructuring program. Additionally, we incurred a nonrecurring compensation charge totaling $2.6 million for a terminated employee, and we incurred consulting fees of $1.6 million to assist in the restructuring of our operations.

    In fiscal 1997, restructuring and other charges included a $1.8 million charge related to the acquisition of intellectual property. This charge was offset by a $2.4 million gain related to the divestiture of a product line.

Acquired in-process research and development

    Acquired in-process research and development of $3.6 million in fiscal 1999 is comprised of $3.0 million and $0.6 million associated with the acquisitions of Attitude Software, LLC ("Attitude Software") and Photomerge Technology ("Photomerge"), respectively. The following is a summary of the projects acquired in the acquisitions and the assumptions used in determining the value of the in-process research and development costs.

    During the fourth quarter of fiscal 1999 we acquired substantially all of the assets, consisting of intellectual property, of Attitude Software. The acquisition was accounted for using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16 ("APB 16"), and substantially all of the purchase price of $3.0 million cash was allocated to in-process research and development and expensed at the time of acquisition. The ongoing project at Attitude Software at the time of the purchase included the development of the 3D Anarchy authoring product. We purchase this technology to incorporate it into future versions of our existing Adobe products to further enhance the feature sets and user interface contained within the products. At the date we acquired Attitude Software, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately 18 months to complete and would cost $1.8 million. The efforts required to complete the development of the technology primarily relate to additional design efforts to integrate the technologies into several of Adobe's products, finalization of coding, and completion testing. The value of the in-process technology was determined by estimating the projected net cash flows related to products the technology will be integrated into, including costs to complete the development of the technology and the future net revenues that may be earned from the products, excluding the value attributed to the existing technology with the products prior to the integration of the purchased technology. These cash flows were discounted back to their net present value using a discount rate of 20%, exclusive of the value attributable to the use of the in-process technologies in future products.

    Additionally, during the fourth quarter of fiscal 1999, we acquired substantially all of the assets, consisting of intellectual property, of Photomerge. In connection with the acquisition of Photomerge, 100% of the purchase price, or $600,000 cash, was allocated to in-process research and development due to the state of completion and the uncertainty of the technology.

    During fiscal 1997, we acquired three software companies, in separate transactions, for an aggregate consideration of approximately $8.5 million. These acquisitions were accounted for using the purchase method of accounting, and approximately $6.0 million of the purchase price was allocated to in-process research and development and expensed at the time of the acquisitions. One of the in-process technologies acquired for $2.5 million was discontinued in fiscal 1998. The project associated with an additional $2.8 million of the purchased in-process technology was canceled as part of the restructuring in the third quarter of fiscal 1998 and was subsequently sold to a management-led buyout group.

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Amortization of goodwill and purchased intangibles

    Amortization of goodwill and purchased intangibles in fiscal 1999 primarily relates to the acquisition of substantially all of the assets of GoLive Systems, Inc. and a related partnership (together "GoLive Systems") in January 1999. (For further information, see Note 2 of the Notes to Consolidated Financial Statements.)

    In fiscal 1998, amortization of goodwill and purchased intangibles was higher than fiscal 1997 as a result of acquisitions made in fiscal 1998 and remaining amortization related to the merger with Aldus in fiscal 1994.

Nonoperating income

    Investment gain consists principally of realized gains or losses from direct investments as well as mark-to-market valuation adjustments for investments held by Adobe Incentive Partners, L.P. ("AIP").

    In fiscal 1999, we recorded a realized gain of $58.4 million related to the sale of our investment in Vignette Corporation. We also recorded investment gains from mark-to-market adjustments totaling $17.8 million, $10.4 million, and $7.0 million related to investments in Electronic Submission Publishing Systems, Inc.; DigitalThink, Inc.; and Tumbleweed Communications Corporation, respectively. These gains were partially offset by an investment loss of $5.2 million related to the acquisition of PointCast, Inc., a former investee of the Company, by idealab!'s Launchpad Technologies, Inc. ("idealab!"). In connection with the acquisition, we exchanged our shares of PointCast, Inc. for approximately 542,000 shares of idealab! (since then has become EntryPoint Inc.). Additionally, we recorded a net gain totaling $0.5 million related to mark-to-market adjustments of various other Adobe venture investments.

    In fiscal 1998, we recorded a realized gain of $6.7 million related to our investment in McQueen International Limited ("McQueen"), due to the acquisition of McQueen by Sykes Enterprises, Incorporated ("Sykes"), a publicly traded company. In addition, we liquidated our investment in Siebel Systems, Incorporated ("Siebel") through the distribution to our stockholders of approximately 165,000 shares of Siebel common stock as a dividend-in-kind and the sale of our remaining Siebel shares. A gain was recognized on the transaction of approximately $5.7 million. The remaining net realized gain recorded in fiscal 1998 represents valuation adjustments related to our venture investments held by AIP.

    In fiscal 1997, the investment gain related primarily to the liquidation of our investment in Netscape Communications Corporation ("Netscape") through the distribution to its stockholders of 554,660 shares of Netscape common stock as a dividend-in-kind and the sale of our remaining Netscape shares.

    We are uncertain of future investment gains or losses as they are primarily dependent upon the operations of the underlying investee companies.

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Interest and other income

    Interest and other income consists principally of interest earned on cash, cash equivalents, and short-term investments, as well as foreign exchange transaction gains and losses and realized gains or losses on the disposal of assets.

    The decrease in interest and other income over the past three years is due to lower average cash and short-term investment balances, primarily as a result of cash used for stock repurchases. In addition, during fiscal 1999 more investments were made in tax-exempt securities resulting in lower interest income on a comparative pre-tax basis. The decrease in interest and other income in fiscal 1999 was partially offset by a $5.7 million gain realized from the sale of a corporate facility in Edinburgh, Scotland in connection with the restructuring program announced in the second quarter of fiscal 1999.

    Interest income is expected to decrease in fiscal 2000 due to lower average cash balances resulting from stock repurchases conducted in fiscal 1999. Further, our cash balances could also be reduced in fiscal 2000 due to continuing stock repurchases and the purchase of software companies, products, or technologies that are complementary to our business.

Income tax provision

    Our effective tax rate decreased in fiscal 1999 compared to fiscal 1998, primarily due to a decrease in nondeductible goodwill amortization.

    Our effective tax rate increased in fiscal 1998 from fiscal 1997 principally as a result of the nondeductible write-off of goodwill and lower tax-exempt interest income.

    We have targeted our effective tax rate to decrease in fiscal 2000 to approximately 35%.

Factors That May Affect Future Results of Operations

    We believe that in the future our results of operations could be affected by various factors, including:

•

delays in shipment of our new products and major new versions of existing products



•

lack of market acceptance of new products and upgrades



•

introduction of new products by major competitors



•

weakness in demand for application software and printers



•

renegotiation of royalty arrangements



•

lack of growth in worldwide personal computer and printer sales, and downward sales price adjustments



•

consolidation in the OEM printer business



•

ongoing weakness in our printing business due to product transitions



•

industry transitions to new business and information delivery models

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•

adverse changes in general economic conditions in any of the countries in which we do business



•

Year 2000 issues (as discussed later under "Year 2000 Issues")

    We have stated that in fiscal 2000 our annual revenue growth target is 20% over fiscal 1999 revenue and that our gross margin and operating profit margin targets are 91% and 30%, respectively. Additionally, in fiscal 2000, our operating model targets for research and development, sales and marketing, and general and administrative expenses are 20%, 32%, and 9% of revenue, respectively, and our effective tax rate target is 35%. We use these targets to assist us in making decisions about our allocation of resources and investments, not as predictions of future results. The targets reflect a number of assumptions, including:

•

assumptions about product pricing



•

manufacturing costs and volumes



•

the mix of application products and licensing revenue, full and upgrade products, distribution channels, and geographic distribution

    These and many other factors described in this report affect our financial performance and may cause our future results, including results for the current quarter, to vary materially from these targets.

    Our ability to develop and market products, including upgrades of current products that successfully adapt to changing customer needs, may also have an impact on our results of operations. Our ability to extend our core technologies into new applications and to anticipate or respond to technological changes could affect our ability to develop these products. A portion of our future revenue will come from these new applications. Delays in product or upgrade introductions, whether by us or by our OEM customers, could cause a decline in our revenue, earnings, or stock price. We cannot determine the ultimate effect that these new products or upgrades will have on our revenue or results of operations.

    The market for our graphics applications, particularly our consumer and Web publishing products, is intensely and increasingly competitive and is significantly affected by product introductions and market activities of industry competitors. Additionally, Microsoft Corporation ("Microsoft") has increased its presence in the digital imaging/graphics market; we believe that, due to Microsoft's market dominance, any new Microsoft digital imaging products will be highly competitive with our products. If competing new products achieve widespread acceptance, our operating results would suffer.

    We generally offer our application and server-based products on Macintosh, Windows, UNIX, and Linux platforms. To the extent that there is a slowdown of customer purchases of personal computers on either the Windows or Macintosh platforms or in general, our business could be harmed.

    We distribute our application products primarily through distributors, resellers, and retailers (collectively referred to as "distributors"). A significant amount of our revenue for application products is from a single distributor. We are in the process of revising our channel program to reduce the overall number of our distributors worldwide and focus our channel efforts on larger distributors. This revision of the channel program has resulted in an increase in our dependence on a smaller number of distributors selling through a larger amount of our products. Additionally, our goal is to increase our direct distribution of our products to end users through our online store located on our Web site atwww.adobe.com. Any such increase in our direct revenue efforts will place us in increased competition with our channel distributors and with newer types of distribution of our products by online, Internet-based resellers of our products. While we anticipate that the restructuring and streamlining of our product distribution channels and the increase in the scope of our direct sales efforts will eventually improve our business by decreasing discounts or rebate programs provided to distributors, decreasing product returns, and shortening inventory cycles, these changes could instead seriously harm our business.

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    In addition, we continue to expand into third-party distribution channels, including value-added resellers and systems integrators, in our effort to further broaden our customer base. As a result, the financial health of these third parties and our continuing relationships with them are becoming more important to our success. Some of these companies are thinly capitalized and may be unable to withstand changes in business conditions. Our business could be seriously harmed if the financial condition of some of these third parties substantially weakens or if our relationships with them deteriorate. Also, as we seek to further broaden our customer base in the corporate business and consumer markets, we may not successfully adapt our application software distribution channels, which could cause our operating results to suffer. We could experience decreases in average selling prices and some transitions in our distribution channels that could seriously harm our business.

    We currently rely on three manufacturers of our products, each located in a different region; one of these has just been added in the first quarter of fiscal 2000. If a manufacturer terminates its relationship with us or if our supply from a manufacturer is interrupted or terminated for any other reason, we may not have enough time to replace the supply of products manufactured by that manufacturer to avoid harm to our business.

    Revenue from our OEM PostScript and Other segment experienced a 34% decline in fiscal 1999 compared to fiscal 1998, primarily as a result of a decline in revenue from the licensing of PostScript technology. We expect this trend to continue and believe that our financial results could be harmed by it. The weakness in the monochrome laser printer and Japanese markets were factors causing the revenue decline. In addition, in the fall of fiscal 1997, HP began to ship a clone version of Adobe PostScript technology in some printers, resulting in lower licensing revenue to us in fiscal 1999 and 1998. Even though we continue to work with HP printer operations to incorporate Adobe PostScript and other technologies into other HP products, we expect continued lower revenue in this segment from HP in fiscal 2000. If other significant customers also decide to incorporate a clone version instead of Adobe PostScript technology, it could seriously harm our business. Further, OEM customers on occasion seek to renegotiate their royalty arrangements. We evaluate these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, which could result in lower licensing revenue for us.

    From the end of fiscal 1997 through the first quarter of fiscal 1999, we experienced a decline in revenue from the Japanese market due to a weak Japanese computer market and general economic conditions in Japan. During the second, third, and fourth quarters of fiscal 1999, we experienced an increase in application revenue from our Japanese operation but still continued to experience a decline in OEM PostScript and Other revenue. In addition, at the end of fiscal 1997, inventory levels for application products at our Japanese distributors remained higher than what we consider normal. During fiscal 1998, we worked with our major distributors in Japan to reduce channel inventory to what we consider a reasonable level. Despite the slight improvement in the Japanese economy in the second, third, and fourth quarters of fiscal 1999, these adverse economic conditions may continue in the short term, and they may continue to adversely affect our revenue and earnings. Although there are also adverse conditions in other Asian and Latin American economies, the countries affected represent a much smaller portion of our revenue and thus have less impact on our operational results.

    We recently implemented restructurings of our business in the second, third, and fourth quarters of fiscal 1999, resulting in a workforce reduction of 9%. However, we plan to continue to invest in certain areas, which will require us to hire additional employees. Competition for high-quality personnel, especially highly skilled engineers, is extremely intense. Our ability to effectively manage this growth will require us to continue to improve our operational and financial controls and information management systems and to attract, retain, motivate, and manage employees effectively; otherwise our business could be seriously harmed.

    The Internet market is rapidly evolving and is characterized by an increasing number of market entrants that have introduced or developed products addressing authoring and communication over the

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Internet. As is typical in the case of a new and evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty. The software industry addressing authoring and communications over the Internet is young and has few proven products. Standards defining Web graphics have not yet been finally adopted. In addition, new models for licensing software will be needed to accommodate new information delivery practices. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, ease of use and access, cost, and quality of service) remain unresolved and may affect the growth of Internet use, together with the software standards and electronic media employed in such markets.

    We have stated that we intend to increase our investment in eBusiness and enhanced marketing activities in an effort to achieve revenue growth, but we can provide no assurance that this increased investment in this new market will result in increased revenue.

    We derive a significant portion of our revenue and operating income from our subsidiaries located in Europe, Japan, Asia Pacific, and Latin America. We generally experience lower revenue from our European operations in the third quarter because many customers reduce their purchasing activities in the summer months. Additionally, we are uncertain whether the recent weakness experienced in the Japan, Asia Pacific, and Latin America markets will continue in the foreseeable future due to possible currency devaluation and liquidity problems in these regions. While most of the revenue of our European subsidiaries is denominated in U.S. dollars, the majority of our revenue derived from Japan is denominated in yen, and the majority of all our subsidiaries' operating expenses are denominated in their local currencies. As a result, our operating results are subject to fluctuations in foreign currency exchange rates. To date, the financial impact of such fluctuations has not been significant. Our hedging policy attempts to mitigate some of these risks, based on our best judgment of the appropriate trade-offs among risk, opportunity, and expense. We have established a hedging program to hedge our exposure to foreign currency exchange rate fluctuations, primarily of the Japanese yen. Our hedging program is not comprehensive, and our program may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates.

    In connection with the enforcement of our own intellectual property rights or in connection with disputes relating to the validity or alleged infringement of third-party rights, we have been and may in the future be subject to complex, protracted litigation as part of our policy to vigorously defend our intellectual property rights. Intellectual property litigation is typically very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended past litigation, we may not prevail in any ongoing or future litigation. Adverse decisions in such litigation could have negative results, including subjecting us to significant liabilities, requiring us to seek licenses from others, preventing us from manufacturing or licensing certain of our products, or causing severe disruptions to our operations or the markets in which we compete, any one of which could seriously harm our business.

    We prepare our financial statements in conformity with generally accepted accounting principles ("GAAP"). GAAP are subject to interpretation by the American Institute of Certified Public Accountants (the "AICPA"), the Securities and Exchange Commission (the "SEC"), and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may even affect the reporting of transactions completed before a change is announced. Accounting policies affecting many other aspects of our business, including:

•

rules relating to software revenue recognition



•

purchase and pooling-of-interests accounting for business combinations



•

the valuation of in-process research and development



•

employee stock purchase plans



•

stock option grants

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have recently been revised or are under review by one or more groups. Changes to these rules or the questioning of current practices may have a significant adverse effect on our reported financial results or in the way in which we conduct our business.

    Due to the factors noted earlier, as well as the Year 2000 issues noted later, our future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings compared to analysts' or investors' expectations could cause, and has caused in the past, an immediate and significant decline in the trading price of our common stock. Additionally, we may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and greater decline in the trading price of our common stock. Finally, we participate in a highly dynamic industry. In addition to factors specific to us, changes in analysts' earnings estimates for us or our industry, and factors affecting the corporate environment, our industry, or the securities markets in general will often result in significant volatility of our common stock price.

Year 2000 Issues

    We have been addressing a broad range of issues associated with the programming code in existing computer systems as the year 2000 approached. The Year 2000 problem is complex, as many computer systems have been affected in some way by the rollover of the two-digit year value to 00. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Year 2000 issue creates risk for us from unforeseen problems in our products or our own computer and embedded systems and from third parties with whom we deal on financial and other transactions worldwide. Failure of our and/or third parties' computer systems or Year 2000 defects in our products could harm our ability to conduct our business.

    We commenced a phased program to inventory, assess, remediate, test, implement, and develop contingency plans for all mission-critical applications and products potentially affected by the Year 2000 issue (the "Y2K Program"). All phases have been substantially completed, including proactive testing and monitoring in the early part of the Year 2000. All of our business groups were involved in the Y2K Program efforts.

    We identified three potential areas of impact for review: (1) the software and systems, including embedded systems, used in our internal business processes; (2) third-party vendors, manufacturers and suppliers; and (3) our software products offered to customers. We estimate that the aggregate cost incurred for the Y2K Program was less than $3.0 million, which we funded from operating cash flows.

    Internal business processes.  We have substantially completed all phases of our Y2K Program related to our internal business processes, including proactive monitoring and testing of these processes during the early part of Year 2000. In addition, in order to protect against the acquisition of additional products that may not be Year 2000 ready, we implemented a policy requiring Year 2000 review of products or upgrades sold or licensed to us prior to their acquisition. Through January 2000, we have not discovered any material issues. However, as it is still early in the Year 2000, such failures, or the failure of any contingency plan, remain a possibility, and it could seriously harm our business if significant new noncompliance issues are identified.

    Third-party vendors, manufacturers, and suppliers.  Both before and after the Year 2000 date change, we contacted our critical suppliers, manufacturers, distributors, and other vendors to determine whether their operations and the products and services that they provide to us are Year 2000 compliant. Through January 2000, we have not discovered any material issues. However, as it is still early in the Year 2000, such failures or the failure of any contingency plan remain a possibility and could seriously harm our business.

    Products.  In addition, the Year 2000 issue could affect the products that we license. We are currently continuing to test our products and gather information about our technologies and products affected by the Year 2000 transition. Current information about our products is available on our Year 2000 Web site

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(www.adobe.com/newsfeatures/year2000). Information on our Web site is provided to customers for the sole purpose of assisting in the transition to the Year 2000. Such information is the most currently available concerning our products and is provided "as-is" without warranty of any kind. We can provide no assurance that our current products do not contain undetected errors or defects associated with Year 2000 issues that may result in material costs to us.

    Contingency plans.  Our Y2K Program was designed to minimize the possibility of serious Year 2000 interruptions. However, because the possibility of such interruptions could not be eliminated, we developed contingency plans addressing Year 2000 issues in our high-impact areas and for other areas as we deemed practicable and advisable. Such plans for high-impact processes continue to be revised and updated based on current information, even after the start of the Year 2000, particularly in light of our internal ongoing process and structural changes. Other contingency plans were prepared, tested, and updated as we deemed practicable and appropriate. We continue to expect to have personnel and resources available to deal with any Year 2000 problems that occur.

    Some commentators have stated that a significant amount of litigation will arise from Year 2000 compliance issues, and we are aware of a growing number of lawsuits against other software vendors. Because of the unprecedented nature of such litigation, it is uncertain whether or to what extent we may be affected by it, and the impact and cost of such litigation is therefore not estimable. The impact of the Year 2000 on our future revenue is difficult to discern but is a risk to be considered in evaluating our future growth. Any costs associated with potential Year 2000 litigation exposure are not included in the total cost estimate above.

Recent Accounting Pronouncements

    In December 1998, the AICPA issued Statement of Position ("SOP") 98-9, "Modifications of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," which amends SOP 97-2 and supersedes SOP 98-4. SOP 98-9 requires recognition of revenue using the "residual method" in a multiple-element software arrangement when fair value does not exist for one or more of the delivered elements in the arrangement. Under the "residual method," the total fair value of the undelivered elements is deferred and recognized in accordance with SOP 97-2. We will adopt SOP 98-9 in fiscal 2000, and we do not expect this to have a significant impact on us.

    In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which provides guidance on accounting for the costs of developing computer software intended for internal use. We must adopt SOP 98-1 effective as of fiscal 2000, and we do not expect the adoption to have a material impact on our results of operations or financial position.

    In June 1998, the Financial Accounting Standards Board ("the FASB") issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative financial instruments and hedging activities, and requires us to recognize all derivatives as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value would be accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. In June 1999, the FASB issued SFAS 137, which defers the implementation of SFAS 133. We will be required to implement SFAS 133 in fiscal year 2001. We have not determined the impact that SFAS 133 will have on our financial statements and we believe that such determination will not be meaningful until closer to the date of initial adoption.

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LIQUIDITY AND CAPITAL RESOURCES

    Our cash, cash equivalents, and short-term investments consist principally of money market mutual funds, municipal bonds, and United States government agency securities. All of our cash equivalents and short-term investments are classified as available-for-sale under the provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." The securities are carried at fair value with the unrealized gains and losses, net of tax, included in accumulated other comprehensive income, which is reflected as a separate component of stockholders' equity.

    Our cash, cash equivalents, and short-term investments increased $226.2 million, or 83%, in fiscal 1999, primarily due to cash generated from operations of $334.2 million, proceeds from the issuance of treasury stock related to the exercise of stock options under our stock option plans and sale of stock under the Employee Stock Purchase Plan of $142.9 million, and the release of restricted funds totaling $130.3 million associated with the refinancing of our corporate headquarters lease agreement. Other sources of cash include the proceeds from the sale of equity securities and the sale of a building in the amount of $63.9 million and $40.6 million, respectively. In addition, short-term investments increased due to a reclassification of $46.7 million of investments classified as long-term to short-term as well as mark-to-market adjustments totaling $81.2 million.

    These factors were partially offset by the purchase of treasury stock in the amount of $479.2 million, capital expenditures of $42.2 million, the purchase of other assets for $43.5 million, the purchase of the assets of GoLive Systems and Attitude Software for $36.9 million, and the payment of dividends totaling $12.2 million.

    We expect to continue our investing activities, including expenditures for computer systems for research and development, sales and marketing, product support, and administrative staff. Furthermore, cash reserves may be used to purchase treasury stock and acquire software companies, products, or technologies that are complementary to our business.

    In September 1997, Adobe's Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 30.0 million shares of our common stock over a two-year period. We repurchased approximately 1.7 million shares in the first quarter of fiscal 1999, 20.3 million shares in fiscal 1998, and 8.0 million shares in fiscal 1997, at a cost of $30.5 million, $362.4 million, and $188.6 million, respectively. This program was completed during the first quarter of fiscal 1999.

    In April 1999, Adobe's Board of Directors authorized, subject to certain business and market conditions, the purchase of up to an additional 5.0 million shares of our common stock over a two-year period. This new stock repurchase program was in addition to an existing program whereby we have been authorized to repurchase shares to offset issuances under employee stock option and stock purchase plans. No purchases have been made under the 5.0 million share repurchase program.

    Under our existing plan to repurchase shares to offset issuances under employee stock plans, we repurchased approximately 11.2 million, 0.7 million, and 4.6 million shares in fiscal 1999, 1998, and 1997, respectively, at a cost of $448.7 million, $16.8 million, and $87.0 million, respectively.

    We have paid cash dividends on our common stock each quarter since the second quarter of 1988. Adobe's Board of Directors declared a cash dividend on our common stock of $0.025 per common share for each of the four quarters in fiscal 1999, 1998, and 1997. On December 1, 1997, we dividended one share of Siebel common stock for each 600 shares of Adobe common stock held by stockholders of record on October 31, 1997. An equivalent cash dividend was paid for holdings of less than 15,000 Adobe shares and

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for odd-lot and fractional Siebel shares. Also, in fiscal 1997, we dividended one share of Netscape common stock for each 200 shares of Adobe common stock held by stockholders of record on July 31, 1997. An equivalent cash dividend was paid for holdings of less than 5,000 Adobe shares and for fractional Netscape shares. The declaration of future dividends, whether in cash or in-kind, is within the discretion of Adobe's Board of Directors and will depend on business conditions, our results of operations and financial condition, and other factors.

    To facilitate our stock repurchase program, we sold put warrants in a series of private placements in fiscal 1999, 1998, and 1997. Each put warrant entitles the holder to sell one share of our common stock to us at a specified price. Approximately 6.0 million, 8.0 million, and 9.2 million put warrants were written in fiscal 1999, 1998, and 1997, respectively. At December 3, 1999, approximately 2.7 million put warrants were outstanding that expire on various dates through April 2000 and have exercise prices ranging from $40.16 to $69.35 per share, with an average exercise price of $54.78 per share.

    In addition, in fiscal 1999, 1998, and 1997, we purchased call options that entitle us to buy 2.9 million, 3.2 million, and 4.6 million shares, respectively, of our common stock. At December 3, 1999, approximately 1.6 million call options were outstanding that expire on various dates through April 2000 and have exercise prices ranging from $43.42 to $74.83 per share, with an average exercise price of $60.42 per share. Under these arrangements, at our option, we can settle with physical delivery or net shares equal to the difference between the exercise price and the value of the option as determined by the contract.

    We believe that existing cash, cash equivalents, and short-term investments, together with cash generated from operations, will provide sufficient funds for us to meet our operating cash requirements in the foreseeable future.

Commitments

    Our principal commitments as of December 3, 1999 consisted of obligations under operating leases, a line of credit agreement, venture investing activities, real estate development agreements, and various service agreements.

    In fiscal 1994 and 1996, we entered into real estate development agreements and operating lease agreements in connection with the construction of two corporate headquarters office facilities in San Jose, California. The operating lease agreement for the first office building commenced in 1996, and the operating lease agreement for the second facility commenced in 1998. In August 1999, we restructured these two lease agreements for our corporate headquarters. The amended and restated agreement replaces the two prior lease agreements commencing in 1996 and 1998, respectively. The lease is for a period of five years and is subject to standard covenants including financial ratios. We have an option to purchase the buildings at any time during the term for an amount equal to the total investment of the lessor. At the end of the lease term, we may exercise the purchase option or, with the mutual agreement of the lessor, renew the term of the lease. In addition to these possibilities, at the end of the term, we may elect to have the buildings sold to an unrelated third party. In such case, we are obligated to use our best efforts to arrange for such a sale and are obligated to pay the lessor the difference between the total investment in the buildings and the net sales proceeds, provided, however, that in no event would we be required to pay more than a maximum guaranteed residual amount as set forth in the lease. In the event we default during the term of the lease, the lessor could require us to purchase the buildings for an amount equal to our option price. As of December 3, 1999, we were in compliance with all financial covenants.

    During 1998, we entered into a real estate development agreement for the construction of an office building in Edinburgh, Scotland. During fiscal 1998 and 1999, we paid approximately $34.9 million for land, fees, and construction costs. During fiscal 1999, we announced a Board-approved restructuring which resulted in the reduction in workforce primarily in our European headquarters in Edinburgh, Scotland. (For further information, see Note 7 of the Notes to Consolidated Financial Statements.) As a result of the restructuring, the decision was made by management to sell the new facility in Edinburgh, and the sale was

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completed in September 1999. We received $40.6 million cash from the sale of the facility and realized a gain upon the sale of $5.7 million. As of December 3, 1999, we had no commitments related to this building.

    In August 1999, we entered into a $200.0 million unsecured revolving line of credit with a group of 15 banks for general corporate purposes, subject to certain financial covenants. One-half of the facility expires in August 2000, and the other $100.0 million expires in August 2002. Outstanding balances accrue interest at London Interbank Offered Rate ("LIBOR") plus a margin that is based on our financial ratios. There were no outstanding balances on the credit facility as of December 3, 1999. In addition, as of December 3, 1999, we were in compliance with all financial covenants.

    We believe that if the line of credit is canceled or amounts are not available under the line, there would not be a material adverse effect on our financial results, liquidity, or capital resources.

    Under the terms of the line of credit and the lease agreement, we may pay cash dividends unless an event of default has occurred or we do not meet certain financial ratios.

Derivatives and Financial Instruments
(Item 7a. Quantitative and Qualitative Disclosures About Market Risk)

Foreign currency hedging instruments

    We transact business in various foreign currencies, primarily in certain European countries and Japan. Accordingly, we are subject to exposure from movements in foreign currency exchange rates. This exposure is primarily related to yen denominated licenses in Japan and local currency denominated operating expenses in Europe, where we license primarily in U.S. dollars.

    Our Japanese operating expenses are in yen, which mitigates a portion of the exposure related to yen denominated licenses in Japan. In addition, we hedge firmly committed transactions using primarily forward contracts. We also hedge a percentage of forecasted international revenue with purchased options. At December 3, 1999, total outstanding contracts included $17.0 million in foreign currency forward exchange contracts and purchased Japanese yen put option contracts with a notional value of $64.0 million. All contracts expire at various times through December 2000. Our hedging policy is designed to reduce the impact of foreign currency exchange rate movements, and we expect any gain or loss in the hedging portfolio to be offset by a corresponding gain or loss in the underlying exposure being hedged.

    A sensitivity analysis was performed on our hedging portfolio as of December 3, 1999. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10% and 15% shift in the value of exchange rates relative to the U.S. dollar. An increase in the value of the U.S. dollar (and a corresponding decrease in the value of the hedged foreign currency asset) would lead to an increase in the fair value of our financial hedging instruments by $2.6 million and $4.4 million, respectively. Conversely, a decrease in the value of the U.S. dollar would result in a decrease in the fair value of these financial instruments by $2.2 million and $3.3 million, respectively.

    Our accounting policies for these instruments are based on our designation of such instruments as hedging transactions. We recognize gains and losses associated with the mark-to-market of outstanding foreign exchange forward contracts that are designated and effective as hedges of existing transactions, for which a firm commitment has been attained, as income in the current period. Corresponding gains and losses on the foreign currency denominated transactions being hedged are recognized as income in that same period. In this manner, the gains and losses on foreign currency denominated transactions will be offset by the gains and losses on the foreign currency contracts. We do not anticipate any material adverse effect on our consolidated financial position, results of operations, or cash flows as a result of these instruments. We use yen options to hedge anticipated exposures.

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    We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.

    We currently do not use financial instruments to hedge local currency denominated operating expenses in Europe. Instead, we believe that a natural hedge exists, in that local currency revenue from product upgrades substantially offsets the local currency denominated operating expenses. We assess the need to utilize financial instruments to hedge European currency exposure on an ongoing basis.

    We regularly review our hedging program and may as part of this review determine at any time to change our hedging program.

Fixed income investments

    At December 3, 1999, we had an investment portfolio of fixed income securities, including those classified as cash equivalents, of $327.0 million. These securities are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of our fixed income securities.

    A sensitivity analysis was performed on our investment portfolio as of November 30, 1999. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 50, plus 100, or plus 150 basis points over six-month and twelve-month time horizons. The market value changes for a 50, 100, or 150 basis point increase in short-term treasury security yields were not material due to the limited duration of our portfolio.

    We do not use derivative financial instruments in our investment portfolio to manage interest rate risk. We do, however, limit our exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for its fixed income portfolios. At the present time, the maximum duration of all portfolios is limited to 2.3 years. The guidelines also establish credit quality standards, limits on exposure to one issue, issuer, as well as the type of instrument. Due to the limited duration and credit risk criteria established in our guidelines, we do not expect the exposure to market and credit risk to be material.

Facility leases

    We are exposed to interest rate risk associated with leases of our facilities whose payments are tied to the LIBOR and have evaluated the hypothetical changes in lease obligations arising from selected hypothetical changes in the LIBOR rate. Market changes reflected immediate hypothetical parallel shifts in the LIBOR curve of plus or minus 50, 100, and 150 basis points for a twelve-month period. Based on this analysis, such charges would not be material to our results of operations or financial position.

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Item 8. Financial Statements and Supplementary Data

FINANCIAL STATEMENTS

    Our financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 14.(a)1 for a listing of financial statements provided in the section titled "FINANCIAL STATEMENTS".

SUPPLEMENTARY DATA

    The following tables (presented in thousands, except per share amounts) set forth quarterly supplementary data for each of the years in the two-year period ended December 3, 1999. All share and per share amounts referred to in the table below have been adjusted to reflect the two-for-one stock split in the form of a stock dividend of our common stock effected October 26, 1999.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

    There were no disagreements on any matter of accounting principles, financial statement disclosure, or auditing scope or procedure to be reported under this item.

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PART III

Item 10. Directors and Executive Officers of the Registrant

DIRECTORS

    You will find information regarding Directors in the section captioned "Election of Directors" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on April 26, 2000. Such information is incorporated herein by reference.

EXECUTIVE OFFICERS

    You will find information with respect to executive officers in Item 1. Business of this report.

Item 11. Executive Compensation

    You will find this information in the section captioned "Executive Compensation" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on April 26, 2000. Such information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

    You will find this information in the section captioned "Security Ownership of Certain Beneficial Owners and Management" which will appear in the definitive Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held April 26, 2000. We are incorporating that information here by reference.

Item 13. Certain Relationships and Related Transactions

    During fiscal 1999, we entered into two separate loan agreements with Graham Freeman, an executive officer of Adobe, to assist with his relocation to San Jose, California. The first loan in the amount of $550,000 was repaid to us on December 31, 1999. The second loan, in the amount of $1.0 million, is interest-free and is secured by Mr. Freeman's principal residence. Under the terms of the agreement, Mr. Freeman is required to repay this loan at $200,000 per year for the next five years, beginning December 2000. In addition, the loan must be repaid in full within thirty days of any termination of his employment.

37

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)

Documents filed as part of this report



1.

Financial statements




•

Management's Report



•

Independent Auditors' Report



•

Consolidated Balance Sheets
  December 3, 1999 and November 27, 1998



•

Consolidated Statements of Income
  Years Ended December 3, 1999, November 27, 1998, and November 28, 1997



•

Consolidated Statements of Stockholders' Equity and Other Comprehensive Income
  Years Ended December 3, 1999, November 27, 1998, and November 28, 1997



•

Consolidated Statements of Cash Flows
  Years Ended December 3, 1999, November 27, 1998, and November 28, 1997



•

Notes to Consolidated Financial Statements



2.

Financial statement schedule




•

Schedule II—Valuation and Qualifying Accounts



3.

Exhibits

(a)

Index to Exhibits

(continued)

38

(continued)

39

*

Compensatory plan or arrangement

    We will furnish any exhibit listed above that is not included here. You must specifically request the exhibit you would like to receive and pay our reasonable expenses in furnishing it to you. You should call or write:

Investor Relations Department
345 Park Avenue
San Jose, CA 95110-2704
408-536-4416
Fax 408-537-4034

    Many of the above exhibits are also available through our EDGAR filings at www.sec.gov.

(b)

Reports on Form 8-K

    On September 17, 1999, we filed a Report on Form 8-K under Item 5 to report a two-for-one split of our common stock, in the form of a dividend, for stockholders of record on October 4, 1999.

40

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 16^th day of February, 2000.

41

SUMMARY OF TRADEMARKS

    The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in certain jurisdictions, are referenced in this Form 10-K:

Adobe
Acrobat
Acrobat Capture
Acrobat Reader
ActiveShare
Adobe Dimensions
Adobe Font Folio
Adobe PhotoDeluxe
Adobe Premiere
Adobe Publishing Collection
Adobe Type Library
Adobe Type Manager
After Effects
ePaper
ePaper Solutions
Extreme
FrameMaker
FrameMaker+SGML
GoLive
Illustrator
ImageReady
ImageStyler
InCopy
InDesign
PageMaker
PageMill
PDF Merchant
Photoshop
PostScript
PostScript 3
PressReady
PrintGear
Streamline

    All other brand or product names are trademarks or registered trademarks of their respective holders.

42

FINANCIAL STATEMENTS

    As required under Item 8. Financial Statements and Supplementary Data, the consolidated financial statements of the Company are provided in this separate section. The consolidated financial statements included in this section are as follows:

43

MANAGEMENT'S REPORT

    Management is responsible for all the information and representations contained in the consolidated financial statements and other sections of thisForm 10-K. Management believes that the consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances to reflect, in all material respects, the substance of events and transactions that should be included, and that the other information in thisForm 10-K is consistent with those statements. In preparing the consolidated financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being accounted for.

    In meeting its responsibility for the reliability of the consolidated financial statements, management depends on the Company's system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization, and are recorded properly to permit the preparation of consolidated financial statements in accordance with generally accepted accounting principles. In designing control procedures, management recognizes that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions.

    The Board of Directors pursues its oversight role for these consolidated financial statements through the Audit Committee, which is comprised solely of Directors who are not officers or employees of the Company. The Audit Committee meets with management periodically to review their work and to monitor the discharge of each of their responsibilities. The Audit Committee also meets periodically with KPMG LLP, the independent auditors, who have free access to the Audit Committee or the Board of Directors, without management present, to discuss internal accounting control, auditing, and financial reporting matters.

    KPMG LLP is engaged to express an opinion on our consolidated financial statements. Their opinion is based on procedures believed by them to be sufficient to provide reasonable assurance that the consolidated financial statements are not materially misleading and do not contain material errors.

December 14, 1999

44

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Adobe Systems Incorporated:

    We have audited the accompanying consolidated financial statements of Adobe Systems Incorporated and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

    We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adobe Systems Incorporated and subsidiaries as of December 3, 1999 and November 27, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 3, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

KPMG LLP
Mountain View, California
December 14, 1999

45

ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

46

ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

47

ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(In thousands)