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 April 4, 1999 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.) One Johnson & Johnson Plaza New Brunswick, New Jersey 08933 (Address of principal executive offices) (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 April 30, 1999, 1,345,200,546 shares of Common Stock, $1.00 par value, were outstanding. - 1 - JOHNSON & JOHNSON AND SUBSIDIARIES TABLE OF CONTENTS Part I - Financial Information Page No. Item 1. Financial Statements Consolidated Balance Sheet - April 4, 1999 and January 3, 1999 3 Consolidated Statement of Earnings for the Three Months Ended April 4, 1999 and March 29, 1998 5 Consolidated Statement of Cash Flows for the Three Months Ended April 4, 1999 and March 29, 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Part II - Other Information Item 1 - Legal Proceedings 23 Item 6 - Exhibits and Reports on Form 8-K 23 Signatures 24 - 2 - Part I - FINANCIAL INFORMATION Item 1 - Financial Statements JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) ASSETS April 4, January 3, 1999 1999 Current Assets: Cash and cash equivalents $ 1,780 1,927 Marketable securities, at cost 805 651 Accounts receivable, trade, less allowances $385 (1998 - $385) 3,935 3,661 Inventories (Note 3) 2,963 2,853 Deferred taxes on income 1,111 1,180 Prepaid expenses and other receivables 1,024 860 Total current assets 11,618 11,132 Marketable securities, non-current 418 416 Property, plant and equipment, at cost 10,238 10,024 Less accumulated depreciation and amortization 4,166 3,784 6,072 6,240 Intangible assets, net (Note 4) 7,489 7,209 Deferred taxes on income 76 102 Other assets 1,073 1,112 Total assets $26,746 26,211 See Notes to Consolidated Financial Statements - 3 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) LIABILITIES AND SHAREOWNERS' EQUITY April 4, January 3, 1999 1999 Current Liabilities: Loans and notes payable $ 2,489 2,747 Accounts payable 1,587 1,861 Accrued liabilities 2,930 2,920 Accrued salaries, wages and commissions446 428 Taxes on income 414 206 Total current liabilities 7,866 8,162 Long-term debt 1,346 1,269 Deferred tax liability 571 578 Employee related obligations 1,719 1,738 Other liabilities 1,022 874 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 1,534,842,000 and 1,534,824,000 shares) 1,535 1,535 Note receivable from employee stock ownership plan (41) (44) Accumulated other comprehensive income(467) (328) (Note 7) Retained earnings 14,565 13,928 15,592 15,091 Less common stock held in treasury, at cost (189,081,000 & 190,773,000 shares) 1,370 1,501 Total shareowners' equity 14,222 13,590 Total liabilities and shareowners' equity $26,746 26,211 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 April 4, Percent March 29, Percent 1999 to Sales 1998 to Sales Sales to customers (Note 5) $6,638 100.0 5,783 100.0 Cost of products sold 2,038 30.7 1,777 30.7 Gross Profit 4,600 69.3 4,006 69.3 Selling, marketing and administrative expenses 2,403 36.2 2,100 36.3 Research expense 536 8.1 494 8.5 Interest income (52) (.8) (61) (1.0) Interest expense, net of portion capitalized 49 .7 28 .5 Other (income)expense, net 59 .9 11 .2 2,995 45.1 2,572 44.5 Earnings before provision for taxes on income 1,605 24.2 1,434 24.8 Provision for taxes on income (Note 2) 477 7.2 424 7.3 NET EARNINGS $1,128 17.0 1,010 17.5 NET EARNINGS PER SHARE (Note 6) Basic $ .84 .75 Diluted $ .82 .73 CASH DIVIDENDS PER SHARE $ .25 .22 AVG. SHARES OUTSTANDING Basic 1,344.9 1,345.3 Diluted 1,373.4 1,374.7 See Notes to Consolidated Financial Statements - 5 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; Dollars in Millions) Fiscal Quarter Ended April 4, March 29, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $1,128 1,010 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 408 294 Increase in accounts receivable, trade, less allowances (426) (195) Increase in inventories (208) (221) Changes in other assets and liabilities 223 311 NET CASH FLOWS FROM OPERATING ACTIVITIES 1,125 1,199 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment(298) (215) Proceeds from the disposal of assets 2 8 Acquisition of businesses, net of cash acquired (188) (78) Other, principally marketable securities (215) (85) NET CASH USED BY INVESTING ACTIVITIES (699) (370) CASH FLOWS FROM FINANCING ACTIVITIES Dividends to shareowners (336) (296) Repurchase of common stock (131) (347) Proceeds from short-term debt 92 76 Retirement of short-term debt (249) (120) Proceeds from long-term debt 9 - Retirement of long-term debt (6) (104) Proceeds from the exercise of stock options 99 111 NET CASH USED BY FINANCING ACTIVITIES (522) (680) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (51) (9) (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS(147) 140 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD1,927 2,753 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,780 2,893 See Notes to Consolidated Financial Statements - 6 - 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 January 3, 1999. 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. NOTE 2 - INCOME TAXES The effective income tax rates for the first three months of 1999 and 1998 are 29.7% and 29.6%, respectively, as compared to the U.S. federal statutory rate of 35%. The difference from the statutory rate is primarily 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 21, 2010. NOTE 3 - INVENTORIES (Dollars in Millions) April 4, 1999 January 3, 1999 Raw materials and supplies $ 767 770 Goods in process 476 489 Finished goods 1,720 1,594 $ 2,963 2,853 - 7 - NOTE 4 - INTANGIBLE ASSETS (Dollars in Millions) April 4, 1999 January 3, 1999 Intangible assets $ 8,401 8,042 Less accumulated amortization 912 833 $ 7,489 7,209 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 up to 40 years. The cost of other acquired intangibles is amortized on a straight-line basis over their estimated useful lives. NOTE 5 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) SALES BY SEGMENT OF BUSINESS First Quarter Percent 1999 1998 Increase Consumer Domestic $ 927 840 10.4 International 801 799 .3 1,728 1,639 5.4% Pharmaceutical Domestic $ 1,441 1,169 23.3 International 1,035 923 12.1 2,476 2,092 18.4% Professional Domestic $ 1,289 1,086 18.7 International 1,145 966 18.5 2,434 2,052 18.6% Domestic $ 3,657 3,095 18.2 International 2,981 2,688 10.9 Worldwide $ 6,638 5,783 14.8% - 8 - NOTE 5 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) OPERATING PROFIT BY SEGMENT OF BUSINESS First Quarter Percent 1999 1998 Change Consumer $ 223 194 14.9 Pharmaceutical 967 827 16.9 Professional 455 431 5.6 Segments total 1,645 1,452 13.3 Expenses not allocated to segments (40) (18) Worldwide total $ 1,605 1,434 11.9% SALES BY GEOGRAPHIC AREA First Quarter Percent Increase 1999 1998 (Decrease) U.S. $ 3,657 3,095 18.2 Europe 1,773 1,539 15.2 Western Hemisphere Excluding U.S. 478 507 (5.7) Asia-Pacific, Africa 730 642 13.7 Total $ 6,638 5,783 14.8% NOTE 6 - EARNINGS PER SHARE The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the three months ended April 4, 1999 and March 29, 1998: (Shares in Millions) April 4, March 29, 1999 1998 Basic net earnings per share $ .84 .75 Average shares outstanding - basic 1,344.9 1,345.3 Potential shares exercisable under stock option plans 71.3 73.2 Less: shares which could be repurchased under treasury stock method (42.8) (43.8) Adjusted average shares outstanding - diluted1,373.4 1,374.7 Diluted earnings per share $ .82 .73 - 9 - NOTE 7 - ACCUMULATED OTHER COMPREHENSIVE INCOME During 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 three months ended April 4, 1999 is $1,007 million, compared with $961 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 available for sale securities. NOTE 8 - ACQUISITIONS During the quarter, the Company completed the acquisition of the dermatological skin care business of S.C. Johnson & Son, Inc. The S.C. Johnson dermatological business is composed of specialty brands marketed in the U.S., Canada and Western Europe. The primary brand involved in the transaction, AVEENO, is a line of skin care products including specialty soaps, bath, and anti-itch treatments. 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 9 - PENDING LEGAL PROCEEDINGS The Company is involved in numerous product liability cases in the United States, many of which concern adverse reactions to drugs and medical devices. The damages claimed are substantial, and while the Company is confident of the adequacy of the warnings which accompany such products, it is not feasible to predict the ultimate outcome of litigation. However, the Company believes that if any liability results from such cases, it will be substantially covered by reserves established under its self-insurance program and by commercially available excess liability insurance. 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. 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. - 11 - NOTE 9 - PENDING LEGAL PROCEEDINGS - Continued The Company is involved in a number of patent, trademark and other lawsuits incidental to its business. On April 1, 1999, the Company announced that all pending patent litigation between U.S. Surgical Corporation and the Company's Ethicon Endo-Surgery unit had been settled. No money will change hands in the settlement, which included immunity from patent suit with respect to nearly all Ethicon Endo-Surgery and U.S. Surgical products currently on the market, as well as current suture products of the Company's Ethicon subsidiary and U.S. Surgical's Davis & Geck unit. The Company's Ortho Biotech subsidiary is party to an arbitration proceeding filed against it by Amgen, Ortho's licensor of U.S. non- dialysis rights to EPO, in which Amgen seeks to terminate Ortho's U.S. license rights based on alleged deliberate EPO sales by Ortho during the early 1990's into Amgen's reserved dialysis market. The Company believes no basis exists for terminating Ortho's U.S. license rights and is vigorously contesting Amgen's claims. However, Ortho's U.S. license rights to EPO are material to the Company; thus, an unfavorable outcome could have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. The Company believes that the above proceedings, except as noted above, would not have a material adverse effect on its results of operations, cash flows or financial position. - 12 - NOTE 10 - 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). This standard is effective for all fiscal quarters of 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 value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the designation of the hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability or firm commitment, changes in the fair value of the derivative instrument will generally be offset by changes in the fair value of the hedged item. For cash flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset, liability or 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 will adopt FAS 133 in the first quarter of 2000 and does not expect it to have a material effect on the Company's results of operations, cash flows or financial position. - 13 - NOTE 11 - RESTRUCTURING AND SPECIAL CHARGES In 1998, the Company approved a plan to reconfigure its global network of manufacturing and operating facilities with the objective of enhancing operating efficiencies. It is expected that the plan will be completed over the next fifteen months. Among the initiatives supporting this plan were the closure of inefficient manufacturing facilities, exiting certain businesses which were not providing an acceptable return and related employee separations. The estimated cost of this plan is $613 million. The charge consisted of employee separation costs of $161 million, asset impairments of $322 million, impairments of intangibles of $52 million, and other exit costs of $78 million. Employee separations will occur primarily in manufacturing and operations facilities affected by the plan. The decision to exit certain facilities and businesses decreased expected future cash flows triggering the asset impairment. The amount of impairment of such assets was calculated using discounted cash flows or appraisals. The status of the remaining accruals is summarized as follows: 1999 Beginning Cash Remaining (Dollars in Millions) Accrual Outlays Accrual Restructuring charges: Employee separations $ 158 8 150 Other exit costs 78 9 69 $ 236 17 219 The $161 million for employee separations reflects the termination of approximately 5,100 employees of which 750 have been separated as of April 4, 1999. - 14 - Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES AND EARNINGS Consolidated sales for the first quarter of 1999 were $6.64 billion, an increase of 14.8% over 1998 first quarter sales of $5.78 billion. The effect of the stronger dollar relative to foreign currencies decreased first quarter sales by .6%. The sales increase of 15.4% due to operations included a positive price change effect of 1.0%. Consolidated net earnings for the first quarter of 1999 were $1.13 billion, compared with $1.01 billion for the same period a year ago, an increase of 11.7%. Worldwide basic net earnings per share for the period were $.84, compared with $.75 for the same period in 1999, an increase of 12.0%. Worldwide diluted net earnings per share for the period were $.82, compared with $.73 for the same period in 1998, an increase of 12.3%. Domestic sales for the first three months of 1999 were $3.66 billion, an increase of 18.2% over 1998 domestic sales of $3.10 billion for the same period. Sales by international subsidiaries were $2.98 billion for the first quarter of 1999 compared with $2.69 billion for the same period a year ago, an increase of 10.9%. Excluding the impact of the higher value of the dollar, international sales increased by 12.2% for the quarter. Worldwide Consumer segment sales for the first quarter of 1999 were $1.73 billion, an increase of 5.4% versus the same period a year ago. Domestic sales were up 10.4% while international sales gains in local currency of 5.0% were almost entirely offset by a negative currency impact of 4.7%. 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 TYLENOL Arthritis, TYLENOL PM, and TYLENOL COLD. - 15 - During the quarter, the Company launched its NEUTROGENA line of cosmetics. NEUTROGENA Cosmetics combine beauty and skin benefits. In addition, the Company launched BENECOL in the United Kingdom in both a margarine spread and a cream-cheese style product. BENECOL contains the dietary ingredient stanol ester, which is patented for use in reducing cholesterol. The Company has a licensing agreement with Raisio Group of Finland for the worldwide marketing rights (ex- Finland) to BENECOL. The Company also completed the acquisition of the dermatological skin care business of S.C. Johnson & Son, Inc., which includes the AVEENO brand specialty soaps, bath, anti-itch and moisturizing cream and lotion products. Worldwide pharmaceutical sales of $2.48 billion for the quarter increased 18.4% over the same period in 1998, including 23.3% growth in domestic sales. International sales increased 12.1%. Sales gains in local currency of 13.0% were modestly offset by a negative currency impact of .9% This growth reflects the strong performance of PROCRIT, for the treatment of anemia; RISPERDAL, an antipsychotic medication; DURAGESIC, a transdermal patch for chronic pain; LEVAQUIN, an anti-infective, and ULTRAM, an analgesic. During the quarter, the company received European and Canadian approval for REGRANEX, the first biologic treatment proven to increase the incidence of healing in diabetic foot ulcers. In the United States, the Company received FDA approval for SPORANOX Injection, an intravenous treatment for several difficult to treat, potentially life-threatening fungal infections. Also in the quarter, an approvable letter was received from the FDA for ACIPHEX (rabeprazole), a proton pump inhibitor for gastroesophageal reflux disease (GERD), GERD maintenance and duodenal and gastric ulcers. Eisai and Janssen Pharmaceutica, a wholly-owned subsidiary of Johnson & Johnson, have entered into a co-promotion alliance to market rabeprazole worldwide with the exception of Japan and certain other territories. - 16 - Worldwide sales of $2.43 billion in the Professional segment represented an increase of 18.6% over the first quarter of 1998. In local currency, worldwide sales increased 18.1% before adjusting for a .5% positive currency impact. The 1998 acquisition of DePuy, Inc., a leading orthopaedic products manufacturer, contributed to the strong sales growth in the Professional segment. In addition, strong performance was achieved by Ethicon Endo-Surgery's laparoscopy and wound closure products; LifeScan's blood glucose monitoring systems, and Ethicon's Mitek suture anchors and Gynecare women's health products. During the quarter, the Company received FDA approval to market the Lumbar I/F Cage with VSP Spine System, an implant used to treat degenerative disc disease by facilitating interbody fusion of the lumbar spine. The I/F Cage represents a significant improvement over current technology and is hailed by the surgical spine community as truly innovative. In addition to providing anterior column support with secure posterior fixation, it uses a unique carbon fiber reinforced polymer material, the first of its kind to be used in a device approved in the United States for an orthopaedic application. Average shares of common stock outstanding in the first three months of 1999 were 1,344.9 million, compared with 1,345.3 million for the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES Cash and current marketable securities increased $7 million during the first three months of 1999 to $2,585 million at April 4, 1999. Total borrowings decreased $181 million during the first three months of 1999 to $3,835 million. Net debt (debt net of cash and current marketable securities) as of April 4, 1999 was 8.1% of net capital (shareowners' equity and net debt) compared with 9.6% at the end of 1998. Total debt represented 21.2% of total capital (shareowners' equity and total borrowings) at quarter end compared with 22.8% at the end of 1998. - 17 - Additions to property, plant and equipment were $298 million for the first three months of 1999, compared with $215 million for the same period in 1998. On April 22, 1999, the Board of Directors approved a 12.0% increase in the quarterly dividend rate from 25 cents per share to 28 cents per share. The dividend is payable on June 8, 1999 to shareowners of record as of May 18, 1999. 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 or device might interpret "00" as "2000", "1900", an error or some other input. In such a case, the computer program or device 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. - 18 - 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. The Company has substantially completed this plan and full completion is expected by the third quarter of 1999. The Company has engaged additional outside consultants to examine selected critical areas in certain of its major franchises. In addition, the Company has contracted with independent third party consultants to conduct audits of critical sites worldwide to evaluate our programs, processes and progress and to identify any remaining areas of effort required to achieve compliance. 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 $144 million, on a worldwide basis, in internal and external costs on a pre-tax basis to address its Year 2000 readiness issues. These expenditures include information system replacement and embedded technology upgrade costs of $82 million, supplier and customer compliance costs of $13 million and all other costs of $49 million. The Company currently estimates that the total of such costs for addressing its internal Year 2000 readiness, on a worldwide basis, will approximate $200 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. - 19 - Although a failure to complete remediation of one system may adversely affect 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. 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. This analysis of potential exposures includes both the domestic and international operations of the Company. - 20 - The Company believes that its most reasonably likely "worst case scenario" would occur if a significant number of its key suppliers or customers were not fully Year 2000 functional, in which case the Company estimates that up to a 10 business day disruption in business operations could occur. 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, closely managing appropriate 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. 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 herein under the heading "Cautionary Factors that May Affect Future Results". - 21 - CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This Form 10-Q contains "forward-looking statements" that anticipate results based on management's plans that are subject to uncertainty. Forward-looking statements do not relate strictly to historical or current facts and maybe identified by their use of words like "plans," "expects," "will," "anticipates," "estimates," and other words of similar meaning. These 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 any forward- looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that unknown risks or uncertainties materialize, actual results could differ materially from our projections. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments. The Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1999 contains, in Exhibit 99(b), a discussion of various factors that could cause actual results to differ from expectations. That Exhibit from the Form 10-K is incorporated in this filing by reference. The Company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995. Investors are cautioned not to place undue reliance on any forward- looking statements. Investors also should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties. - 22 - Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in the Company's assessment of its sensitivity to market risk since its presentation set forth in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in its Annual Report on Form 10-K for the fiscal year ended January 3, 1999. Part II - OTHER INFORMATION Item 1. Legal Proceedings The information called for by this item is incorporated herein by reference to Note 9 in the "Notes to Consolidated Financial Statements" included in Part I of this Report on Form 10-Q. 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 April 4, 1999. - 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: May 14, 1999 By /s/ R. J. DARRETTA R. J. DARRETTA (Vice President, Finance) Date: May 14, 1999 By /s/ C. E. LOCKETT C. E. LOCKETT (Corporate Controller) - 24 -