10-Q 1 0001.txt 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 October 1, 2000 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 October 27, 2000, 1,390,029,030 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 - October 1, 2000 and January 2, 2000 3 Consolidated Statement of Earnings for the Fiscal Quarter Ended October 1, 2000 and October 3, 1999 5 Consolidated Statement of Earnings for the Fiscal Nine Months Ended October 1, 2000 and October 3, 1999 6 Consolidated Statement of Cash Flows for the Fiscal Nine Months Ended October 1, 2000 and October 3, 1999 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II - Other Information Item 1 - Legal Proceedings 19 Item 5 - Other Information 21 Item 6 - Exhibits and Reports on Form 8-K 21 Signatures 22 - 2 - Part I - FINANCIAL INFORMATION Item 1 - Financial Statements JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) ASSETS October 1, January 2, 2000 2000 Current Assets: Cash and cash equivalents $ 3,550 2,363 Marketable securities, at cost 2,037 1,516 Accounts receivable, trade, less allowances $401 (1999 - $389) 4,212 4,233 Inventories (Note 3) 3,022 3,095 Deferred taxes on income 1,015 1,105 Prepaid expenses and other receivables 1,389 888 Total current assets 15,225 13,200 Marketable securities, non-current 246 441 Property, plant and equipment, at cost 11,207 11,046 Less accumulated depreciation and amortization 4,588 4,327 6,619 6,719 Intangible assets, net (Note 4) 7,289 7,571 Deferred taxes on income 98 104 Other assets 1,307 1,128 Total assets $30,784 29,163 See Notes to Consolidated Financial Statements - 3 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) LIABILITIES AND SHAREOWNERS' EQUITY October 1, January 2, 2000 2000 Current Liabilities: Loans and notes payable $ 895 1,806 Accounts payable 1,728 2,003 Accrued liabilities 2,949 2,972 Accrued salaries, wages and commissions638 467 Taxes on income 455 206 Total current liabilities 6,665 7,454 Long-term debt 2,417 2,450 Deferred tax liability 238 287 Employee related obligations 1,911 1,749 Other liabilities 1,067 1,010 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 1,534,921,000 and 1,534,916,000 shares) 1,535 1,535 Note receivable from employee stock ownership plan (35) (41) Accumulated other comprehensive income(480) (396) (Note 7) Retained earnings 18,546 16,192 19,566 17,290 Less common stock held in treasury, at cost (144,565,000 & 145,233,000 shares) 1,080 1,077 Total shareowners' equity 18,486 16,213 Total liabilities and shareowners' equity $30,784 29,163 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 Oct. 1, Percent Oct. 3, Percent 2000 to Sales 1999 to Sales Sales to customers (Note 5) $7,204 100.0 6,884 100.0 Cost of products sold 2,179 30.2 2,068 30.1 Gross Profit 5,025 69.8 4,816 69.9 Selling, marketing and administrative expenses 2,675 37.1 2,617 38.0 Research expense 692 9.6 635 9.2 Interest income (106) (1.4) (63) (.9) Interest expense, net of portion capitalized 31 .4 46 .7 Other (income)expense, net (13) (.1) 50 .7 3,279 45.6 3,285 47.7 Earnings before provision for taxes on income 1,746 24.2 1,531 22.2 Provision for taxes on income (Note 2) 482 6.7 420 6.1 NET EARNINGS $1,264 17.5 1,111 16.1 NET EARNINGS PER SHARE (Note 6) Basic $ .91 .80 Diluted $ .89 .78 CASH DIVIDENDS PER SHARE $ .32 .28 AVG. SHARES OUTSTANDING Basic 1,390.6 1,389.9 Diluted 1,415.1 1,419.0 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 Oct. 1, Percent Oct. 3, Percent 2000 to Sales 1999 to Sales Sales to customers (Note 5)$22,031 100.0 20,594 100.0 Cost of products sold 6,676 30.3 6,261 30.4 Gross Profit 15,355 69.7 14,333 69.6 Selling, marketing and administrative expenses 8,029 36.4 7,642 37.1 Research expense 1,996 9.1 1,788 8.7 Interest income (264) (1.2) (170) (.8) Interest expense, net of portion capitalized 115 .5 153 .7 Other (income)expense, net (25) (.1) 138 .7 9,851 44.7 9,551 46.4 Earnings before provision for taxes on income 5,504 25.0 4,782 23.2 Provision for taxes on income (Note 2) 1,595 7.3 1,369 6.6 NET EARNINGS $ 3,909 17.7 3,413 16.6 NET EARNINGS PER SHARE (Note 6) Basic $ 2.81 2.46 Diluted $ 2.77 2.41 CASH DIVIDENDS PER SHARE $ .92 .81 AVG. SHARES OUTSTANDING Basic 1,390.3 1,390.1 Diluted 1,412.5 1,418.6 See Notes to Consolidated Financial Statements - 6 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; Dollars in Millions) Fiscal Nine Months Oct. 1, Oct. 3, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 3,909 3,413 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 1,183 1,136 Accounts receivable reserves 25 (46) Changes in assets and liabilities, net of effects from acquisition of businesses: Increase in accounts receivable (236) (607) Increase in inventories (84) (351) Changes in other assets and liabilities 517 944 NET CASH FLOWS FROM OPERATING ACTIVITIES 5,314 4,489 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment(1,043) (1,101) Proceeds from the disposal of assets 25 18 Acquisition of businesses, net of cash acquired (7) (228) Purchases of investments (3,617) (1,558) Sales of investments 3,297 1,125 Other (109) 75 NET CASH USED BY INVESTING ACTIVITIES (1,454) (1,669) CASH FLOWS FROM FINANCING ACTIVITIES Dividends to shareowners (1,279) (1,090) Repurchase of common stock (621) (547) Proceeds from short-term debt 491 3,061 Retirement of short-term debt (1,359) (4,276) Proceeds from long-term debt 6 776 Retirement of long-term debt (28) (145) Proceeds from the exercise of stock options 190 124 NET CASH USED BY FINANCING ACTIVITIES (2,600) (2,097) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (73) (44) INCREASE IN CASH AND CASH EQUIVALENTS 1,187 679 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,363 1,994 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,550 2,673 ACQUISITION OF BUSINESSES Fair value of assets acquired $ 83 228 Fair value of liabilities assumed (1) - 82 228 Treasury stock issued at fair value (75) - Net cash payments $ 7 228 See Notes to Consolidated Financial Statements - 7 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - The accompanying unaudited 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 2, 2000. The unaudited financial statements for the fiscal quarter and nine months ended October 3, 1999 have been prepared to give retroactive effect to the merger with Centocor on October 6, 1999. The unaudited 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 2000 and 1999 are as follows: 2000 1999 First Quarter 30.5% 29.8% First Half 29.6 29.2 Nine Months 29.0 28.6 The effective income tax rates for the first nine months of 2000 and 1999 are 29.0% and 28.6%, 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) October 1, 2000 January 2, 2000 Raw materials and supplies $ 709 663 Goods in process 389 416 Finished goods 1,924 2,016 $ 3,022 3,095 - 8 - NOTE 4 - INTANGIBLE ASSETS (Dollars in Millions) October 1, 2000 January 2, 2000 Intangible assets $ 8,662 8,755 Less accumulated amortization 1,373 1,184 $ 7,289 7,571 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 Third Quarter Nine Months Percent Percent 2000 1999 Increase 2000 1999 Increase (Decrease) (Decrease) Consumer Domestic $ 939 921 2.0 2,784 2,722 2.3 International 783 783 - 2,397 2,398 - 1,722 1,704 1.1% 5,181 5,120 1.2% Pharmaceutical Domestic 1,900 1,683 12.9 5,970 4,927 21.2 International 1,034 1,052 (1.7) 3,227 3,215 .4 2,934 2,735 7.3% 9,197 8,142 13.0% Professional Domestic 1,390 1,331 4.4 4,061 3,935 3.2 International 1,158 1,114 3.9 3,592 3,397 5.7 2,548 2,445 4.2% 7,653 7,332 4.4% Domestic 4,229 3,935 7.5 12,815 11,584 10.6 International 2,975 2,949 .9 9,216 9,010 2.3 Worldwide $7,204 6,884 4.6% 22,031 20,594 7.0% - 9 - NOTE 5 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) OPERATING PROFIT BY SEGMENT OF BUSINESS Third Quarter Nine Months Percent Percent Increase Increase 2000 1999(Decrease) 2000 1999 (Decrease) Consumer 224 206 8.7 667 583 14.4 Pharmaceutical 1,083 976 11.0 3,597 3,063 17.4 Professional 462 385 20.0 1,358 1 268 7.1 Segments total 1,769 1,567 12.9 5,622 4,914 14.4 Expenses not allocated to segments (23) (36) (118) (132) Worldwide total$1,7461,531 14.0 5,504 4,782 15.1 SALES BY GEOGRAPHIC AREA Third Quarter Nine Months Percent Percent Increase Increase 2000 1999(Decrease) 2000 1999 (Decrease) U.S. $4,229 3,935 7.5 12,815 11,584 10.6 Europe 1,496 1,577 (5.1) 4,839 5,028 (3.8) Western Hemisphere excluding U.S. 530 514 3.1 1,553 1,503 3.3 Asia-Pacific, Africa 949 858 10.6 2,824 2,479 13.9 Worldwide $7,204 6,884 4.6% 22,031 20,594 7.0% NOTE 6 - EARNINGS PER SHARE The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the nine months ended October 1, 2000 and October 3, 1999: Fiscal Fiscal Quarter Ended Nine Months Ended Oct. 1, Oct. 3, Oct. 1, Oct. 3, 2000 1999 2000 1999 Basic net earnings per share$ .91 .80 2.81 2.46 Average shares outstanding - basic 1,390.6 1,389.9 1,390.3 1,390.1 Potential shares exercisable under stock option plans 61.3 68.0 60.8 68.3 Less: shares which could be repurchased under treasury stock method (36.8) (38.8) (38.6) (39.8) Adjusted average shares outstanding - diluted 1,415.1 1,419.0 1,412.5 1,418.6 Diluted earnings per share $ .89 .78 2.77 2.41 The diluted earnings per share calculation does not include approximately 12 million shares of options whose exercise price is greater than average market value as the effect would be anti- dilutive. - 10 - NOTE 7 - ACCUMULATED OTHER COMPREHENSIVE INCOME The total comprehensive income for the nine months ended October 1, 2000 is $3.8 billion, compared with $3.3 billion 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 AND DIVESTITURES During the first quarter, the Company completed the acquisitions of Innovasive Devices and Medtrex. Innovasive Devices manufactures and sells devices for sport medicine surgery for soft tissue injuries. Medtrex develops and manufactures electrosurgical generators (HydrocoolT) and disposable products (EncoreT pencil). Pro forma results of the acquisitions, assuming that the transactions were consummated at the beginning of each year presented, would not be materially different from the results reported. During the third quarter, the Company sold its DePuy OrthoTech business to dj Orthopaedics LLC. DePuy OrthoTech was a producer of knee braces and related products for rehabilitating musculoskeletal disorders. - 11 - NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This standard was amended by Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" and changed the effective date for SFAS 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133". SFAS 133-138 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 assets or liabilities, 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 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 SFAS 133-138 in the first quarter of 2001 and does not expect it to have a material effect on the Company's results of operations, cash flows or financial position. During May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives." EITF No. 00-14 addresses the classification of various sales incentives and will be effective for the fourth quarter of 2000. The Company has determined that the adoption of EITF Issue No. 00- 14 will have no effect on its financial position. The Company is in the process of determining the potential effect on its statement of earnings presentation and upon adoption, if necessary, previously issued financial statements may need to be revised to conform to the new presentation. - 12 - NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES In the fourth quarter of 1998, the Company approved a plan to reconfigure its global network of manufacturing and operating facilities with the objective of enhancing operating efficiencies. This plan is substantially complete with full completion expected by year-end 2000. Among the initiatives supporting this plan were the closures 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. Of the separation costs of $161 million, $3 million were paid in 1998 and $58 million were paid in 1999. With regard to the exit costs of $78 million, $38 million were paid in 1999. Payments made through nine months ended October 1, 2000 of these severance and other exit costs are as follows: Remaining Remaining Accrual @ Cash Accrual @ January 2, 2000 Outlays Oct. 1, 2000 Employee Separations $ 100 42 58 Other exit costs: Distributor terminations 11 7 4 Disposal costs 10 5 5 Lease termination 7 7 - Customer compensation 1 1 - Other 11 7 4 Total other costs 40 27 13 $ 140 69 71 The restructuring plan included the reduction of manufacturing facilities around the world by 36, from 159 to 123 plants. None of the assets affected by this plan were held for disposal. Changes in estimates to date have been immaterial. The headcount reduction related to this plan through October 1, 2000 was approximately 2,800 employees. NOTE 11 - LEGAL PROCEEDINGS The information called for by this footnote is incorporated herein by reference to Item 1 ("Legal Proceedings") included in Part II of this Report on Form 10-Q. - 13 - 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 2000 were $22.03 billion, which exceeded sales of $20.59 billion for the first nine months of 1999 by 7.0%. The strength of the U.S. dollar relative to the foreign currencies decreased sales for the first nine months of 2000 by 2.9%. Excluding the effect of the stronger U.S. dollar relative to foreign currencies, sales increased 9.9% on an operational basis for the first nine months of 2000. Consolidated net earnings for the first nine months of 2000 were $3.91 billion, compared with net earnings of $3.41 billion for the first nine months of 1999. Other income and expense reflects gains related to the sale of certain equity securities. Also included in other income and expense is the write-down of certain intangible assets to their realizable market value. Worldwide basic net earnings per share for the first nine months of 2000 were $2.81, compared with $2.46 for the same period in 1999, an increase of 14.2%. Worldwide diluted net earnings per share for the first nine months of 2000 were $2.77, compared with $2.41 for the same period in 1999, an increase of 14.9% Consolidated sales for the third quarter of 2000 were $7.20 billion, an increase of 4.6% over 1999 third quarter sales of $6.88 billion. The effect of the stronger U.S. dollar relative to foreign currencies decreased third quarter sales by 3.6%. Consolidated net earnings for the third quarter of 2000 were $1.26 billion, compared with $1.11 billion for the same period a year ago, an increase of 13.8%. Worldwide basic net earnings per share for the third quarter of 2000 rose 13.8% to $.91, compared with $.80 in the 1999 period. Worldwide diluted net earnings per share for the third quarter of 2000 rose 14.1% to $.89, compared with $.78 in 1999. Domestic sales for the first nine months of 2000 were $12.82 billion, an increase of 10.6% over 1999 domestic sales of $11.58 billion for the same period a year ago. Sales by international subsidiaries were $9.22 billion for the first nine months of 2000 compared with $9.01 billion for the same period a year ago, an increase of 2.3%. Excluding the impact of the stronger value of the dollar, international sales increased by 8.8%. - 14 - Worldwide Consumer segment sales for the third quarter of 2000 were $1.72 billion, an increase of 1.1% versus the same period a year ago. Domestic sales were 2.0% while international sales gains in local currency of 6.9% were entirely offset by negative currency. Consumer sales were led by continued strength in the skin care franchise, which includes the NEUTROGENA and CLEAN & CLEAR product lines, as well as solid results from McNeil Consumer Healthcare, which markets both the TYLENOL and MOTRIN family of products and over-the-counter pharmaceuticals. During the quarter, the Company and its partner, Takeda Chemical Industries, launched several TYLENOL analgesic products in Japan. Japan is the second largest over-the-counter market in the world with sales of more than $10 billion. In October, the Company announced a nationwide launch of SPLENDA, its non-caloric sweetener made from sugar, in tabletop packages (granular and packet forms). Sucralose, the sweetening ingredient in SPLENDA, has FDA approval for use as a general purpose sweetener in any food or beverage. Worldwide pharmaceutical sales of $2.93 billion for the quarter increased 7.3% over the same period in 1999, including 12.9% growth in domestic sales and a 1.7% decrease in international sales. International sales gains in local currency of 8.1% were offset by a negative currency impact of 9.8%. Sales growth reflects the strong performance of PROCRIT/EPREX, for the treatment of anemia; RISPERDAL, an antipsychotic medication; DURAGESIC, a transdermal patch for chronic pain; LEVAQUIN, an anti-infective; REMICADE, a treatment for rheumatoid arthritis and Crohn's disease, and TOPAMAX, an antiepileptic treatment. PROPULSID (cisapride, sold outside the United States as PREPULSID), a gastrointestinal prokinetic, experienced an anticipated decline in sales. In March, the Company announced a limited-access program for PROPULSID and that the product would no longer be marketed in the United States. In Europe, the European Agency for the Evaluation of Medicinal Products (EMEA) has initiated an Article 12 procedure to review the benefit/risk of PREPULSID. The product license has also been temporarily suspended in a number of European countries pending the outcome of the EMEA review. As a result of these actions, the Company has recorded reserves related to inventory and sales returns. - 15 - During the quarter, the Company received approval from the U.S. Food and Drug Administration (FDA) for an additional indication for LEVAQUIN (levofloxacin) for the treatment of complicated skin and skin structure infections. This is the ninth indication for LEVAQUIN, which already is widely used to treat respiratory, urinary and certain types of skin infections. The Company also received an approvable letter from the FDA for REMINYL (galantamine), a new treatment for mild to moderately severe Alzheimer's disease. REMINYL has been shown to significantly benefit the cognitive, functional and behavioral symptoms of patients with the disease. Professional segment sales in the third quarter increased over the same period in the prior year by 4.2% to $2.55 billion with domestic and international sales up 4.4% and 3.9%, respectively. International sales gains in local currency of 11.8% were partially offset by a negative currency impact of 7.9%. Sales growth reflects the strong performance of Cordis' coronary and endovascular stents; Ethicon's Mitek suture anchors and Gynecare's women's health products; Ethicon Endo-Surgery's MAMMOTOME breast biopsy system and ULTRACISION Harmonic scalpel; Vistakon's disposable contact lens products, and DePuy's spinal products. The Company received FDA approval to market its new TRAPEASE Permanent Vena Cava Filter. Vena cava filters are used to help prevent pulmonary embolism that occurs when a blood clot breaks free from the peripheral circulation and travels to the lung, blocking the flow of blood. The Company also received FDA approval for its new TRUFILL n-BCA* Liquid Embolic System, which acts as a "surgical glue" to reduce bleeding by blocking blood vessels before surgery. In addition, in July, the Company sold its DePuy OrthoTech business to dj Orthopaedics LLC. DePuy OrthoTech was a producer of knee braces and related products for rehabilitating musculoskeletal disorders. - 16 - LIQUIDITY AND CAPITAL RESOURCES Cash and current marketable securities increased $1.71 billion during the first nine months of 2000 to $5.59 billion at October 1, 2000. Total borrowings decreased $944 million during the first nine months of 2000 to $3.31 billion. Net cash (cash and current marketable securities net of debt) as of October 1, 2000 was $2.28 billion. Net debt (debt net of cash and current marketable securities) as of the end of 1999 was $377 million. Total debt represented 15.2% of total capital (shareowners' equity and total debt) at quarter end compared with 20.8% at the end of 1999. For the period ended October 1, 2000, there were no material cash commitments. Additions to property, plant and equipment were $1.04 billion for the first nine months of 2000, compared with $1.10 billion for the same period in 1999. On October 16, 2000, the Board of Directors approved a regular quarterly dividend of 32 cents per share, payable on December 12, 2000 to shareowners of record as of November 21, 2000. - 17 - CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This Form 10-Q contains "forward-looking statements." Forward- looking statements do not relate strictly to historical or current facts and anticipate results based on management's plans that are subject to uncertainty. Forward-looking statements may be identified by the use of words like "plans," "expects," "will," "anticipates," "estimates" and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company's strategy for growth, product development, regulatory approvals, market position and expenditures. 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 unknown risks or uncertainties materialize, actual results could vary materially from the Company's expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, 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 2, 2000 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. - 18 - 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 2, 2000. Part II - OTHER INFORMATION Item 1. 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 and instructions for use 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's subsidiary, Johnson & Johnson Vision Care Inc. (Vision Care), 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, which were filed between July 1994 and December 1996 and are consolidated before the United States district Court for the Middle District of Florida, assert that enforcement of Vision Care'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. - 19 - Johnson & Johnson Vision Care is also a defendant in a nationwide consumer class action brought on behalf of purchasers of its ACUVUE brand contact lenses. The plaintiffs in that action, which was filed in 1996 in New Jersey State Court, allege that Vision Care sold its 1-DAY ACUVUE lens at a substantially cheaper price than ACUVUE and misled consumers into believing these were different lenses when, in fact, they were allegedly "the same lenses." Plaintiffs are seeking substantial damages and an injunction against supposed improper conduct. The Company believes these claims are without merit and is defending the action vigorously. The Company's Ortho Biotech subsidiary is party to an arbitration proceeding filed against it in 1995 by Amgen, Ortho Biotech's licensor of U.S. non-dialysis rights to EPO, in which Amgen seeks to terminate Ortho Biotech's U.S. license rights and collect substantial damages based on alleged deliberate EPO sales by Ortho Biotech during the early 1990's into Amgen's reserved dialysis market. The Company believes no basis exists for terminating Ortho Biotech's U.S. license rights or for obtaining damages and is vigorously contesting Amgen's claims. However, Ortho Biotech'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 is also involved in a number of patent, trademark and other lawsuits incidental to its business. 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. - 20 - Item 5. Other Information Testimony in Amgen`s patent infringement trial in Boston, Massachusetts against Transkaryotic Therapies, Inc. (TKT), the developer of a gene-activated EPO product, and Aventis S.A., which holds marketing rights to the TKT product, concluded in September. A decision by the Federal District Judge Young is expected relatively soon. TKT and Aventis are seeking to invalidate the Amgen patents asserted against them, which patents are exclusively licensed to Ortho Biotech in the U.S. for non-dialysis indications. Ortho Biotech is not a party to the action and is not in a position to express views as to its probable outcome. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Numbers 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 October 1, 2000. - 21 - 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: October 31, 2000 By /s/ R. J. DARRETTA R. J. DARRETTA Vice President, Finance Date: October 31, 2000 By /s/ C. E. LOCKETT C. E. LOCKETT Controller (Chief Accounting Officer) - 22 -