Johnson & Johnson is a global American pharmaceutical and consumer goods company with headquarters in New Brunswick, New Jersey. The company is listed in the Dow Jones Industrial Average.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to - ----------------------------------------------------------------- Commission file number 1-3215 JOHNSON & JOHNSON (Exact name of registrant as specified in its charter) NEW JERSEY 22-1024240 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) New Brunswick, New Jersey 08933 (Address of principal executive offices, including zip code) 732-524-0400 Registrant's telephone number, including area code 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On October 23, 1998, 1,344,669,448 shares of Common Stock, $1.00 par value, were outstanding. - 1 - JOHNSON & JOHNSON AND SUBSIDIARIES TABLE OF CONTENTS Part I - Financial Information Page No. Consolidated Balance Sheet - September 27, 1998 and December 28, 1997 3 Consolidated Statement of Earnings for the Fiscal Quarter Ended September 27, 1998 and September 28, 1997 5 Consolidated Statement of Earnings for the Fiscal Nine Months Ended September 27, 1998 and September 28, 1997 6 Consolidated Statement of Cash Flows for the Fiscal Nine Months Ended September 27, 1998 and September 28, 1997 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Signatures 24 Part II - Other Information Items 1 through 4 are not applicable Item 5 - Other Information 23 Item 6 - Exhibits and Reports on Form 8-K 23 - 2 - Part I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) ASSETS September 27, December 28, 1998 1997 Current Assets: Cash and cash equivalents $ 3,742 2,753 Marketable securities, at cost 84 146 Accounts receivable, trade, less allowances $353 (1997 - $358) 3,724 3,329 Inventories (Note 4) 2,897 2,516 Deferred taxes on income 852 831 Prepaid expenses and other receivables 877 988 Total current assets 12,176 10,563 Marketable securities, non-current 382 385 Property, plant and equipment, at cost10,068 9,444 Less accumulated depreciation and amortization 4,093 3,634 5,975 5,810 Intangible assets, net (Note 5) 3,297 3,261 Deferred taxes on income 411 332 Other assets 1,092 1,102 Total assets $ 23,333 21,453 See Notes to Consolidated Financial Statements - 3 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) LIABILITIES AND SHAREOWNERS' EQUITY September 27, December 28, Current Liabilities: 1998 1997 Loans and notes payable $ 575 714 Accounts payable 1,487 1,753 Accrued liabilities 2,427 2,258 Accrued salaries, wages and commissions 574 332 Taxes on income 337 226 Total current liabilities 5,400 5,283 Long-term debt 1,117 1,126 Deferred tax liability 260 175 Certificates of extra compensation 145 126 Other liabilities 2,473 2,384 Shareowners' Equity: Preferred stock - without par value (authorized and unissued 2,000,000 shares) - - Common stock - par value $1.00 per share (authorized 2,160,000,000 shares; issued 1,534,824,000 shares) 1,535 1,535 Note receivable from employee stock ownership plan (45) (51) Accumulated other comprehensive Income (Note 2) (397) (378) Retained earnings 14,278 12,661 15,371 13,767 Less common stock held in treasury, at cost (189,892,000 & 189,687,000 shares) 1,433 1,408 Total shareowners' equity 13,938 12,359 Total liabilities and shareowners' equity $23,333 21,453 See Notes to Consolidated Financial Statements - 4 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (Unaudited; dollars & shares in millions except per share figures) Fiscal Quarter Ended Sept. 27, Percent Sept. 28, Percent 1998 to Sales 1997 to Sales Sales to customers (Note 6)$5,724 100.0 5,586 100.0 Cost of products sold 1,758 30.7 1,750 31.3 Selling, marketing and administrative expenses 2,151 37.6 2,149 38.5 Research expense 511 8.9 516 9.2 Interest income (67) (1.2) (58) (1.0) Interest expense, net of portion capitalized 26 .5 36 .6 Other (income)expense, net 28 .5 (4) - 4,407 77.0 4,389 78.6 Earnings before provision for taxes on income 1,317 23.0 1,197 21.4 Provision for taxes on income (Note 3) 356 6.2 342 6.1 NET EARNINGS $ 961 16.8 855 15.3 NET EARNINGS PER SHARE (Notes 1 and 8) Basic $ .71 .64 Diluted $ .70 .63 CASH DIVIDENDS PER SHARE $ .25 .22 AVG. SHARES OUTSTANDING Basic 1,344.9 1,335.1 Diluted 1,373.0 1,363.9 See Notes to Consolidated Financial Statements - 5 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (Unaudited; dollars & shares in millions except per share figures) Fiscal Nine Months Ended Sept. 27, Percent Sept. 28, Percent 1998 to Sales 1997 to Sales Sales to customers (Note 6)$17,290 100.0 16,999 100.0 Cost of products sold 5,338 30.9 5,271 31.0 Selling, marketing and administrative expenses 6,365 36.8 6,429 37.8 Research expense 1,537 8.9 1,514 8.9 Interest income (192) (1.1) (151) (.8) Interest expense, net of portion capitalized 80 .5 104 .6 Other (income)expense, net 40 .2 39 .2 13,168 76.2 13,206 77.7 Earnings before provision for taxes on income 4,122 23.8 3,793 22.3 Provision for taxes on income (Note 3) 1,146 6.6 1,120 6.6 NET EARNINGS $ 2,976 17.2 2,673 15.7 NET EARNINGS PER SHARE (Notes 1 and 8) Basic $ 2.21 2.00 Diluted $ 2.17 1.96 CASH DIVIDENDS PER SHARE$ .72 .63 AVG. SHARES OUTSTANDING Basic 1,345.0 1,333.7 Diluted 1,371.4 1,363.8 See Notes to Consolidated Financial Statements - 6 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; Dollars in Millions) Fiscal Nine Months Ended Sept. 27, Sept. 28 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $2,976 2,673 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 906 868 Increase in accounts receivable, trade, less allowances (345) (555) Increase in inventories (358) (272) Changes in other assets and liabilities 350 536 NET CASH FLOWS FROM OPERATING ACTIVITIES 3,529 3,250 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment(848) (761) Proceeds from the disposal of assets 20 46 Acquisition of businesses, net of cash acquired (78) (158) Other, principally intangible assets (96) (89) NET CASH USED BY INVESTING ACTIVITIES (1,002) (962) CASH FLOWS FROM FINANCING ACTIVITIES Dividends to shareowners (969) (841) Repurchase of common stock (653) (429) Proceeds from short-term debt 174 240 Retirement of short-term debt (193) (185) Proceeds from long-term debt - 6 Retirement of long-term debt (142) (190) Proceeds from the exercise of stock options 223 156 NET CASH USED BY FINANCING ACTIVITIES (1,560) (1,243) EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 22 (62) INCREASE IN CASH AND CASH EQUIVALENTS 989 983 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,753 2,011 CASH AND CASH EQUIVALENTS, END OF PERIOD$ 3,742 2,994 See Notes to Consolidated Financial Statements - 7 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - The accompanying interim financial statements and related notes should be read in conjunction with the Consolidated Financial Statements of Johnson & Johnson and Subsidiaries (the "Company") and related notes as contained in the Annual Report on Form 10-K for the fiscal year ended December 28, 1997. The interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of such statements. At year-end 1997, the Company adopted Statement of Financial Accounting Standards No. 128 that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common shareowners by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Prior periods have been restated to reflect the new standard. NOTE 2 - ADOPTION OF SFAS NO. 130 At March 29, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of an alternative income measurement and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements. The total comprehensive income for the nine months ended September 27, 1998 is $2,957 million, compared with $2,405 million for the same period a year ago. Total comprehensive income includes net earnings, net unrealized currency gains and losses on translation and net unrealized gains and losses on securities. - 8 - NOTE 3 - INCOME TAXES The effective income tax rates for 1998 and 1997 are as follows: 1998 1997 First Quarter 29.6% 30.2% First Half 28.2 30.0 Nine Months 27.8 29.5 The effective income tax rates for the first nine months of 1998 and 1997 are 27.8% and 29.5%, respectively, as compared to the U.S. federal statutory rate of 35%. The difference from the statutory rate is the result of domestic subsidiaries operating in Puerto Rico under a grant for tax relief expiring on December 31, 2007 and the result of subsidiaries manufacturing in Ireland under an incentive tax rate expiring on December 31, 2010. The decrease in the 1998 worldwide effective tax rate was primarily due to a greater proportion of taxable income derived from lower tax rate countries NOTE 4 - INVENTORIES (Dollars in Millions) Sept. 27, 1998 Dec. 28, 1997 Raw materials and supplies $ 890 655 Goods in process 440 417 Finished goods 1,567 1,444 $ 2,897 2,516 NOTE 5 - INTANGIBLE ASSETS (Dollars in Millions) Sept. 27, 1998 Dec. 28, 1997 Intangible assets $ 4,085 3,885 Less accumulated amortization 788 624 $ 3,297 3,261 The excess of the cost over the fair value of net assets of purchased businesses is recorded as goodwill and is amortized on a straight-line basis over periods of 40 years or less. The cost of other acquired intangibles is amortized on a straight-line basis over their estimated useful lives. - 9 - NOTE 6 - SALES TO CUSTOMERS BY SEGMENT OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) SALES BY SEGMENT OF BUSINESS Third Quarter Nine Months Percent Percent Increase/ Increase/ 1998 1997 (Decrease) 1998 1997 (Decrease) Consumer Domestic $ 806 801 .6 2,398 2,400 (.1) International 781 783 (.3) 2,398 2,481 (3.3) 1,587 1,584 .2% 4,796 4,881 (1.7)% Pharmaceutical Domestic 1,153 993 16.1 3,500 2,888 21.2 International 945 925 2.2 2,852 2,907 (1.9) 2,098 1,918 9.4% 6,352 5,795 9.6% Professional Domestic 1,117 1,168 (4.4) 3,275 3,502 (6.5) International 922 916 .7 2,867 2,821 1.6 2,039 2,084 (2.2)% 6,142 6,323 (2.9)% Domestic 3,076 2,962 3.8 9,173 8,790 4.4 International 2,648 2,624 .9 8,117 8,209 (1.1) Worldwide $5,724 5,586 2.5% 17,290 16,999 1.7% SALES BY GEOGRAPHIC AREAS Third Quarter Nine Months Percent Percent Increase/ Increase/ 1998 1997 (Decrease) 1998 1997 (Decrease) Domestic $3,076 2,962 3.8 9,173 8,790 4.4 Europe 1,482 1,373 7.9 4,607 4,478 2.9 Western Hemisphere excluding U.S. 520 512 1.6 1,560 1,518 2.8 Asia-Pacific, Africa 646 739 (12.6) 1,950 2,213 (11.9) Worldwide $5,724 5,586 2.5% 17,290 16,999 1.7% NOTE 7 - ACQUISITIONS During the first quarter, the Company completed the acquisition of IsoStent, Inc. The Company acquired intellectual property and specific assets, including the BX Stent, a new flexible interventional medical device in development for treatment of coronary artery disease. Pro forma results of the acquisition, assuming that the transaction was consummated at the beginning of each year presented, would not be materially different from the results reported. - 10 - NOTE 8 - EARNINGS PER SHARE The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the nine months ended September 27, 1998 and September 28, 1997: Fiscal Fiscal Quarter Ended Nine Months Ended Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1998 1997 1998 1997 Basic net earnings per share$ .71 .64 2.21 2.00 Average shares outstanding - basic 1,344.9 1,335.1 1,345.0 1,333.7 Potential shares exercisable under stock option plans 68.3 70.3 68.0 71.5 Less: shares which could be repurchased under treasury stock method (40.2) (41.5) (41.6) (41.4) Adjusted averages shares outstanding - diluted 1,373.0 1,363.9 1,371.4 1,363.8 Diluted earnings per share $ .70 .63 2.17 1.96 NOTE 9 - PENDING LEGAL PROCEEDINGS The Company, along with numerous other pharmaceutical manufacturers and distributors, is a defendant in a large number of individual and class actions brought by retail pharmacies in state and federal courts under the antitrust laws. These cases assert price discrimination and price-fixing violations resulting from an alleged industry-wide agreement to deny retail pharmacists price discounts on sales of brand name prescription drugs. The Company believes the claims against the Company in these actions are without merit and is defending them vigorously. In September 1998, trial of the liability phase of the federal class action brought on behalf of retail pharmacists against the Company, three other pharmaceutical manufacturers and six wholesalers, began before a jury in Chicago. In the event liability is established, the damages phase will begin before the same jury. Twenty other pharmaceutical manufacturers named in the complaint previously settled. It is anticipated that the trial will last several months. While the Company is confident of the legality of its conduct, it is not possible to predict with certainty the outcome of the jury trial or the size of a damage award, if any. - 11 - Further, the Company together with another contact lens manufacturer, a trade association and various individual defendants, is a defendant in several consumer class actions and an action brought by multiple State Attorneys General on behalf of consumers alleging violations of federal and state antitrust laws. These cases assert that enforcement of the Company's long- standing policy of selling contact lenses only to licensed eye care professionals is a result of an unlawful conspiracy to eliminate alternative distribution channels from the disposable contact lens market. The Company believes that these actions are without merit and is defending them vigorously. In August 1998, the Company's Ortho Biotech subsidiary commenced an arbitration hearing under its license agreement with Amgen, Inc. and Kirin-Amgen, Inc. concerning marketing rights to what Amgen refers to as Novel Erythropoeis Stimulating Protein or NESP. NESP is an analogue of the recombinant human erythropoietin currently marketed by Ortho as Procrit (Eprex outside the U.S.) and by Amgen as Epogen. Amgen has taken the position in the arbitration that Ortho has no rights to NESP and that Amgen is free to sell it into U.S. and international markets reserved exclusively to Ortho under Ortho's license agreements with Amgen and Kirin-Amgen. Ortho disputes Amgen's contentions and takes the position that NESP is covered by its existing license agreements pursuant to which Ortho has exclusive marketing rights to all non-dialysis indications in the U.S. and all indications outside the U.S. except in China and Japan. A decision by the panel of arbitrators is expected early next year. While Ortho believes its position correctly reflects the intent of the parties to the license, it is not possible to predict with certainty the outcome of the arbitration, or the impact on Ortho's business if the outcome is adverse to its position. The Company believes that the above proceedings in the aggregate would not have a material adverse effect on its results of operations, cash flows or financial position. - 12 - NOTE 10 - SUBSEQUENT EVENTS On July 21, 1998, Johnson & Johnson and DePuy, Inc. announced the signing of a definitive agreement under which Johnson & Johnson would acquire DePuy for $35.00 per share, for an aggregate transaction value of $3.5 billion. Pursuant to the agreement, Johnson & Johnson began a cash tender offer for all outstanding shares of DePuy for $35.00 per share. DePuy has approximately 99,000,000 shares outstanding. The offer commenced on July 27, 1998 and expired on October 29, 1998. Approximately 98.6 million DePuy shares, representing 99.7 percent of the outstanding DePuy shares were tendered and paid for. On November 4, 1998 the remaining shares of DePuy were acquired by merger. The Company anticipates that there will be a one-time charge against earnings for in-process R&D and restructuring expenses, as a result of the acquisition. DePuy is one of the world's leading orthopaedic products companies. The company's products are used by orthopaedic surgeons and medical specialists to reconstruct damaged or diseased joints, to facilitate fusion of elements of the spine and correct spinal deformities, to repair bone fractures, and to rehabilitate sports-related injuries. NOTE 11 - NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their respective fair values. Changes in the fair values of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is - 13 - designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in an asset's, liability's, or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be offset by changes in the hedged item's fair value. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be recognized in earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The Company is in the process of evaluating the new standard and does not expect it to have a material effect on the Company's results of operations, cash flow or financial position. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES AND EARNINGS Consolidated sales for the first nine months of 1998 were $17,290 million, which exceeded sales of $16,999 million for the first nine months of 1997 by 1.7%. The strength of the U.S. dollar relative to the foreign currencies decreased sales for the first nine months of 1998 by 3.4%. Excluding the effect of the stronger U.S. dollar relative to foreign currencies, sales increased 5.1% on an operational basis for the first nine months of 1998. Consolidated net earnings for the first nine months of 1998 were $2,976 million, compared with net earnings of $2,673 million for the first nine months of 1997. Worldwide basic net earnings per share for the first nine months of 1998 were $2.21, compared with $2.00 for the same period in 1997, an increase of 10.5%. Worldwide diluted net earnings per share for the first nine months of 1998 were $2.17, compared with $1.96 for the same period in 1997, an increase of 10.7% - 14 - Consolidated sales for the third quarter of 1998 were $5,724 million, an increase of 2.5% over 1997 third quarter sales of $5,586 million. The effect of the stronger U.S. dollar relative to foreign currencies decreased third quarter sales by 2.3%. Consolidated net earnings for the third quarter of 1998 were $961 million, compared with $855 million for the same period a year ago, an increase of 12.4%. Worldwide basic net earnings per share for the third quarter of 1998 rose 10.9% to $.71, compared with $.64 in the 1997 period. Worldwide diluted net earnings per share for the third quarter of 1998 rose 11.1% to $.70, compared with $.63 in 1997. Domestic sales for the first nine months of 1998 were $9,173 million, an increase of 4.4% over 1997 domestic sales of $8,790 million for the same period a year ago. Sales by international subsidiaries were $8,117 million for the first nine months of 1998 compared with $8,209 million for the same period a year ago, a decrease of 1.1%. Excluding the impact of the stronger value of the dollar, international sales increased by 6.0%. Worldwide Consumer segment sales for the third quarter were essentially unchanged versus the same period a year ago. Domestic sales increased by .6% in the quarter while international sales declined by .3%. International sales gains in local currency of 6.5% were offset by a negative currency impact of 6.8%. Consumer sales were led by continued strength in the skin care franchise, which includes the NEUTROGENA, RoC and CLEAN & CLEAR product lines, as well as strong performances from the adult and children's MOTRIN line of analgesic products. At the end of the quarter, the Johnson & Johnson Merck joint venture introduced a new chewable form of PEPCID AC. Worldwide Pharmaceutical sales of $2.1 billion for the quarter increased 9.4% versus the same period in 1997, including 16.1% growth in domestic sales. International sales increased by 2.2%. Sales gains in local currency of 6.0% were partially offset by a negative currency impact of 3.8%. Worldwide growth reflects the strong performance of RISPERDAL, an antipsychotic medication; PROCRIT, for the treatment of anemia; DURAGESIC, a transdermal patch for chronic pain, and the oral contraceptive line of products. Recently PARIET/ACIPHEX (rabeprazole), a proton pump inhibitor for duodenal and gastric ulcers, gastroesophageal reflux disease (GERD) and GERD maintenance received European Union approval. - 15 - Worldwide sales of $2.0 billion in the Professional segment declined by 2.2% versus the third quarter of 1997. Domestic sales were down 4.4% in the quarter while international sales gains in local currency of 4.8% were largely offset by the strength of the U.S. dollar. Strong sales growth of Ethicon Endo- Surgery's laparoscopy and mechanical closure products, Ethicon's Mitek suture anchors and Gynecare's women's health products, LifeScan's blood glucose monitoring systems and Johsnon & Johnson Professional's orthopaedic products were offset by a decline in sales of Cordis' coronary stents. Average shares of common stock outstanding in the first nine months of 1998 were 1,345.0 million, compared with 1,333.7 million for the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES Cash and current marketable securities increased $927 million during the first nine months of 1998 to $3,826 million at September 27, 1998. Total borrowings decreased $148 million during the first nine months of 1998 to $1,692 million. Net cash (cash and current securities net of borrowings) was $2,134 million at September 27, 1998 compared with $1,059 million at the end of 1997. Total debt represented 10.8% of total capital (shareowners' equity and total borrowings) at quarter end compared with 13.0% at the end of 1997. Additions to property, plant and equipment were $848 million for the first nine months of 1998, compared with $761 million for the same period in 1997. On October 19, 1998, the Board of Directors approved a regular quarterly dividend rate of 25 cents per share payable on December 8, 1998 to shareowners of record as of November 17, 1998. - 16 - YEAR 2000 COMPUTER SYSTEMS COMPLIANCE The "Year 2000" issue relates to potential problems resulting from a practice of computer programmers. For some time, calendar years have frequently been represented in computer programs by their last two digits. Thus, "1998" would be rendered "98". The logic of the programs frequently assumes that the first two digits of a year given in this format are "19". It is unclear what would happen with respect to such computer programs upon the change in calendar year from 1999 to 2000. The program might interpret "00" as "2000", "1900", an error or some other input. In such a case, the computer program might cease to function, function improperly, provide an erroneous result or act in some unpredictable manner. The Company has had a program in place since the fourth quarter of 1996 to address Year 2000 issues in critical business areas related to its products, information management systems, non- information systems with embedded technology, suppliers and customers. A report on the progress of this program has been provided to the Audit Committee of the Company's Board of Directors. The Company has completed its review of its critical automated information systems and is currently in the remediation phase with respect to such critical systems. It is anticipated that this remediation will be substantially complete by the second quarter of 1999. The Company is also in the process of reviewing and remediating, where necessary, its other automated systems. The Company estimates that it will complete assessment and remediation of substantially all such other automated systems by the end of the second quarter of 1999. The Company has a plan for assessment and testing of all of its products and has made substantial progress toward completion of such assessment and testing. It anticipates substantial completion of assessment, testing and remediation, if required, for most products by December 1998 with full completion by the third quarter of 1999. - 17 - The Company plans to engage additional outside consultants to examine selected critical areas in certain of its major franchises and anticipates that this work will begin in the fourth quarter of 1998. The total costs of addressing the Company's Year 2000 readiness issues are not expected to be material to the Company's financial condition or results of operations. Since initiation of its program in 1996, the Company estimates that it has expensed approximately $120 million in internal and external costs on a pre-tax basis to address its Year 2000 readiness issues. The Company currently estimates that the total of such costs for addressing its internal Year 2000 readiness will not exceed $250 million in the aggregate on a pre-tax basis. These costs are being expensed as they are incurred and are being funded through operating cash flows. No projects material to the financial condition or results of operations of the Company have been deferred or delayed as a result of this project. The ability of the Company to implement and effect its Year 2000 readiness program and the related costs or the costs of non- implementation, cannot be accurately determined at this time. The Company's automated systems (both information technology and non-information systems) are generally complex but are decentralized. Although a failure to complete remediation of one system may adversely effect other systems, the Company does not currently believe that such effects are likely. If, however, a significant number of such failures should occur, some of such systems might be rendered inoperable and would require manual back-up methods or other alternatives, where available. In such a case, the speed of processing business transactions, manufacturing and otherwise conducting business would likely decrease significantly and the cost of such activities would increase, if they could be carried on at all. That could have a material adverse effect on the financial condition and results of operations of the business. - 18 - The Company has highly integrated relationships with certain of its suppliers and customers. These include among others providers of energy, telecommunications, and raw materials and components, financial institutions, managed care organizations and large retail establishments. The Company has been reviewing, and continues to review, with its critical suppliers and major customers the status of their year 2000 readiness. The Company has in place a program of requesting assurances of Year 2000 readiness from such suppliers. However, many critical suppliers have either declined to provide the requested assurances or have limited the scope of assurances to which they are willing to commit. The Company has established a plan for ongoing monitoring of critical suppliers during 1999. The Year 2000 readiness of certain major customers is unclear. The Company has established a program to contact major customers to assess their readiness to deal with Year 2000 issues. If a significant number of such suppliers and customers were to experience business disruptions as a result of their lack of Year 2000 readiness, their problems could have a material adverse effect on the financial position and results of operations of the Company. In order to address this situation, the Company is formulating contingency plans intended to deal with the impact on the Company of Year 2000 problems that may be experienced by such critical suppliers and major customers. With respect to critical suppliers, these plans may include, among others, arranging availability of substitute sources of utilities, increasing levels of inventory and identifying alternate sources of supply of raw materials. The Company is also alerting customers to their need to address these problems, but the Company has few alternatives available, other than reversion to manual methods, for avoiding or mitigating the effects of lack of Year 2000 readiness by major customers. In any event, even where the Company has contingency plans, there can be no assurance that such plans will address all the problems that may arise, or that such plans, even if implemented, will be successful. - 19 - Notwithstanding the foregoing, the Company has no reason to believe that its exposure to the risks of lack of supplier and customer Year 2000 readiness is any greater than the exposure to such risk that affects its competitors generally. Further, the Company believes that its programs for Year 2000 readiness will significantly improve its ability to deal with its own Year 2000 readiness issues and those of suppliers and customers over what would have occurred in the absence of such a program. That does not, however, guarantee that some material adverse effects will not occur. The descriptions of Year 2000 issues set forth in this section is subject to the qualifications set forth under the heading "Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995 - `Safe Harbor' for Forward-Looking Statements". CAUTIONARY STATEMENT PURSUANT TO PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS The Company may from time to time make certain forward-looking statements in publicly-released materials, both written and oral. Forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "expects," "will," "anticipates," "estimates" and other words of similar meaning. Such statements may address, among other things, the Company's strategy for growth, product development, regulatory approvals, market position, expenditures, financial results and the effect of Year 2000 readiness issues. Forward-looking statements are based on current expectations of future events. The Company cannot guarantee that expectations expressed in forward-looking statements will be realized. Some important factors that could cause the Company's actual results to differ materially from those projected in any such forward- looking statements are as follows: - 20 - Economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates and the potential effect of such fluctuations on revenues, expenses and resulting margins; Competitive factors, including technological advances achieved and patents attained by competitors and generic competition as patents on the Company's products expire; Domestic and foreign healthcare reforms resulting in pricing pressures, including the continued consolidation among healthcare providers, trends toward managed care and healthcare cost containment and government laws and regulations relating to pharmaceutical reimbursement and pricing generally; Government laws and regulations, affecting domestic and foreign operations, including those relating to trade, monetary and fiscal policies, taxes, price controls, regulatory approval of new products and licensing; Difficulties inherent in product development, including the potential inability to successfully continue technological innovation, complete clinical trials, obtain regulatory approvals in the United States and abroad, gain and maintain market approval of products and the possibility of encountering infringement claims by competitors with respect to patent or other intellectual property rights which can prelude or delay commercialization of a product; Significant litigation adverse to the Company including product liability claims, patent infringement claims, and antitrust claims; Product efficacy or safety concerns resulting in product recalls or declining sales; The impact of business combinations, including acquisitions and divestitures, and organizational restructuring consistent with evolving business strategies; Issuance of new or revised accounting standards by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board or the Securities and Exchange Commission; - 21 - The dates for completion of specified tasks in the Company Year 2000 readiness program and the assessment of future costs are based upon, among other things, assumptions of the lack of complicating factors that could cause delay, the availability of adequate resources, including appropriately skilled third parties, and the availability of substitute or alternate products or services, where required; The assessments of the Year 2000 readiness of others and of the effects of lack of such readiness are highly uncertain. The impact of a failure of readiness by critical suppliers or major customers or both cannot be estimated with confidence. The effectiveness of contingency plans to mitigate the effects of any such failures is largely untested. The Company has employed its standard internal procedures to assess the reasonableness of its estimates of costs, timing and effectiveness of remediation of Year 2000 readiness issues. While the Company believes such an approach is adequate, it should be noted that no external or independent audit or verification of such estimates has been completed nor have extraordinary means been undertaken to verify their reasonableness. Even though the Company expects an increased ability to avoid significant disruptions of its business as a result of its Year 2000 readiness program, management cannot provide an assurance that there will be no material adverse effects to the financial condition or results of operations of the Company as a result of Year 2000 issues. The Company may not successfully identify all systems and products that present Year 2000 readiness issues. Even if the Company successfully identifies all such systems and products, it may not be successful in remedying the problems presented. The foregoing list sets forth many, but not all, of the factors that could impact upon the Company's ability to achieve results described in any forward-looking statements. Investors are cautioned not to place undue reliance on such statements which speak only as of the date made. The Company undertakes no obligation to update any forward-looking statements as a result of future events or developments. - 22 - Part II - Other Information Item 5. Other Information Under rules recently adopted by the Securities and Exchange Commission, if a shareowner notifies the Company after January 26, 1999 of an intent to present a proposal at the Company's 1999 Annual Meeting, the Company may have the right to exercise its discretionary voting authority with respect to such proposal, if presented at the meeting, without including information regarding such proposal in its proxy materials. Shareowner proposals to be presented at the 1999 Annual Meeting must be received by the Company on or before November 10, 1998 for inclusion in the proxy statement and proxy card relating to that meeting. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Numbers (1) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three month period ended September 27, 1998. - 23 - 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. JOHNSON & JOHNSON (Registrant) Date: November 6, 1998 By /s/ R. J. DARRETTA R. J. DARRETTA (Vice President, Finance) Date: November 6, 1998 By /s/ C. E. LOCKETT C. E. LOCKETT (Corporate Controller) - 24 -