Exhibit 13a
FINANCIAL REVIEW
OVERVIEW OF CONSOLIDATED OPERATING RESULTS
In 1998, total revenues grew 23% to $13,544 million, reflecting the strong
worldwide demand for our in-line products as well as our copromoted products and
the introduction of two major products--Trovan and Viagra. We achieved net
income growth of 51% to $3,351 million for 1998. The following are reflected in
our 1998 results:
o the sale of our Medical Technology Group (MTG) businesses and the combining
of our pharmaceutical and consumer health care businesses
o substantial investments in product support and research and development
(R&D)
o the recording of charges associated with adjustments to asset values, the
exiting of certain product lines, plant rationalizations, severance
payments, copromotion payments to Searle and a contribution to The Pfizer
Foundation
Accompanying financial data for all periods present MTG as discontinued
operations.
ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
% Change
---------------
(millions of dollars) 1998 1997 1996 98/97 97/96
- --------------------------------------------------------------------------------
Net sales $12,677 $10,739 $9,864 18 9
Alliance revenue 867 316 -- 175 --
- --------------------------------------------------------
Total revenues $13,544 $11,055 $9,864 23 12
Cost of sales $ 2,094 $ 1,776 $1,695 18 5
Selling, informational and
administrative expenses $ 5,568 $ 4,401 $3,859 27 14
% of total revenues 41.1% 39.8% 39.1%
R&D expenses $ 2,279 $ 1,805 $1,567 26 15
% of total revenues 16.8% 16.3% 15.9%
Other deductions-- net $ 1,009 $ 206 $ 215 391 (5)
- --------------------------------------------------------
Income from continuing
operations before taxes $ 2,594 $ 2,867 $2,528 (10) 13
% of total revenues 19.2% 25.9% 25.6%
Taxes on income $ 642 $ 775 $ 758 (17) 2
Effective tax rate 24.8% 27.0% 30.0%
Income from continuing
operations $ 1,950 $ 2,082 $1,764 (6) 18
% of total revenues 14.4% 18.8% 17.9%
Discontinued
operations-- net of tax 1,401 131 165 972 (21)
Net income $ 3,351 $ 2,213 $1,929 51 15
% of total revenues 24.7% 20.0% 19.6%
- --------------------------------------------------------------------------------
PERCENTAGES MAY REFLECT ROUNDING ADJUSTMENTS.
TOTAL REVENUES
Total revenues increased $2,489 million in 1998 and $1,191 million in 1997.
Excluding the impact of foreign exchange, total revenues grew by 26% in 1998 and
16% in 1997. These increases were primarily due to higher sales volume of our
products and revenue generated from product alliances (alliance revenue).
ELEMENTS OF [X] Volume
TOTAL REVENUE GROWTH [X] Price
[X] Currency
- --------------------------------------------------------------------------------
The following represents a bar chart in the printed piece.
Year Volume Price Currency
- ---- ------ ----- --------
1998 24.8% 1.2% (3.5)%
1997 14.0% 1.6% (3.5)%
1996 15.5% 0.7% (2.6)%
Volume has been the
major contributor to
total revenue growth
in each of the last
three years.
- --------------------------------------------------------------------------------
PERCENTAGE CHANGE IN TOTAL REVENUES
Analysis of Change
--------------------------
Total %
Change Volume Price Currency
- ------------------------------------------------------------
Pharmaceutical
1998 vs. 1997 25.8 28.1 1.0 (3.3)
1997 vs. 1996 12.5 14.3 1.6 (3.4)
Animal Health
1998 vs. 1997 (1.1) .6 2.4 (4.1)
1997 vs. 1996 8.8 11.6 1.2 (4.0)
Consolidated
1998 vs. 1997 22.5 24.8 1.2 (3.5)
1997 vs. 1996 12.1 14.0 1.6 (3.5)
- --------------------------------------------------------------------------------
28
Pfizer Inc and Subsidiary Companies
PHARMACEUTICAL revenues increased 26% to $12,230 million in 1998 and 13% to
$9,726 million in 1997. Excluding the effect of foreign exchange, pharmaceutical
revenues increased 29% in 1998 and 16% in 1997. These changes reflect the
strengthening of the dollar relative to the Japanese yen, as well as several
European and other Asian currencies. In the U.S. market, growth was 38% in 1998
and 17% in 1997, while international growth was 10% in 1998 and 8% in 1997. The
introduction of Viagra accounts for 12% of the 1998 U.S.
growth.
Our major pharmaceutical products grew 28% in 1998. These
products--Norvasc, Procardia XL, Cardura, Diflucan, Zithromax, Trovan, Zoloft,
Viagra, Glucotrol XL and Zyrtec--comprised 82% of worldwide pharmaceutical net
sales. These products have U.S. patent expirations ranging from 2000 to 2011.
Two new pharmaceuticals, Lipitor and Aricept, were launched in 1997 through
product alliances. Lipitor is a cholesterol-lowering medication developed by the
Parke-Davis Division of Warner-Lambert Company. Aricept is used to treat
symptoms of Alzheimer's disease and was developed by Eisai Co., Ltd. These
alliances allow us to copromote or license these products for sale in certain
countries. Under the copromotion agreements, these products are marketed and
promoted with our alliance partners. We provide cash, staff and other resources
to sell, market, promote and further develop these products. Revenue from
copromotion agreements is reported in the Statement of Income as Alliance
revenue. Certain alliance agreements include quid-pro-quo provisions which would
give our product alliance partners the right to copromote one of our products.
Rebates under Medicaid and related state programs reduced revenues by $150
million in 1998, $99 million in 1997 and $92 million in 1996. The 1998 increase
in rebates reflects growth of in-line products and the introduction of two
products--Trovan and Viagra. We also provided to the federal government
legislatively mandated discounts of $105 million in 1998, $88 million in 1997
and $87 million in 1996. Performance-based contracts also provide rebates to
several customers and have reduced total revenue in the U.S. Volume increases in
all three years more than offset these revenue reductions.
NET SALES -- MAJOR PHARMACEUTICAL PRODUCTS
- --------------------------------------------------------------------------------
% Change
(millions of dollars) 1998 1997 1996 98/97 97/96
- --------------------------------------------------------------------------------
CARDIOVASCULAR DISEASES: $4,186 $3,806 $3,486 10 9
Norvasc 2,575 2,217 1,795 16 23
Procardia XL 714 822 1,005 (13) (18)
Cardura 688 626 533 10 17
INFECTIOUS DISEASES: 2,823 2,483 2,325 14 7
Diflucan 916 881 910 4 (3)
Zithromax 1,041 821 619 27 33
Trovan 160 -- -- -- --
CENTRAL NERVOUS SYSTEM
DISORDERS: 1,924 1,553 1,382 24 12
Zoloft 1,836 1,507 1,337 22 13
VIAGRA 788 -- -- -- --
DIABETES: 273 234 213 17 9
Glucotrol XL 226 175 135 29 30
ALLERGY: 422 273 156 55 74
Zyrtec/Reactine 416 265 146 57 81
- --------------------------------------------------------------------------------
PERCENTAGES MAY REFLECT ROUNDING ADJUSTMENTS.
THE DECLINE IN PROCARDIA XL IS DUE IN PART TO THE INCREASED ACCEPTANCE
OF NORVASC WITHIN THE MEDICAL COMMUNITY.
TOTAL REVENUES BY BUSINESS SEGMENT
- --------------------------------------------------------------------------------
The following represents a graph
in the printed piece.
(% of total revenues)
(millions of dollars) % Change
1998 98/97
Pharmaceutical 90% PHARMACEUTICAL $12,230 26
Animal Health 10% ANIMAL HEALTH 1,314 (1)
----------------------------
TOTAL $13,544 23
- --------------------------------------------------------------------------------
1997 97/96
Pharmaceutical 88% Pharmaceutical $ 9,726 13
Animal Health 12% Animal Health 1,329 9
----------------------------
Total $11,055 12
- --------------------------------------------------------------------------------
1996 96/95
Pharmaceutical 88% Pharmaceutical $ 8,642 16
Animal Health 12% Animal Health 1,222 -
----------------------------
Total $ 9,864 14
- --------------------------------------------------------------------------------
ANIMAL HEALTH net sales decreased 1% in 1998 due to a weak livestock market
in the U.S. and poor Asian economies. Excluding the effect of foreign exchange,
net sales increased 3%. Animal health net sales increased 9% in 1997, reflecting
growth of several products. In 1997, sales of companion animal products
increased 14% and sales of products for food animals increased 7%. Sales of
Dectomax, an antiparasitic medication for livestock, grew 58% to $150 million in
1997.
29
Pfizer Inc and Subsidiary Companies
In December 1998, the Council of European Agricultural Ministers voted to
ban Stafac (virginiamycin), an antibacterial for poultry and swine used in
animal feed, throughout the European Union after June 30, 1999. We have filed
suit against the European Union, seeking reversal of the agricultural ministers'
decision. We believe the decision to ban Stafac disregarded the view of the
European Community Commission's own Scientific Committee on Animal Nutrition
that the use of this product in animal feed posed no threat to human health.
Total 1998 sales of Stafac in Western Europe were $24 million. We do not expect
any ban on sales of virginiamycin to have a material effect on future results of
our operations.
TOTAL REVENUES BY COUNTRY
- --------------------------------------------------------------------------------
The following represents a graph
in the printed piece.
(%of total revenues) (millions of dollars) % Change
1998 98/97
United States 61% UNITED STATES $ 8,205 35
Japan 7% JAPAN 943 (1)
All Other Countries 32% ALL OTHER COUNTRIES 4,396 9
----------------------------
TOTAL $13,544 23
- --------------------------------------------------------------------------------
1997 97/96
United States 55% United States $ 6,089 17
Japan 9% Japan 949 3
All Other Countries 36% All Other Countries 4,017 7
----------------------------
Total $11,055 12
- --------------------------------------------------------------------------------
1996 96/95
United States 53% United States $ 5,193 18
Japan 9% Japan 922 (2)
All Other Countries 38% All Other Countries 3,749 13
----------------------------
Total $ 9,864 14
- --------------------------------------------------------------------------------
CHANGES IN GEOGRAPHIC TOTAL REVENUES BY BUSINESS SEGMENT
- --------------------------------------------------------------------------------
% Change in Total Revenues
-------------------------------
U.S. International
-------------- -------------
98/97 97/96 98/97 97/96
- --------------------------------------------------------------------------------
Pharmaceutical 38 17 10 8
Animal Health 3 25 (4) --
Consolidated 35 17 8 6
- --------------------------------------------------------------------------------
Revenues were in excess of $100 million in each of 12 countries outside the
U.S. in 1998. The U.S. was the only country to contribute more than 10% to total
revenues.
PRODUCT DEVELOPMENTS
We continue to invest in R&D to provide future sources of revenue through the
development of new products as well as additional uses for existing products.
Certain significant regulatory actions by, and filings pending with, the U.S.
Food and Drug Administration (FDA) follow:
1998 U.S. FDA APPROVALS
- --------------------------------------------------------------------------------
Product Indication Date Approved
- --------------------------------------------------------------------------------
Zyrtec Allergies in children 2 to 5 years of age May 1998
Viagra Erectile dysfunction (impotence) March 1998
- --------------------------------------------------------------------------------
PENDING U.S. NEW DRUG APPLICATIONS
- --------------------------------------------------------------------------------
Product Indication Date Filed
- --------------------------------------------------------------------------------
Relpax Migraine headaches October 1998
Zoloft Post-traumatic stress disorder October 1998
Zoloft Oral liquid dosage form April 1998
Tikosyn Heart rhythm disorders March 1998
Zeldox Psychotic disorders -- December 1997
intramuscular dosage form
Zeldox Psychotic disorders -- March 1997
oral dosage form
- --------------------------------------------------------------------------------
On January 28, 1999, the FDA's Cardiovascular and Renal Drugs Advisory
Committee recommended the approval of Tikosyn for use in the treatment of heart
rhythm disorders.
We received a non-approvable letter from the FDA for Zeldox in 1998. We are
undertaking additional clinical work on this product to answer questions from
the FDA.
In December 1998, G.D. Searle & Co. (Searle), the pharmaceutical division
of Monsanto Company, received approval from the FDA to market Celebrex for the
relief of symptoms of adult osteoarthritis and rheumatoid arthritis. We will
copromote Celebrex worldwide except in Japan. In February 1999, we launched
Celebrex with Searle. We are also participating with Searle in ongoing clinical
trials of Celebrex for additional indications, including Alzheimer's disease and
colon cancer and of a second-generation compound, valdecoxib.
Ongoing or planned clinical trials for additional uses for existing
products as well as new product development programs include:
o Norvasc--for the treatment of patients with congestive heart failure
attributable to causes other than impaired blood flow to the heart
o Zithromax--to decrease cardiovascular risk in patients with atherosclerosis
(a process in which fatty substances are deposited within blood vessels)
caused by a certain infection
30
Pfizer Inc and Subsidiary Companies
o droloxifene and CP-336,156--for the prevention and treatment of
osteoporosis, the prevention of breast cancer and to reduce the risk of
coronary heart disease
o Alond--for the treatment of nervous system, kidney and cardiovascular
disorders related to diabetes
o voriconazole and UK-292,663--for the treatment of fungal infections
o darifenacin--for the treatment of urinary urge incontinence
o ezlopitant--for the treatment of chemotherapy-induced nausea and vomiting
in cancer patients
o an inhaled form of insulin for the treatment of diabetes
Sixty-five other compounds are in early-stage development.
We entered into worldwide agreements with Hoechst Marion Roussel AG
(Hoechst) to manufacture insulin and codevelop and copromote inhaled insulin.
Under the agreements, Hoechst and Pfizer will contribute expertise in the
development and production of insulin products as well as selling and marketing
resources. We bring to the alliance our development of inhaled insulin from our
collaboration with Inhale Therapeutic Systems, Inc. We plan to build a new
insulin manufacturing plant in Frankfurt, Germany, which will be jointly owned
with Hoechst, to support the product currently in development.
COSTS AND EXPENSES
In 1998, we recorded charges for asset impairment and restructuring. These
pre-tax charges were recorded in the Statement of Income as follows:
- --------------------------------------------------------------------------------
(millions of dollars) Total COS* SI&A* R&D OD*
- --------------------------------------------------------------------------------
Asset impairments $213 $18 $ -- $ -- $195
Restructuring charges 177 68 17 1 91
*COS -- COST OF SALES; SI&A -- SELLING, INFORMATIONAL AND ADMINISTRATIVE
EXPENSES; OD -- OTHER DEDUCTIONS-NET.
We recorded an impairment charge of $110 million in the pharmaceutical
segment to adjust intangible asset values, primarily goodwill and trademarks,
related to consumer health care product lines.
These charges are a result of significant changes in the marketplace and a
revision of our strategies, including:
o the decision to redeploy resources from personal care and minor brands to
over-the-counter switches of prescription products
o the withdrawal of one of our major over-the-counter products in Italy
o an acquired product line which experienced declines in market share
As noted in our discussion of revenues, our animal health antibiotic feed
additive, Stafac, was banned throughout the European Union, resulting in asset
impairment charges of $103 million ($85 million was to adjust intangible asset
values, primarily goodwill and trademarks, and $18 million was to adjust the
carrying value of machinery and equipment in the pharmaceutical segment).
These events have caused the projected undiscounted cash flows of a number
of our consumer health care product lines and Stafac to be less than their
carrying value. As a result, we lowered the carrying value of the
above-mentioned assets to their estimated fair value.
The components of the restructuring charges follow:
- --------------------------------------------------------------------------------
(millions of dollars)
- --------------------------------------------------------------------------------
Property, plant and equipment $ 49
Write-down of intangibles 44
Employee termination costs 40
Other 44
- --------------------------------------------------------------------------------
Total $177
- --------------------------------------------------------------------------------
These charges resulted from a current review of our global operations to
increase efficiencies and return on assets, thereby resulting in plant and
product line rationalizations. In addition to the disposition of our MTG
businesses, we have exited, or plan to exit by the end of 1999, certain product
lines including those associated with certain of our livestock external
parasiticides and feed businesses. Also, we have decided to exit certain of our
fermentation operations.
We have written off assets related to the product lines we are exiting,
including inventory, intangible assets--primarily goodwill--as well as certain
buildings, machinery and equipment for which we have no plans to use or sell. We
have begun to seek buyers for other properties which have been written down to
their estimated fair value. We will either dispose of or abandon these
properties by the end of 1999.
As a result of the restructuring, the work force will be reduced by 520
manufacturing, sales and corporate personnel. Notifications to personnel have
been made. At December 31, 1998, 134 employees had been terminated. We will
complete terminations of the remaining personnel by December 31, 1999. Employee
termination costs represent payments for severance, outplacement counseling
fees, medical and other benefits and a $5 million noncash charge for the
acceleration of nonvested employee stock options.
Other restructuring charges consist of charges for inventory for product
lines we have exited--$12 million, contract termination payments--$9 million,
facility closure costs--$7 million and environmental remediation costs
associated with the disposal of certain facilities--$16 million.
31
Pfizer Inc and Subsidiary Companies
Restructuring charges of $90 million are reflected in the pharmaceutical
segment and $87 million are in the animal health segment.
As a result of the asset write-downs and the exiting of certain product
lines, we expect a reduction in annual revenues of $71 million and a realization
of annual cost savings of $67 million, of which $11 million represents a
reduction in amortization and depreciation expense.
COST OF SALES increased 18% in 1998 as compared with 5% in 1997. Excluding
the 1998 asset impairments and restructuring charges, cost of sales increased
13%. As a percentage of net sales, cost of sales, excluding the 1998 asset
impairments and restructuring charges, declined to 15.8% in 1998 and 16.5% in
1997 from 17.2% in 1996. These declines largely reflect:
o a more favorable business and product mix
o productivity improvements
SI&A increased 27% in 1998 as compared with 14% in 1997. This increase
reflects a substantial global investment in our pharmaceutical selling efforts.
These efforts included the expansion of our sales forces in the U.S. and key
international markets. Recent additions to our U.S. sales force include a new
primary-care sales force, a specialty sales force dedicated largely to
rheumatology and the expansion of other specialty sales forces in the U.S.
R&D expenses increased 26% in 1998 and 15% in 1997. These expenditures were
necessary to support the advancement of potential drug candidates in all stages
(from initial discovery through final regulatory approval). Pharmaceutical R&D
expenses, as a percentage of pharmaceutical revenues, averaged 17% over the last
three years.
OTHER DEDUCTIONS -- NET increased substantially in 1998 as compared to a
minor decrease in 1997. This increase was primarily due to:
o asset impairments -- $195 million
o restructuring charges -- $91 million
o copromotion payments to Searle for rights to Celebrex-- $240 million
o a contribution to The Pfizer Foundation -- $300 million
o legal settlements involving the brand-name prescription drug antitrust
litigation -- $57 million, partially offset by
o an increase in interest income on the investment of cash generated from
operations and the divestiture of MTG
o foreign exchange effects
RESEARCH AND
DEVELOPMENT EXPENSES
- --------------------------------------------------------------------------------
(millions of dollars)
The following represents a bar chart in the printed piece.
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$1,036 $1,340 $1,567 $1,805 $2,279
Research and devel-
opment expenses
have increased at a
compound annual
growth rate of 21%
over the past 5 years.
Our overall EFFECTIVE TAX RATE increased from 28.0% in 1997 to 35.4% in
1998. This increase was due mainly to a higher tax rate on the gain on the
disposal of discontinued operations. The effective tax rate for continuing
operations decreased from 27.0% in 1997 to 24.8% in 1998. This decrease was
partially due to the extension to June 30, 1999 of the R&D tax credit in the
U.S. as well as to the tax benefit associated with the 1998 charges for asset
impairment, restructuring, copromotion payments to Searle and the contribution
to The Pfizer Foundation.
The effective tax rate for continuing operations decreased from 30.0% in
1996 to 27.0% in 1997. This decrease was mainly due to the favorable changes in
the mix of income by country, partially offset by the continuing reduction of
tax benefits from our operations in Puerto Rico as a result of the enactment of
the Omnibus Budget Reconciliation Act of 1993 and the elimination of the tax
exemption on Puerto Rican investment income.
We have received and are protesting assessments from the Belgian tax
authorities. For additional details, see note 8, "Taxes on Income," beginning on
page 50.
32
Pfizer Inc and Subsidiary Companies
DISCONTINUED OPERATIONS
During 1998, we exited the medical devices business with the sale of our
remaining MTG businesses:
o Howmedica to Stryker Corporation in December for $1.65 billion in cash
o Schneider to Boston Scientific Corporation in September for $2.1 billion in
cash
o American Medical Systems to E.M. Warburg, Pincus & Co., LLC in September
for $130 million in cash
o Valleylab to U.S. Surgical Corporation in January for $425 million in cash
The net proceeds from these divestitures have been or will be used for
general corporate purposes including the repayment of commercial paper
borrowings. Net income of these businesses up to the date of their divestiture
and divestiture gains are included in DISCONTINUED OPERATIONS--NET OF TAX.
NET INCOME
Net income for 1998 increased 51% over 1997. Diluted earnings per share were
$2.55 and increased by 50% over 1997. Income from continuing operations (net
income after adjustment for discontinued operations) adjusted to add back
certain significant charges increased by 26.6% over net income in 1997. On the
same basis, diluted earnings per share were $2.00 and increased by 25.8% over
1997. The 1998 pre-tax significant charges related to:
o asset impairments -- $213 million
o restructuring charges -- $177 million
o copromotion payments to Searle -- $240 million
o contribution to The Pfizer Foundation -- $300 million
o other, which is primarily related to legal settlements-- $126 million
FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES
Our net financial asset position as of December 31 was as follows:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Financial assets* $5,835 $3,034 $3,140
Short- and long-term debt 3,256 2,976 2,885
- --------------------------------------------------------------------------------
Net financial assets $2,579 $ 58 $ 255
- --------------------------------------------------------------------------------
* CONSISTS OF CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, SHORT-TERM
LOANS AND LONG-TERM LOANS AND INVESTMENTS.
Selected Measures of Liquidity and
Capital Resources
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Cash and cash equivalents and
short-term investments and
loans (millions of dollars) $4,079 $1,704 $1,991
Working capital (millions of dollars) 2,739 2,448 1,914
Current ratio 1.38:1 1.49:1 1.36:1
Shareholders' equity per
common share* $ 7.00 $ 6.30 $ 5.54
Debt to total capitalization** 27% 27% 29%
- --------------------------------------------------------------------------------
* REPRESENTS TOTAL SHAREHOLDERS' EQUITY DIVIDED BY THE ACTUAL NUMBER OF COMMON
SHARES OUTSTANDING (WHICH EXCLUDES TREASURY SHARES AND THOSE HELD BY THE
EMPLOYEE BENEFIT TRUSTS).
** REPRESENTS TOTAL SHORT-TERM BORROWINGS AND LONG-TERM DEBT DIVIDED BY THE SUM
OF TOTAL SHORT-TERM BORROWINGS, LONG-TERM DEBT AND TOTAL SHAREHOLDERS'
EQUITY.
The change in working capital from 1997 to 1998 was primarily due to the
following:
INCREASES IN:
O CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS--due to the receipt of
cash from the MTG divestiture
o ACCOUNTS RECEIVABLE--due to the alliance revenue receivables and growth in
sales volume
o INVENTORY--due to higher pharmaceutical inventory levels as a result of new
products
o SHORT-TERM BORROWINGS--due to an increase in funding for common stock
purchases at a higher average price net of repayments made with cash
received from the MTG divestiture
o DIVIDENDS PAYABLE--related to the first-quarter 1999 dividend declared in
December 1998
o INCOME TAXES PAYABLE--primarily due to changes in operations and the
divestiture of the MTG businesses
o OTHER CURRENT LIABILITIES--primarily due to accrued charges associated with
the divestiture of the MTG businesses and our plan to exit certain product
lines
DECREASE IN NET ASSETS OF DISCONTINUED OPERATIONS--due to the sale of the
MTG businesses
33
Pfizer Inc and Subsidiary Companies
The increase in working capital from 1996 to 1997 was primarily due to the
following:
INCREASES IN:
O ACCOUNTS RECEIVABLE--due in part to the alliance revenue receivables as
well as higher sales volumes
o INVENTORY--due to higher pharmaceutical inventory levels for new products
DECREASES IN:
o Short-term loans--primarily due to the renewal of short-term loans as loans
with maturities beyond one year
o Income taxes payable--primarily due to the settlements of tax-related
contingencies
The increase in shareholders' equity per common share in 1998 and 1997, as
well as the decrease in the 1997 percentage of debt to total capitalization was
primarily due to growth in net income.
SUMMARY OF CASH FLOWS
Operations in 1998 provided significant cash inflows. Commercial paper and
short-term borrowings supplement operating cash flows.
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Cash provided by/(used in):
Operating activities $ 2,925 $1,422 $1,828
Investing activities (335) (963) (850)
Financing activities (1,920) (823) (367)
Discontinued operations 4 118 134
Effect of exchange rate changes on
cash and cash equivalents 1 (27) 2
- --------------------------------------------------------------------------------
Net increase/(decrease) in cash
and cash equivalents $ 675 $ (273) $ 747
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES increased in 1998 primarily due
to:
o the inclusion of charges associated with asset impairments and
restructuring in 1998 INCOME FROM CONTINUING OPERATIONS
o higher taxes payable associated with sales growth of existing and new
products as well as the MTG divestitures, partially offset by tax benefits
associated with charges for asset impairment, restructuring, copromotion
payments to Searle and the contribution to The Pfizer Foundation
o higher compensation related accruals, reduced by
o higher receivable and inventory levels related to new products
Cash flows from operating activities decreased in 1997 as the growth in
income from continuing operations was offset by an increase in accounts
receivable and inventories.
NET CASH USED IN INVESTING ACTIVITIES changed in 1998 primarily due to:
o proceeds from the sale of the MTG businesses, some of which accounts for
our increase in short-term investments, reduced by
o increased long-term investments and capital expenditures
Net cash used in investing activities changed in 1997 largely due to the:
o increase in capital expenditures
o decrease in proceeds from the sale of businesses
o absence of business acquisitions in 1997
In 1999, additions to property, plant and equipment are expected to be
approximately $1.5 billion.
NET CASH USED IN FINANCING ACTIVITIES increased in 1998 and 1997 largely
due to the effects of:
o the increase in common stock purchases at a higher average price
o higher dividend payments to our shareholders, reduced by
o more cash received from employee stock option exercises
In September 1998, we completed a program under which we purchased 26.4
million shares of our common stock at a total cost of $2 billion. In that same
month, the Board of Directors approved a new share-purchase program with
authorization to purchase up to $5 billion of our company's common stock. Under
the new program, we purchased approximately 4.9 million shares in the open
market for approximately $525 million in the fourth quarter of 1998. Purchased
shares are available for general corporate purposes.
We have available lines of credit and revolving-credit agreements with a
select group of banks and other financial intermediaries. Major unused lines of
credit totaled approximately $1.3 billion at December 31, 1998.
Our short-term debt has been rated P1 by Moody's Investors Services
(Moody's) and A1+ by Standard and Poor's (S&P). Also, our long-term debt has
been rated Aaa by Moody's and AAA by S&P for the past 13 years. Moody's and S&P
are the major corporate debt-rating organizations and these are their highest
ratings.
34
Pfizer Inc and Subsidiary Companies
Cash Dividends Paid
Per Common Share
The following represents a bar chart in the printed piece.
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars)
$0.47 $0.52 $0.60 $0.68 $0.76
The 1998 cash
dividends paid
represented the 31st
consecutive year of
dividend increases.
- --------------------------------------------------------------------------------
DIVIDENDS ON COMMON STOCK
Our dividend payout ratio, which represents cash dividends paid per common share
divided by diluted earnings per common share amounted to 29.8% in 1998 and 40.0%
in both 1997 and 1996. Excluding the effects on net income of discontinued
operations and charges for asset impairment, restructuring, copromotion payments
to Searle and the contribution to The Pfizer Foundation, the dividend payout
ratio was 38.0% in 1998. In December 1998, the Board of Directors declared a
first-quarter 1999 dividend of $.22, an increase of 16% over the $.19 per share
dividend declared and paid in each quarter of 1998. This marked the 32nd
consecutive year of quarterly dividend increases.
BANKING OPERATION
Our international banking operation, Pfizer International Bank Europe (PIBE),
operates under a full banking license from the Central Bank of Ireland. The
results of its operations are included in OTHER DEDUCTIONS--NET.
PIBE extends credit to financially strong borrowers, largely through U.S.
dollar loans made primarily for short and medium terms, with floating interest
rates. Generally, loans are made on an unsecured basis. When deemed appropriate,
guarantees and certain covenants may be obtained as a condition to the extension
of credit.
To reduce credit risk, PIBE has established credit approval guidelines,
borrowing limits and monitoring procedures. Credit risk is further reduced
through an active policy of diversification with respect to borrower, industry
and geographic location. PIBE continues to have S&P's highest short-term rating
of A1+.
The net income of PIBE is affected by changes in market interest rates
because of repricing and maturity mismatches between its interest-sensitive
assets and liabilities. PIBE is currently asset sensitive (more assets than
liabilities repricing in a given period) and, therefore, we expect that in an
environment of decreasing interest rates, net income would decline. PIBE's asset
and liability management reflects its liquidity, interest-rate outlook and
general market conditions.
For additional details regarding our banking operation, see note 3,
"Financial Subsidiaries," on page 45.
FORWARD-LOOKING INFORMATION AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This annual report and
other written and oral statements that we make from time to time contain such
forward-looking statements that set out anticipated results based on
management's plans and assumptions. We have tried, wherever possible, to
identify such statements by using words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans," "believes" and words and terms of
similar substance in connection with any discussion of future operating or
financial performance.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements. We undertake no
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise.
Certain risks, uncertainties and assumptions are discussed here and under
the heading entitled "Cautionary Factors That May Affect Future Results" in Item
1 of our annual report on Form 10-K for the year ended December 31, 1998, which
will be filed at the end of March 1999.
35
Pfizer Inc and Subsidiary Companies
Prior to the filing of Form 10-K, you should refer to the discussion under the
same heading in our quarterly report on Form 10-Q for the quarter ended
September 27, 1998, and to the extent incorporated by reference therein, in our
Form 10-K filing for 1997. This discussion of potential risks and uncertainties
is by no means complete but is designed to highlight important factors that may
impact our outlook.
COMPETITION AND THE HEALTH CARE ENVIRONMENT
In the U.S., many of our pharmaceutical products are subject to increasing price
pressures as managed care organizations, institutions and government agencies
seek price discounts. Government efforts to reduce Medicare and Medicaid
expenses are expected to increase the use of managed care organizations. This
may result in managed care influencing prescription decisions for a larger
segment of the population. International operations are also subject to price
and market regulations. As a result, it is expected that pressures on pricing
and operating results will continue.
CALCIUM CHANNEL BLOCKERS
During 1995, the authors of some nonclinical studies questioned the safety of
calcium channel blockers (CCBs). Although the clinical evidence supported the
safety of this class of medications, the FDA convened an advisory panel to
review their safety. In 1996, that advisory panel found no data to support
challenges to the safety of newer sustained-release and intrinsically
long-acting CCBs (such as Norvasc and Procardia XL--products for treatment of
hypertension and angina).
Questions about this class of products continued throughout 1997, however,
and included scientific publications and presentations asserting that these
products were associated with various serious medical conditions.
During 1997, data from newly conducted studies and reviews, etc. and
decisions by two national regulatory authorities plus newly published National
Institutes of Health (NIH) guidelines were all supportive of the safety of
long-acting CCBs like Norvasc and Procardia XL and that they were appropriate
first-line medications in the treatment of hypertension.
We continue to believe that the safety and effectiveness of Norvasc and
Procardia XL are supported by a large body of data from numerous studies and the
daily clinical experiences of physicians around the world. It is not possible,
however, to predict the impact on our future sales, if any, of existing or
future studies, regulatory agency actions or a continuing debate regarding CCBs.
FINANCIAL RISK MANAGEMENT
The overall objective of our financial risk management program is to seek a
reduction in the potential negative earnings effects from changes in foreign
exchange and interest rates arising in our business activities. We manage these
financial exposures through operational means and by using various financial
instruments. These practices may change as economic conditions change.
FOREIGN EXCHANGE RISK
A significant portion of our revenues and earnings are exposed to changes in
foreign exchange rates. Where practical, we seek to relate expected local
currency revenues with local currency costs and local currency assets with local
currency liabilities.
Foreign exchange risk is also managed through the use of foreign currency
forward-exchange contracts. These contracts are used to offset the potential
earnings effects from short-term foreign currency assets and liabilities that
arise during normal operations.
In addition, foreign currency put options are purchased to reduce a portion
of the potential negative effects on earnings related to certain of our
significant anticipated intercompany inventory purchases for up to one year.
These purchased options hedge Japanese yen versus the U.S. dollar.
Also, under certain market conditions, we protect against possible declines
in the reported net assets of our international subsidiaries in Japan. We do
this through currency swaps and borrowing in Japanese yen.
Our financial instrument holdings at year-end were analyzed to determine
their sensitivity to foreign exchange rate changes. The fair value of these
instruments was determined as follows:
o forward-exchange contracts and currency swaps--net present values
o purchased foreign currency options--foreign exchange option pricing model
o foreign receivables, payables, debt and loans--changes in exchange rates
In our sensitivity analysis, we assumed that the change in one currency's
rates relative to the U.S. dollar would not have an effect on other currencies'
rates relative to the U.S. dollar. All other factors were held constant.
If there were an adverse change in foreign exchange rates of 10%, the
expected effect on net income related to our financial instruments would be
immaterial. For additional details, see note 5-D, "Derivative Financial
Instruments--Accounting Policies," on page 47.
36
Pfizer Inc and Subsidiary Companies
INTEREST RATE RISK
Our U.S. dollar interest-bearing investments, loans and borrowings are subject
to interest rate risk. We invest and borrow primarily on a short-term or
variable-rate basis. We are also subject to interest rate risk on Japanese yen
short-term borrowings. Under certain market conditions, interest rate swap
contracts are used to adjust interest sensitive assets and liabilities.
Our financial instrument holdings at year-end were analyzed to determine
their sensitivity to interest rate changes. The fair values of these instruments
were determined by net present values.
In our sensitivity analysis, we used the same change in interest rate for
all maturities. All other factors were held constant. If interest rates
increased by 10%, the expected effect on net income related to our financial
instruments would be immaterial.
FOREIGN MARKETS
Thirty-nine percent of our 1998 revenues arise from international operations and
we expect revenue and net income growth in 1999 to be impacted by changes in
foreign exchange rates.
Revenues from Asia comprised approximately 12% of total revenues in 1998,
including 7% from Japan. Revenues from the Asian markets most impacted by recent
economic events--Korea, Indonesia, Thailand, Malaysia, the Philippines and
Taiwan--comprised approximately 1% of 1998 total revenues. Revenues from Latin
America comprised approximately 5% of total revenues in 1998, including 2% from
Brazil.
EUROPEAN CURRENCY
A new European currency (Euro) was introduced in January 1999 to replace the
separate currencies of 11 individual countries. This entails changes in our
operations as we modify systems and commercial arrangements to deal with the new
currency. Modifications are necessary in operations such as payroll, benefits
and pension systems, contracts with suppliers and customers and internal
financial reporting systems. Although there is a three-year transition period
during which transactions can be made in the old currencies, this may require
dual currency processes for our operations. We have identified issues involved
and are developing and implementing solutions. The cost of this effort is not
expected to have a material effect on our business or results of operations.
There is no guarantee, however, that all problems have been foreseen and
corrected, or that no material disruption will occur in our business. The
conversion to the Euro may have competitive implications on our pricing and
marketing strategies; however, the full impact is not known at this time.
TAX LEGISLATION
Pursuant to the Small Jobs Protection Act of 1996 (the Act), Section 936 of the
Internal Revenue Code (the U.S. possessions corporation income tax credit) was
repealed for tax years beginning after December 31, 1995. The Act allows us to
continue using the credit against the tax arising from manufacturing income
earned in a U.S. possession for an additional 10-year period. The amount of
manufacturing income eligible for the credit during this additional period is
subject to a cap based on income earned prior to 1996 in the U.S. possession.
This 10-year extension period does not apply to investment income earned in a
U.S. possession, the credit on which expired as of July 1, 1996. The Act does
not affect the amendments made to Section 936 by the 1993 Omnibus Budget
Reconciliation Act, which provided for a five-year phase-down of the U.S.
possession tax credit from 100% to 40%. In addition, the 1996 Act permitted the
extension of the R&D tax credit through June 30, 1998. In 1998, this credit was
again extended to June 30, 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which becomes effective for our financial
statements beginning January 1, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments as assets or liabilities in its balance
sheet and measure them at fair value. We do not expect the adoption of this
Statement to have a material impact on our financial statements.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use and SOP 98-5, Reporting on the Costs of Start-up
Activities, which are effective for our 1999 financial statements. We do not
expect adoption of these SOPs to have a material impact on our financial
statements.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
Many older computer software programs refer to years in terms of their final two
digits only. Such programs may interpret the year 2000 to mean the year 1900, or
another year instead. If not corrected, those programs could cause date-related
or operational transaction failures. We developed a Compliance Assurance Process
to address the Year 2000 issue in four phases: Inventory, Assessment and
Planning, Implementation and Certification. No significant information
technology projects have been deferred as a result of our efforts on Year 2000.
The Inventory phase included preliminary problem determination, an
inventory of information technology (IT) and non-IT hardware and software and an
inventory of our key business systems and material vendors and business
processes. Such systems relate to our research and development, production,
distribution, financial, administrative and communication operations. This phase
was substantially completed at the end of 1998.
37
We have requested our critical vendors, major customers, service suppliers,
communication providers, product alliance partners and banks to verify their
Year 2000 readiness and are currently evaluating their responses. This
evaluation is complete for all of our critical trading partners, but continues
for non-critical partners.
During our Assessment and Planning phase each inventoried item is assessed
to evaluate its risk, to decide whether to remediate or replace, to identify its
priority and to develop a plan for the system. Systems are prioritized based on
their importance to the business, risk of failure, time horizon to failure and
dependency on other critical items. This phase was 90% complete at December 31,
1998, and will be finished by the end of the first quarter of 1999.
The plans developed during the Assessment and Planning phase are being
executed in the Implementation phase. Remediation and replacement of non-Year
2000 compliant systems is in process and we expect our critical systems to be
substantially remediated or replaced by March 31, 1999. The remaining systems,
including embedded systems, will be modified by the end of the third quarter of
1999. While our Implementation efforts are approximately 65% complete, this
phase will overlap with the Certification phase.
During the Certification phase, we will be testing and certifying the
results of our remediation efforts. Testing begins as systems are remediated and
will continue throughout 1999. Testing attempts are to verify that all of our
systems function correctly and extend to all interfaces with key business
partners. We expect to substantially complete testing of critical systems by
March 31, 1999, and the testing of remaining systems and key third-party systems
by the end of the third quarter of 1999.
Because the company's Year 2000 compliance is dependent upon key third
parties also being Year 2000 compliant on a timely basis, there can be no
guarantee that the company's efforts will prevent a material adverse impact on
its results of operations, financial condition or cash flows. If our systems or
those of key third parties are not fully Year 2000 functional, we estimate that
up to a two-week disruption in operations could occur. Such a disruption could
result in delays in the distribution of finished goods or receipt of raw
materials, errors in customer order taking, disruption of clinical activities or
delays in product development. These consequences could have a material adverse
impact on our results of operations, financial condition and cash flows if we
are unable to substantially conduct our business in the ordinary course. We
believe that our efforts, including the development of a contingency plan, will
significantly reduce the adverse impact that any disruption in business might
have.
As part of the contingency plan being developed, Business Continuity Plans
(the Plans) will address critical areas of our business. The Plans will be
designed to mitigate serious disruptions to our business flow beyond the end of
1999 and operate independent of our external providers' Year 2000 compliance.
The Plans will likely provide for maintaining increased inventory to meet
customer needs, protecting the integrity of ongoing activities, identifying and
securing alternate sources of critical services, materials and utilities when
possible and establishing crisis teams to address unexpected problems. We expect
to complete the preliminary Plans by the end of the first quarter 1999 and the
final Plans by the end of the second quarter 1999.
We estimate that the total cost involved in our Year 2000 program is
approximately $127 million of which $36 million has been incurred to date. Costs
for 1999 are estimated to be approximately $91 million, which reflect changes in
estimates and the inclusion of accelerated replacement costs as a result of a
clarification in disclosure guidelines of the Securities and Exchange
Commission. These costs are expensed as incurred, except for capitalizable
hardware of $5 million in 1998 and $15 million estimated for 1999 and are being
funded through operating cash flows. Such costs do not include normal system
upgrades and replacements.
Both our cost estimates and completion timeframes will be influenced by our
ability to successfully identify Year 2000 problems, the nature and amount of
programming required to fix the programs, the availability and cost of personnel
trained in this area and the Year 2000 compliance success that key third parties
attain. As the development of contingency plans continues, the costs to complete
our Year 2000 program may increase. While these and other unforeseen factors
could have a material adverse impact on our results of operations or financial
condition, we believe that our ongoing efforts to address the Year 2000 issue
will minimize possible negative consequences to our company.
LITIGATION, TAX AND ENVIRONMENTAL MATTERS
Claims have been brought against us and our subsidiaries for various legal and
tax matters. In addition, our operations are subject to international, federal,
state and local environmental laws and regulations. It is possible that our cash
flows and results of operations could be affected by the one-time impact of the
resolution of these contingencies. We believe that the ultimate disposition of
these matters to the extent not previously provided for will not have a material
impact on our financial condition or cash flows and results of operations,
except where specifically commented on in note 17, "Litigation," beginning on
page 55 and note 8, "Taxes on Income," beginning on page 50.
RECENT EVENTS
On January 28, 1999, we announced that, barring unusual circumstances, our Board
of Directors intends to vote on a three-for-one split of our common stock on
April 22, 1999. At the annual meeting to take place on the same date,
shareholders will vote on a proposal to increase the authorized shares of our
common stock.
38
MANAGEMENT'S REPORT
We prepared and are responsible for the financial statements that appear on
pages 40 to 61. These financial statements are in conformity with generally
accepted accounting principles and, therefore, include amounts based on informed
judgments and estimates. We also accept responsibility for the preparation of
other financial information that is included in this document.
We have designed a system of internal control to:
o safeguard the Company's assets,
o ensure that transactions are properly authorized, and
o provide reasonable assurance, at reasonable cost, of the integrity,
objectivity and reliability of the financial information.
An effective internal control system has inherent limitations, no matter
how well designed and, therefore, can provide only reasonable assurance with
respect to financial statement preparation. The system is built on a business
ethics policy that requires all employees to maintain the highest ethical
standards in conducting Company affairs. Our system of internal control
includes:
o careful selection, training and development of financial managers,
o an organizational structure that segregates responsibilities,
o a communications program which ensures that the Company's policies and
procedures are well understood throughout the organization and
o an extensive program of internal audits, with prompt follow-up, including
reviews of separate operations and functions around the world.
Our independent certified public accountants, KPMG LLP, have audited the
annual financial statements in accordance with generally accepted auditing
standards. The independent auditors' report expresses an informed judgment as to
the fair presentation of the Company's reported operating results, financial
position and cash flows. Their judgment is based on the results of auditing
procedures performed and such other tests that they deemed necessary, including
their consideration of our internal control structure.
We consider and take appropriate action on recommendations made by KPMG LLP
and our internal auditors. We believe that our system of internal control is
effective and adequate to accomplish the objectives discussed above.
/s/W. C. STEERE, JR.
- --------------------
W. C. Steere, Jr., PRINCIPAL EXECUTIVE OFFICER
/s/D. L. SHEDLARZ
- -----------------
D. L. Shedlarz, PRINCIPAL FINANCIAL OFFICER
/s/H. V. RYAN
- -------------
H. V. Ryan, PRINCIPAL ACCOUNTING OFFICER
FEBRUARY 25, 1999
AUDIT COMMITTEE'S REPORT
The Board of Directors reviews the audit function, the system of internal
control and financial statements largely through its Audit Committee, which
consists solely of directors who are not Company employees. The requirements of
the Audit Committee's charter have been complied with during 1998. The Audit
Committee met six times in 1998 with management, the independent auditors and
internal auditors concerning their respective responsibilities. Among its
various duties, the Audit Committee recommends the appointment of the Company's
independent auditors. Both KPMG LLP and the internal auditors have full access
to the Audit Committee and meet with it, without management present, to discuss
the scope and results of their examinations including internal control, audit
and financial reporting matters.
/s/G. B. HARVEY
- ---------------
G. B. Harvey, Chair, AUDIT COMMITTEE
FEBRUARY 25, 1999
INDEPENDENT AUDITORS' REPORT
(LOGO)
To the Shareholders and Board of Directors of Pfizer Inc:
We have audited the accompanying consolidated balance sheet of Pfizer Inc and
subsidiary companies as of December 31, 1998, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pfizer Inc
and subsidiary companies at December 31, 1998, 1997 and 1996, and the results of
their operations and their cash flows for each of the years then ended, in
conformity with generally accepted accounting principles.
/s/KPMG LLP
- -----------
New York, NY
FEBRUARY 25, 1999
39
Pfizer Inc and Subsidiary Companies
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
Year ended December 31
(millions, except per share data) 1998 1997 1996
Net sales $12,677 $10,739 $9,864
Alliance revenue 867 316 --
- --------------------------------------------------------------------------------
Total revenues 13,544 11,055 9,864
Costs and expenses:
Cost of sales 2,094 1,776 1,695
Selling, informational and administrative
expenses 5,568 4,401 3,859
Research and development expenses 2,279 1,805 1,567
Other deductions -- net 1,009 206 215
- --------------------------------------------------------------------------------
Income from continuing operations before
provision for taxes on income and minority
interests 2,594 2,867 2,528
Provision for taxes on income 642 775 758
Minority interests 2 10 6
- --------------------------------------------------------------------------------
Income from continuing operations 1,950 2,082 1,764
Discontinued operations-- net of tax 1,401 131 165
- --------------------------------------------------------------------------------
Net income $ 3,351 $ 2,213 $1,929
- --------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-- BASIC
Income from continuing operations $ 1.54 $ 1.66 $ 1.41
Discontinued operations-- net of tax 1.11 .10 .14
- --------------------------------------------------------------------------------
Net income $ 2.65 $ 1.76 $ 1.55
- --------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-- DILUTED
Income from continuing operations $ 1.48 $ 1.60 $ 1.37
Discontinued operations-- net of tax 1.07 .10 .13
- --------------------------------------------------------------------------------
Net income $ 2.55 $ 1.70 $ 1.50
- --------------------------------------------------------------------------------
Weighted average shares-- basic 1,263 1,257 1,248
Weighted average shares-- diluted 1,315 1,303 1,288
- --------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
40
Pfizer Inc and Subsidiary Companies
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31
-------------------------------
(millions, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,552 $ 877 $ 1,150
Short-term investments 2,377 712 486
Accounts receivable, less allowance for doubtful
accounts: 1998-- $67; 1997-- $35; 1996-- $41 2,914 2,220 1,914
Short-term loans 150 115 355
Inventories
Finished goods 697 442 371
Work in process 890 808 636
Raw materials and supplies 241 211 224
- --------------------------------------------------------------------------------
Total inventories 1,828 1,461 1,231
- --------------------------------------------------------------------------------
Prepaid expenses, taxes and other assets 1,110 637 608
Net assets of discontinued operations -- 1,420 1,432
- --------------------------------------------------------------------------------
Total current assets 9,931 7,442 7,176
Long-term loans and investments 1,756 1,330 1,149
Property, plant and equipment, less accumulated
depreciation 4,415 3,793 3,456
Goodwill, less accumulated amortization:
1998-- $109; 1997-- $90; 1996-- $59 813 989 1,047
Other assets, deferred taxes and deferred charges 1,387 1,437 1,423
- --------------------------------------------------------------------------------
Total assets $18,302 $14,991 $14,251
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings, including current portion
of long-term debt $ 2,729 $ 2,251 $ 2,204
Accounts payable 971 660 787
Dividends payable 285 -- --
Income taxes payable 1,162 729 848
Accrued compensation and related items 614 456 385
Other current liabilities 1,431 898 1,038
- --------------------------------------------------------------------------------
Total current liabilities 7,192 4,994 5,262
Long-term debt 527 725 681
Postretirement benefit obligation other than
pension plans 359 394 412
Deferred taxes on income 197 127 223
Other noncurrent liabilities 1,217 818 719
- --------------------------------------------------------------------------------
Total liabilities 9,492 7,058 7,297
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, without par value; 12 shares
authorized, none issued -- -- --
Common stock, $.05 par value; 3,000 shares
authorized; issued: 1998-- 1,407; 1997-- 1,388;
1996-- 1,378 70 69 69
Additional paid-in capital 5,646 3,239 1,693
Retained earnings 11,439 9,349 8,017
Accumulated other comprehensive income/(expense) (234) (85) 145
Employee benefit trusts (4,200) (2,646) (1,488)
Treasury stock, at cost:
1998-- 113; 1997-- 94; 1996-- 87 (3,911) (1,993) (1,482)
- --------------------------------------------------------------------------------
Total shareholders' equity 8,810 7,933 6,954
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $18,302 $14,991 $14,251
- --------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
41
Pfizer Inc and Subsidiary Companies
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Employee Accum.
Common Stock Additional Benefit Trusts Treasury Stock Other Com-
---------------- Paid-In --------------- -------------- Retained prehensive
(millions) Shares Par Value Capital Shares Cost Shares Cost Earnings Inc./(Exp.) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1996 1,371 $69 $1,200 (37) $(1,170) (96) $(1,615) $6,859 $163 $5,506
Comprehensive income:
Net income 1,929 1,929
Other comprehensive expense--
net of tax:
Currency translation adjustment (32) (32)
Net unrealized gain on available-
for-sale securities 15 15
Minimum pension liability (1) (1)
--------------
Total other comprehensive expense (18) (18)
--------------
Total comprehensive income 1,911
Cash dividends declared (771) (771)
Stock option transactions 7 -- 124 10 156 280
Purchases of common stock (1) (27) (27)
Employee benefit trust
transactions--net 341 1 (318) 23
Other 28 -- 4 32
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 1,378 69 1,693 (36) (1,488) (87) (1,482) 8,017 145 6,954
Comprehensive income:
Net income 2,213 2,213
Other comprehensive expense--
net of tax:
Currency translation adjustment (253) (253)
Net unrealized gain on available-
for-sale securities 20 20
Minimum pension liability 3 3
--------------
Total other comprehensive expense (230) (230)
--------------
Total comprehensive income 1,983
Cash dividends declared (881) (881)
Stock option transactions 9 -- 343 4 68 411
Purchases of common stock (11) (586) (586)
Employee benefit trusts
transactions--net 1,177 -- (1,158) -- 7 26
Other 1 -- 26 26
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 1,388 69 3,239 (36) (2,646) (94) (1,993) 9,349 (85) 7,933
Comprehensive income:
Net income 3,351 3,351
Other comprehensive expense--
net of tax:
Currency translation adjustment (74) (74)
Net unrealized loss on available-
for-sale securities (2) (2)
Minimum pension liability (73) (73)
--------------
Total other comprehensive expense (149) (149)
--------------
Total comprehensive income 3,202
Cash dividends declared (1,261) (1,261)
Stock option transactions 18 1 747 -- (18) 730
Purchases of common stock (19) (1,912) (1,912)
Employee benefit trusts
transactions--net 1,633 2 (1,554) -- 12 91
Other 1 -- 27 27
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 1,407 $70 $5,646 (34) $(4,200) (113) $(3,911) $11,439 $(234) $8,810
- ------------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
42
Pfizer Inc and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended December 31
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income from continuing operations $1,950 $2,082 $1,764
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 489 428 359
Asset impairments and restructuring charges 323 -- --
Deferred taxes and other (61) 13 80
Changes in assets and liabilities, net of effect
of businesses acquired and divested:
Accounts receivable (765) (477) (259)
Inventories (439) (350) (140)
Prepaid and other assets (350) (128) (174)
Accounts payable and accrued liabilities 628 (63) 25
Income taxes payable 677 (142) 35
Other deferred items 473 59 138
- --------------------------------------------------------------------------------
Net cash provided by operating activities 2,925 1,422 1,828
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,198) (878) (690)
Proceeds from disposal of property, plant and
equipment 79 47 98
Purchases of short-term investments (5,845) (221) (2,850)
Proceeds from redemptions of short-term
investments 4,209 28 3,490
Proceeds from sales of businesses-- net 3,059 21 353
Purchases of long-term investments (752) (74) (810)
Acquisitions, net of cash acquired -- -- (451)
Other investing activities 113 114 10
- --------------------------------------------------------------------------------
Net cash used in investing activities (335) (963) (850)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuances of long-term debt -- 57 636
Repayments of long-term debt (202) (269) (798)
Increase in short-term debt-- net 485 395 269
Purchases of common stock (1,912) (586) (27)
Cash dividends paid (976) (881) (771)
Stock option transactions 643 411 280
Other financing activities 42 50 44
- --------------------------------------------------------------------------------
Net cash used in financing activities (1,920) (823) (367)
- --------------------------------------------------------------------------------
Net cash provided by discontinued operations 4 118 134
- --------------------------------------------------------------------------------
Effect of exchange-rate changes on cash and cash
equivalents 1 (27) 2
- --------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 675 (273) 747
Cash and cash equivalents at beginning of year 877 1,150 403
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,552 $ 877 $1,150
- --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $1,073 $ 809 $ 657
Interest 155 149 135
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SIGNIFICANT ACCOUNTING POLICIES
A--CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the parent company and all
significant subsidiaries, including those operating outside the U.S. Balance
sheet amounts for the foreign operations are as of November 30 of each year and
income statement amounts are for the full-year periods ending on the same date.
Substantially all unremitted earnings of international subsidiaries are free of
legal and contractual restrictions. All significant transactions among our
businesses have been eliminated. As discussed in note 2, "Discontinued
Operations," the Valleylab, Schneider, American Medical Systems (AMS), Howmedica
and Strato/Infusaid businesses, which comprised the Medical Technology Group
(MTG), are presented as discontinued operations. We made certain
reclassifications to the 1997 and 1996 financial statements to conform to the
1998 presentation.
In preparing the financial statements, management must use some estimates
and assumptions that may affect reported amounts and disclosures. Estimates are
used when accounting for depreciation, amortization, employee benefits and asset
valuation allowances. We are also subject to risks and uncertainties that may
cause actual results to differ from estimated results, such as changes in the
health care environment, competition, foreign exchange and legislation.
"Forward-Looking Information and Factors That May Affect Future Results,"
beginning on page 35, discusses these and other uncertainties.
B--CASH EQUIVALENTS
Cash equivalents include items almost as liquid as cash, such as demand
deposits, certificates of deposit and time deposits with maturity periods of
three months or less when purchased. If items meeting this definition are part
of a larger investment pool, we classify them as SHORT-TERM INVESTMENTS.
C--INVENTORIES
We value inventories at cost or fair value, if lower. Cost is determined as
follows:
o finished goods and work-in-process at average actual cost
o raw materials and supplies at average or latest actual cost
"Last-in, first-out" (LIFO) usage applies to U.S.-sourced pharmaceuticals
and part of animal health inventories (approximately 8% of total inventories)
and "first-in, first-out" usage applies to the rest. The replacement cost of
LIFO inventories is not materially different from the LIFO value reported.
D--LONG-LIVED ASSETS
Long-lived assets include:
o property, plant and equipment--These assets are recorded at original cost
increased by the cost of any significant improvements after purchase. We
depreciate the cost evenly over the assets' useful lives. For tax purposes,
accelerated depreciation methods are used as allowed by tax laws.
o goodwill--Goodwill represents the difference between the purchase price of
acquired businesses and the fair value of their net assets when accounted
for by the purchase method of accounting. We amortize goodwill evenly over
periods not exceeding 40 years.
o other intangible assets--Other intangible assets are included in OTHER
ASSETS, DEFERRED TAXES AND DEFERRED CHARGES. We amortize these assets
evenly over their estimated useful lives.
E--FOREIGN CURRENCY TRANSLATION
For most foreign operations, local currencies are considered their functional
currencies. We translate assets and liabilities to their U.S. dollar equivalents
at rates in effect at the balance sheet date and record translation adjustments
in SHAREHOLDERS' EQUITY. We translate Statement of Income accounts at average
rates for the period. Transaction adjustments are recorded in OTHER
DEDUCTIONS--NET.
For operations in highly inflationary economies, we translate the balance
sheet items as follows:
o monetary items (that is, assets and liabilities that will be settled for
cash) at rates in effect at the balance sheet date, with translation
adjustments recorded in OTHER DEDUCTIONS--NET
o non-monetary items at historical rates (that is, those in effect when the
items were first recorded)
F--PRODUCT ALLIANCES
We have agreements to promote pharmaceutical products developed by other
companies. ALLIANCE REVENUE represents revenues earned under copromotion
agreements (a percentage of net sales adjusted, in some cases, for certain
specific costs). SELLING, INFORMATIONAL AND ADMINISTRATIVE EXPENSES include
other expenses for selling and marketing these products.
We have license agreements in certain foreign countries for these products.
When products are sold under license agreements, we record NET SALES instead of
ALLIANCE REVENUE and record related costs and expenses in the appropriate
caption in the Statement of Income.
44
G--STOCK OPTIONS
The exercise price of stock options granted equals the market price on the grant
date. In general, there is no recorded expense related to stock options. Stock
options outstanding are presumed to be exercised for the purposes of computing
diluted weighted average shares outstanding.
H--ADVERTISING EXPENSE
We record advertising expense as follows:
o production costs as incurred
o costs of radio time, television time and space in publications deferred
until the advertising first occurs
Advertising expense totaled $1,139 million in 1998, $898 million in 1997
and $738 million in 1996.
2 DISCONTINUED OPERATIONS
In 1998, we completed the disposal of the MTG segment. Accordingly, the
consolidated financial statements and related notes reflect the results of
operations and net assets of the MTG businesses--Valleylab, Schneider, AMS,
Howmedica and Strato/Infusaid--as discontinued operations. We completed the
sales of:
o Howmedica to Stryker Corporation in December for $1.65 billion in cash
o Schneider to Boston Scientific Corporation in September for $2.1 billion in
cash
o AMS to E.M. Warburg, Pincus & Co., LLC in September for $130 million
in cash
o Valleylab to U.S. Surgical Corporation in January for $425 million
in cash
In 1997, we sold Strato/Infusaid to Horizon Medical Products and Arrow
International for $21 million in cash.
The contractual net assets identified as part of the disposition of
Valleylab, Schneider, AMS, Howmedica and Strato/Infusaid are recorded as NET
ASSETS OF DISCONTINUED OPERATIONS and the net cash flows of these businesses are
reported as NET CASH PROVIDED BY DISCONTINUED OPERATIONS. NET ASSETS OF
DISCONTINUED OPERATIONS consisted of the following:
- --------------------------------------------------------------------------------
(millions of dollars) 1997 1996
- --------------------------------------------------------------------------------
Net current assets $ 397 $ 347
Property, plant and equipment--net 383 394
Other net noncurrent assets
and liabilities 640 691
- --------------------------------------------------------------------------------
Net assets of discontinued operations $1,420 $1,432
================================================================================
DISCONTINUED OPERATIONS--NET OF TAX were as follows:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Net sales $1,160 $1,449 $1,489*
- --------------------------------------------------------------------------------
Pre-tax income $ 92 $ 232 $ 276
Provision for taxes on income 57 93 111
- --------------------------------------------------------------------------------
Income from operations of
discontinued businesses--net of tax 35 139 165
- --------------------------------------------------------------------------------
Pre-tax gain/(loss) on disposal of
discontinued businesses 2,504 (11) --
Provision/(benefit) for taxes on
gain/(loss) 1,138 (3) --
- --------------------------------------------------------------------------------
Gain/(loss) on disposal of discontinued
businesses--net of tax 1,366 (8) --
- --------------------------------------------------------------------------------
Discontinued operations--net of tax $1,401 $ 131 $ 165
================================================================================
* Includes $47 million of net sales related to our food science business
divested in 1996.
3 FINANCIAL SUBSIDIARIES
Our financial subsidiaries include Pfizer International Bank Europe (PIBE) and a
small captive insurance company. PIBE periodically adjusts its loan portfolio to
meet its business needs. Information about these subsidiaries follows:
CONDENSED BALANCE SHEET
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Cash and interest-bearing deposits $103 $115 $ 78
Loans--net 433 408 381
Other assets 15 8 53
- --------------------------------------------------------------------------------
Total assets $551 $531 $512
- --------------------------------------------------------------------------------
Certificates of deposit and
other liabilities $ 97 $ 73 $ 87
Shareholders' equity 454 458 425
- --------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $551 $531 $512
================================================================================
CONDENSED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest income $ 30 $ 29 $28
Interest expense (2) (2) (3)
Other income--net 1 13 2
Net income $ 29 $ 40 $27
================================================================================
4 COMPREHENSIVE INCOME
Effective January 1, 1998, we adopted Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME. This Statement
establishes standards for the reporting of all changes in equity from
nonshareholder sources. Prior year financial statements have been conformed to
the requirements of SFAS No. 130.
45
Changes in ACCUMULATED OTHER COMPREHENSIVE INCOME/(EXPENSE) for the years
ended December 31, 1996, 1997 and 1998 follow:
- --------------------------------------------------------------------------------
Net Accumulated
Unrealized other com-
Currency gain/(loss) on Minimum prehensive
translation available-for- pension income/
(millions of dollars) adjustment sale securities liability (expense)*
- --------------------------------------------------------------------------------
Balance
January 1, 1996 $ 206 $25 $ (68) $ 163
Period change (32) 15 (1) (18)
- --------------------------------------------------------------------------------
Balance
December 31,
1996 174 40 (69) 145
Period change (253) 20 3 (230)
- --------------------------------------------------------------------------------
Balance
December 31,
1997 (79) 60 (66) (85)
Period change (74) (2) (73) (149)
- --------------------------------------------------------------------------------
Balance
December 31,
1998 $(153) $58 $(139) $(234)
- --------------------------------------------------------------------------------
* Income tax benefit for other comprehensive expense was $4 million in 1996,
$76 million in 1997 and $116 million in 1998.
5 FINANCIAL INSTRUMENTS
Most of our financial instruments are recorded in the Balance Sheet. Several
"derivative" financial instruments are "off-balance-sheet" items.
A--INVESTMENTS IN DEBT AND EQUITY SECURITIES
Information about our investments follows:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Trading securities $ 99 $ -- $ --
- --------------------------------------------------------------------------------
Amortized cost and fair value of
held-to-maturity debt securities:*
Corporate debt 2,306 626 602
Certificates of deposit 670 655 657
Municipals -- 56 29
Other 21 104 81
- --------------------------------------------------------------------------------
Total held-to-maturity debt securities 2,997 1,441 1,369
- --------------------------------------------------------------------------------
Cost and fair value of available-for-sale
debt securities* 686 686 636
- --------------------------------------------------------------------------------
Cost of available-for-sale equity
securities 54 81 78
Gross unrealized gains 106 106 73
Gross unrealized losses (8) (4) (8)
- --------------------------------------------------------------------------------
Fair value of available-for-sale equity
securities 152 183 143
- --------------------------------------------------------------------------------
Total investments $3,934 $2,310 $2,148
================================================================================
* Gross unrealized gains and losses are immaterial.
These investments are in the following captions in the Balance Sheet:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 660 $ 636 $ 640
Short-term investments 2,377 712 486
Long-term loans and investments 897 962 1,022
- --------------------------------------------------------------------------------
Total investments $3,934 $2,310 $2,148
================================================================================
The contractual maturities of the held-to-maturity and available-for-sale
debt securities as of December 31, 1998, were as follows:
- --------------------------------------------------------------------------------
Years
--------------------------------------------------
Over 1 Over 5
(millions of dollars) Within 1 to 5 to 10 Over 10 Total
- --------------------------------------------------------------------------------
Held-to-maturity
debt securities:
Corporate debt $2,271 $ 35 $ -- $-- $2,306
Certificates of deposit 667 3 -- -- 670
Other -- 2 10 9 21
Available-for-sale
debt securities:
Certificates of deposit -- 370 75 -- 445
Corporate debt -- 91 150 -- 241
- --------------------------------------------------------------------------------
Total debt securities $2,938 $501 $235 $ 9 $3,683
Available-for-sale
equity securities 152
Trading securities 99
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS $3,934
================================================================================
B--SHORT-TERM BORROWINGS
The weighted average effective interest rate on short-term borrowings
outstanding at December 31 was 3.7% in 1998, 2.9% in 1997 and 4.9% in 1996. We
had approximately $1.3 billion available to borrow under lines of credit at
December 31, 1998.
C--LONG-TERM DEBT
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Floating-rate unsecured notes $491 $686 $636
Other borrowings and mortgages 36 39 45
- --------------------------------------------------------------------------------
Total long-term debt $527 $725 $681
- --------------------------------------------------------------------------------
Current portion not included above $ 4 $ 4 $261
================================================================================
The floating-rate unsecured notes mature on various dates from 2001 to 2005
and bear interest at a defined variable rate based on the commercial paper
borrowing rate. The weighted average interest rate was 5.3% at December 31,
1998. These notes minimize credit risk on certain available-for-sale debt
securities that may be used to satisfy the notes at maturity. In September 1998,
we repaid $195 million of the outstanding floating-rate unsecured notes prior to
their scheduled maturity by using the proceeds from the issuance of short-term
commercial paper.
46
Long-term debt outstanding at December 31, 1998, matures as follows:
- --------------------------------------------------------------------------------
After
(millions of dollars) 2000 2001 2002 2003 2003
- --------------------------------------------------------------------------------
Maturities $2 $131 $161 $-- $233
================================================================================
D--DERIVATIVE FINANCIAL INSTRUMENTS
PURPOSE
"Forward-exchange contracts," "currency swaps" and "purchased currency options"
are used to reduce exposure to foreign exchange risks. Also, "interest rate
swap" contracts are used to adjust interest rate exposures.
ACCOUNTING POLICIES
We consider derivative financial instruments to be "hedges" (that is, an offset
of foreign exchange and interest rate risks) when certain criteria are met.
Under hedge accounting for a purchased currency option, its impact on earnings
is deferred until the recognition of the underlying hedged item (inventory) in
earnings. We recognize the earnings impact of the other instruments during the
terms of the contracts, along with the earnings impact of the items they offset.
Purchased currency options are recorded at cost and amortized evenly to
operations through the expected inventory delivery date. Gains at the
transaction date are included in the cost of the related inventory purchased.
As interest rates change, we accrue the difference between the debt
interest rates recognized in the Statement of Income and the amounts payable to
or receivable from counterparties under interest rate swap contracts. Likewise,
amounts arising from currency swap contracts are accrued as exchange rates
change.
The financial statements include the following items related to derivative
and other financial instruments serving as hedges or offsets:
PREPAID EXPENSES, TAXES AND OTHER ASSETS include:
o purchased currency options
OTHER CURRENT LIABILITIES include:
o fair value of forward-exchange contracts
o net amounts payable related to interest rate swap contracts
OTHER NONCURRENT LIABILITIES include:
o net amounts payable related to currency swap contracts
ACCUMULATED OTHER COMPREHENSIVE INCOME/(EXPENSE) include changes in the:
o foreign exchange translation of currency swaps and foreign debt
o fair value of forward-exchange contracts for net investment hedges
OTHER DEDUCTIONS--NET include:
o changes in the fair value of foreign exchange instruments and changes
in foreign-denominated assets and liabilities
o payments under swap contracts to offset, primarily, interest expense
or, to a lesser extent, net foreign exchange losses
o amortization of discounts or premiums on currencies sold under forward-
exchange contracts
Our criteria to qualify for hedge accounting are:
FOREIGN CURRENCY INSTRUMENTS
o The instrument must relate to a foreign currency asset, liability or an
anticipated transaction that is probable and whose characteristics and
terms have been identified.
o It must involve the same currency as the hedged item.
o It must reduce the risk of foreign currency exchange movements on our
operations.
INTEREST RATE INSTRUMENTS
o The instrument must relate to an asset or a liability.
o It must change the character of the interest rate by converting a
variable rate to a fixed rate or vice versa.
The following table summarizes the exposures hedged or offset by the
various instruments we use:
- --------------------------------------------------------------------------------
Maximum Maturity in Years
-----------------------------------------
Instrument Exposure 1998 1997 1996
- --------------------------------------------------------------------------------
Forward-exchange Foreign currency
contracts assets and liabilities .5 .5 .5
Net investments -- -- .25
- --------------------------------------------------------------------------------
Currency swaps Net investments 5 -- --
Loans 1 2 1
- --------------------------------------------------------------------------------
Purchased currency Inventory purchases
options and sales 1 1 1
- --------------------------------------------------------------------------------
Interest rate swaps Debt interest 5 1 1
================================================================================
47
INSTRUMENTS OUTSTANDING
The notional amounts of derivative financial instruments, except for currency
swaps, do not represent actual amounts exchanged by the parties, but instead
represent the amount of the item on which the contracts are based.
The notional amounts of our foreign currency and interest rate contracts
follow:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
FOREIGN CURRENCY CONTRACTS:
Commitments to sell foreign
currencies, primarily in exchange
for U.S. dollars:
U.K. pounds $ 482 $ 548 $ 564
Netherlands guilders 316 4 14
Japanese yen 298 224 94
French francs 216 134 193
Australian dollars 98 59 34
Irish punt 61 107 112
German marks 50 158 131
Other currencies 201 240 234
Net investment hedges:
Japanese yen -- -- 615
Swiss francs -- -- 342
Commitments to purchase foreign
currencies, primarily in exchange
for U.S. dollars:
Irish punt 532 92 21
Netherlands guilders 156 4 --
German marks 67 73 54
U.K. pounds 53 60 128
Swiss francs 8 187 154
Other currencies 144 136 114
- --------------------------------------------------------------------------------
Total forward-exchange contracts $2,682 $2,026 $2,804
- --------------------------------------------------------------------------------
Currency swaps:
Japanese yen $ 754 $ -- $ --
U.K. pounds 40 40 --
Other currencies -- -- 45
- --------------------------------------------------------------------------------
Total currency swaps $ 794 $ 40 $ 45
- --------------------------------------------------------------------------------
Purchased currency options,
primarily for U.S. dollars:
Japanese yen $ 364 $ 198 $ 221
German marks -- 130 28
French francs -- 46 35
Belgian francs -- 29 25
Other currencies 25 61 58
- --------------------------------------------------------------------------------
Total purchased options $ 389 $ 464 $ 367
- --------------------------------------------------------------------------------
INTEREST RATE SWAP CONTRACTS:
Japanese yen $ 321 $ 814 $ 932
Swiss francs -- 405 428
- --------------------------------------------------------------------------------
Total interest rate swap contracts $ 321 $1,219 $1,360
================================================================================
The Japanese yen for U.S. dollar currency swaps require that we make
interim payments of a fixed rate of 1.1% on the Japanese yen payable and have
interim receipts of a variable rate based on a commercial paper rate on the U.S.
dollar receivable. These currency swaps replaced $625 million of Japanese yen
debt, which previously served as a hedge of our net investments in Japan, as
well as related interest rate swaps.
The Japanese yen and Swiss franc interest rate swaps effectively fixed the
interest rate on floating rate debt as follows:
o the Japanese yen debt at 1.4% in 1998 and 1997 and 0.7% in 1996
o the Swiss franc debt at 2.1% in 1997 and 1996
The floating interest rates were based on "LIBOR" rates related to the
contract currencies. In connection with the sale of the Schneider Swiss
subsidiary in 1998, we terminated the Swiss franc interest rate swap contracts
and ceased borrowing Swiss francs. The contracts outstanding at December 31,
1996, matured in December 1997.
E--FAIR VALUE
The following methods and assumptions were used to estimate the fair value of
derivative and other financial instruments at the balance sheet date:
o short-term financial instruments (cash equivalents, accounts receivable and
payable, forward-exchange contracts, short-term investments and
borrowings)--cost approximates fair value because of the short maturity
period
o loans--cost approximates fair value because of the short interest reset
period
o long-term investments, long-term debt, forward-exchange contracts and
purchased currency options--fair value is based on market or dealer quotes
o interest rate and currency swap agreements--fair value is based on
estimated cost to terminate the agreements (taking into account broker
quotes, current interest rates and the counterparties' creditworthiness)
The differences between fair and carrying values were not material at
December 31, 1998, 1997 or 1996.
F--CREDIT RISK
We periodically review the creditworthiness of counterparties to foreign
exchange and interest rate agreements and do not expect to incur a loss from
failure of any counterparties to perform under the agreements. In general, there
is no requirement for collateral from customers. There are no significant
concentrations of credit risk related to our financial instruments. No
individual counterparty credit exposure exceeded 10% of our consolidated
SHAREHOLDERS' EQUITY at December 31, 1998.
48
6 PROPERTY, PLANT AND EQUIPMENT
The major categories of property, plant and equipment follow:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Land $ 151 $ 126 $ 99
Buildings 1,669 1,534 1,422
Machinery and equipment 2,685 2,459 2,252
Furniture, fixtures and other 1,383 1,232 1,118
Construction in progress 956 516 476
- --------------------------------------------------------------------------------
6,844 5,867 5,367
Less: accumulated depreciation 2,429 2,074 1,911
- --------------------------------------------------------------------------------
Total property, plant and equipment $4,415 $3,793 $3,456
================================================================================
7 OTHER DEDUCTIONS--NET
Other deductions--net are summarized below:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest income $ (185) $(156) $(133)
Interest expense 143 149 166
Interest expense capitalized (7) (2) (5)
- --------------------------------------------------------------------------------
Net interest (income)/expense (49) (9) 28
Copromotion payments to Searle 240 -- --
Contribution to The
Pfizer Foundation 300 -- --
Legal settlements involving the
brand-name prescription drug
antitrust litigation 57 -- --
Amortization of goodwill and other
intangibles 45 48 48
Net exchange (gains)/losses (16) 26 (2)
Other, net 432 141 141
- --------------------------------------------------------------------------------
Other deductions--net $1,009 $ 206 $215
================================================================================
In 1998, we recorded charges for asset impairment and restructuring. The
components of these pre-tax charges follow:
- --------------------------------------------------------------------------------
(millions of dollars) Total COS* SI&A* R&D OD*
- --------------------------------------------------------------------------------
Asset impairments $213 $18 $ -- $ -- $195
Restructuring charges 177 68 17 1 91
================================================================================
*COS--COST OF SALES; SI&A--SELLING, INFORMATIONAL AND ADMINISTRATIVE EXPENSES;
OD--OTHER DEDUCTIONS-NET.
In 1998, we recorded an impairment charge of $110 million in the
pharmaceutical segment to adjust intangible asset values, primarily goodwill and
trademarks, related to consumer health care product lines.
These charges are a result of significant changes in the marketplace and a
revision of our strategies, including:
o the decision to redeploy resources from personal care and minor brands to
over-the-counter switches of prescription products
o the withdrawal of one of our major over-the-counter products in Italy
o an acquired product line which experienced declines in market share
Our animal health antibiotic feed additive, Stafac, was banned, effective
in mid 1999, throughout the European Union, resulting in asset impairment
charges of $103 million ($85 million was to adjust intangible asset values,
primarily goodwill and trademarks, and $18 million was to adjust the carrying
value of machinery and equipment in the pharmaceutical segment).
These events have caused the projected undiscounted cash flows of a number
of our consumer health care product lines and Stafac to be less than their
carrying value. As a result, we lowered the carrying value of the
above-mentioned assets to their estimated fair value. The estimated fair value
is the present value of the expected associated cash flows.
The components of the restructuring charges follow:
- --------------------------------------------------------------------------------
Utilization
----------------------------
(millions of dollars) Charges in 1998 1998 1999 Beyond
- --------------------------------------------------------------------------------
Property, plant
and equipment $ 49 $ 49 $-- $--
Write-down of intangibles 44 44 -- --
Employee termination costs 40 12 28 --
Other 44 11 11 22
- --------------------------------------------------------------------------------
Total $177 $116 $39 $22
- --------------------------------------------------------------------------------
These charges resulted from a current review of our global operations to
increase efficiencies and return on assets, thereby resulting in plant and
product line rationalizations. In addition to the disposition of our MTG
businesses, we have exited, or plan to exit by the end of 1999, certain product
lines including those associated with certain of our livestock external
parasiticides and feed businesses. Also, we have decided to exit certain of our
fermentation operations.
We have written off assets related to the product lines we are exiting,
including inventory, intangible assets--primarily goodwill--as well as certain
buildings, machinery and equipment for which we have no plans to use or sell. We
have begun to seek buyers for other properties which have been written down to
their estimated fair value. We will either dispose of or abandon these
properties by the end of 1999.
49
As a result of the restructuring, the work force will be reduced by 520
manufacturing, sales and corporate personnel. Notifications to personnel have
been made. At December 31, 1998, 134 employees had been terminated. We will
complete terminations of the remaining personnel by December 31, 1999. Employee
termination costs represent payments for severance, outplacement counseling
fees, medical and other benefits and a $5 million noncash charge for the
acceleration of nonvested employee stock options.
Other restructuring charges consist of charges for inventory for product
lines we have exited--$12 million, contract termination payments--$9 million,
facility closure costs--$7 million and environmental remediation costs
associated with the disposal of certain facilities--$16 million.
8 TAXES ON INCOME
Income from continuing operations before taxes consisted of the following:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
United States $1,184 $1,215 $1,012
International 1,410 1,652 1,516
- --------------------------------------------------------------------------------
Total income from continuing
operations before taxes $2,594 $2,867 $2,528
================================================================================
The provision for taxes on income from continuing operations consisted of
the following:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
United States:
Taxes currently payable:
Federal $344 $344 $316
State and local 24 9 49
Deferred income taxes (162) (23) 5
- --------------------------------------------------------------------------------
Total U.S. tax provision 206 330 370
- --------------------------------------------------------------------------------
International:
Taxes currently payable 550 462 332
Deferred income taxes (114) (17) 56
- --------------------------------------------------------------------------------
Total international tax provision 436 445 388
- --------------------------------------------------------------------------------
Total provision for taxes on income $642 $775 $758
================================================================================
Amounts are reflected in the preceding tables based on the location of the
taxing authorities. As of December 31, 1998, we have not made a U.S. tax
provision for approximately $1.5 billion on approximately $6.5 billion of
unremitted earnings of our international subsidiaries. These earnings are
expected, for the most part, to be reinvested overseas.
We operate a manufacturing subsidiary in Puerto Rico that benefits from a
Puerto Rican incentive grant in effect through the end of 2002. Under this
grant, we are partially exempt from income, property and municipal taxes. For
further information on U.S.taxation of Puerto Rican operations, see "Tax
Legislation" on page 37.
Reconciliations of the U.S. statutory income tax rate to our effective tax
rate on continuing operations follow:
- --------------------------------------------------------------------------------
(percentages) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S. statutory income tax rate 35.0 35.0 35.0
Effect of partially tax-exempt
operations in Puerto Rico (2.2) (1.8) (3.9)
Effect of foreign operations (5.5) (5.0) (3.5)
All other--net (2.5) (1.2) 2.4
- --------------------------------------------------------------------------------
Effective tax rate on continuing
operations 24.8 27.0 30.0
================================================================================
Deferred taxes arise because of different treatment between financial
statement accounting and tax accounting, known as "temporary differences." We
record the tax effect of these temporary differences as "deferred tax assets"
(generally items that can be used as a tax deduction or credit in future
periods) and "deferred tax liabilities" (generally items that we received a tax
deduction for, but have not yet been recorded in the Statement of Income).
50
The tax effects of the major items recorded as deferred tax assets and
liabilities are:
- --------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------
Deferred Tax Deferred Tax Deferred Tax
--------------- -------------- ------------------
(millions of dollars) Assets Liabs. Assets Liabs. Assets Liabs.
- --------------------------------------------------------------------------------
Prepaid/deferred items $ 411 $ 169 $ 252 $189 $ 241 $140
Inventories 322 72 218 60 225 95
Property, plant and
equipment 39 433 30 350 32 394
Employee benefits 391 97 297 113 241 104
Restructurings and
special charge* 301 -- 133 -- 157 --
Foreign tax credit
carryforwards 117 -- 159 -- 65 --
Other carryforwards 97 -- 135 -- 250 --
Unremitted earnings -- 335 -- -- -- --
All other 169 73 119 76 106 71
- --------------------------------------------------------------------------------
Subtotal 1,847 1,179 1,343 788 1,317 804
Valuation allowance (30) -- (27) -- (28) --
- --------------------------------------------------------------------------------
Total deferred taxes $1,817 $1,179 $1,316 $788 $1,289 $804
- --------------------------------------------------------------------------------
Net deferred tax asset $ 638 $ 528 $ 485
================================================================================
* Includes tax effect of the 1991 charge for potential future Shiley c/c heart
valve fracture claims.
These amounts, netted by taxing location, are in the following captions in
the Balance Sheet:
- --------------------------------------------------------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Prepaid expenses, taxes and other assets $ 809 $ 425 $ 410
Other assets, deferred taxes and
deferred charges 26 230 298
Deferred taxes on income (197) (127) (223)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 638 $ 528 $ 485
================================================================================
A valuation allowance is recorded because some items recorded as foreign
deferred tax assets may not be deductible or creditable. The "foreign tax credit
carryforwards" were generated from dividends paid by subsidiaries to the parent
company between 1993 and 1998. We can carry these credits forward to various
dates through 2003 and use them in payment of certain U.S. tax liabilities.
The Internal Revenue Service has completed its audits of our tax returns
through 1992.
In November 1994, Belgian tax authorities notified Pfizer Research and
Development Company N.V./S.A. (PRDCO), an indirect, wholly owned subsidiary of
our company, of a proposed adjustment to the taxable income of PRDCO for fiscal
year 1992. The proposed adjustment arises from an assertion by the Belgian tax
authorities of jurisdiction with respect to income resulting primarily from
certain transfers of property by our non-Belgian subsidiaries to the Irish
branch of PRDCO. In January 1995, PRDCO received an assessment from the tax
authorities for additional taxes and interest of approximately $432 million and
$97 million, respectively, relating to these matters. In January 1996, PRDCO
received an assessment from the tax authorities, for fiscal year 1993, for
additional taxes and interest of approximately $86 million and $18 million,
respectively. The additional assessment arises from the same assertion by the
Belgian tax authorities of jurisdiction with respect to all income of the Irish
branch of PRDCO. Based upon the relevant facts regarding the Irish branch of
PRDCO and the provisions of the Belgian tax laws and the written opinions of
outside counsel, we believe that the assessments are without merit.
We believe that our accrued tax liabilities are adequate for all years.
9 PENSION AND POSTRETIREMENT BENEFITS
Effective January 1, 1998, we adopted SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS No. 132 requires revised
disclosures about pension and other postretirement benefit plans.
Our pension plans cover most employees worldwide. Our postretirement plans
in the U.S. provide medical and life insurance benefits to retirees and their
eligible dependents.
The net pension assets belonging to AMS and certain Howmedica employees
were transferred to the buyers at the date of sale. We retained the accumulated
benefit obligation related to Valleylab, Schneider and certain Howmedica
employees.
Information regarding our pension and postretirement benefit obligation
follows:
- --------------------------------------------------------------------------------
Pension Postretirement
------------------ -------------------------------
(percentages) 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
Weighted-average
assumptions:
Discount rate:
U.S. plans 6.8 7.0 7.5 6.8 7.0 7.5
International plans 5.3 5.9 6.5
Rate of compensation
increase:
U.S. plans 4.5 4.5 4.5
International plans 3.4 3.9 4.2
================================================================================
51
The following tables present reconciliations of the benefit obligation of
the plans; the plan assets of the pension plans and the funded status of the
plans:
- --------------------------------------------------------------------------------
Pension Postretirement
------------------ ------------------------------
(millions of dollars) 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT
OBLIGATION
Benefit obligation at
beginning of year $2,674 $2,130 $2,062 $ 287 $ 285 $ 290
Service cost 151 105 93 10 7 6
Interest cost 181 145 139 20 19 20
Employee
contributions 6 6 7
Plan amendments 15 274 2 -- -- --
Plan net (gains)/losses 354 240 13 (3) (7) (14)
Foreign exchange
impact 36 (103) (30)
Acquisitions -- 3 7 -- -- --
Divestitures (26) -- (4) -- -- --
Curtailments (26) (1) 4 (10) -- --
Settlements (10) (1) (1) -- -- --
Benefits paid (178) (124) (162) (18) (17) (17)
- --------------------------------------------------------------------------------
Benefit obligation at
end of year $3,177 $2,674 $2,130 $ 286 $ 287 $ 285
- --------------------------------------------------------------------------------
CHANGE IN
PLAN ASSETS
Fair value of plan
assets at beginning
of year $2,793 $2,410 $2,168
Actual return on plan
assets 530 491 325
Company
contributions 63 50 54
Employee
contributions 6 6 7
Foreign exchange
impact 3 (57) (9)
Acquisitions -- 1 7
Divestitures (23) -- --
Settlements (13) (1) (1)
Benefits paid (165) (107) (141)
- --------------------------------------------------------------------------------
Fair value of plan
assets at end of year $3,194 $2,793 $2,410
- --------------------------------------------------------------------------------
Funded status:
Plan assets in excess
of/(less than)
benefit obligation $ 17 $ 119 $ 280 $(286) $(287) $(285)
Unrecognized:
Net transition asset (4) (10) (15) -- -- --
Net (gains)/
losses 1 (86) (14) (26) (24) (19)
Prior service
costs/(gains) 248 310 70 (47) (83) (108)
- --------------------------------------------------------------------------------
Net amount
recognized $ 262 $ 333 $ 321 $(359) $(394) $(412)
================================================================================
The components in the balance sheet consist of:
- --------------------------------------------------------------------------------
Pension Postretirement
------------------ -------------------------------
(millions of dollars) 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 504 $ 499 $ 474 $ -- $ -- $ --
Accrued benefit
liability (562) (362) (312) (359) (394) (412)
Intangible asset 71 53 13 -- -- --
Accumulated other
comprehensive
income 249 143 146 -- -- --
- --------------------------------------------------------------------------------
Net amount
recognized $ 262 $ 333 $ 321 $(359) $(394) $(412)
================================================================================
Information related primarily to International plans:
- --------------------------------------------------------------------------------
Pension
---------------------------------
(millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Pension plans with an accumulated benefit
obligation in excess of plan assets:
Fair value of plan assets $323 $294 $319
Accumulated benefit obligation 693 553 615
Pension plans with a benefit obligation
in excess of plan assets:
Fair value of plan assets $435 $422 $438
Benefit obligation 901 774 847
================================================================================
At December 31, 1998, the major U.S. pension plan held approximately 2.7
million shares of our common stock with a fair value of approximately $339
million. The Plan received approximately $2 million in dividends on these shares
in 1998.
The assumptions used and the annual cost related to these plans consist of
the following:
- --------------------------------------------------------------------------------
Pension Postretirement
------------------- -----------------------------
(percentages) 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
Weighted average
assumptions:
Expected return on plan
assets:
U.S. plans 10.0 10.0 10.0
International plans 8.1 7.5 7.8
- --------------------------------------------------------------------------------
(millions of dollars)
- --------------------------------------------------------------------------------
Service cost $ 151 $ 105 $ 93 $ 10 $ 7 $ 6
Interest cost 181 145 139 20 19 20
Expected return on
plan assets (249) (208) (192)
Amortization of:
Prior service costs/
(gains) 24 34 21 (24) (24) (24)
Net transition asset (6) (5) (3) -- -- --
Net (gains)/losses 10 2 12 (1) (1) --
Curtailments and
settlements--net* 28 -- -- (22) -- --
- --------------------------------------------------------------------------------
Net periodic benefit
cost/(gain) $ 139 $ 73 $ 70 $(17) $ 1 $ 2
================================================================================
* Includes approximately $12 million of special termination pension benefits
for certain MTG employees.
52
An average increase of 7.5% in the cost of health care benefits was assumed
for 1999 and is projected to decrease to 5.2% after six years and to then remain
at that level.
A 1% change in the medical trend rate assumed for postretirement benefits
would have the following effects at December 31, 1998:
- --------------------------------------------------------------------------------
(millions of dollars) 1% Increase 1% Decrease
- --------------------------------------------------------------------------------
Total of service and interest
cost components $ 1 $ (1)
Postretirement benefit obligation 13 (12)
================================================================================
10 SAVINGS AND INVESTMENT PLANS
We have savings and investment plans for most employees in the U.S., Puerto
Rico, the U.K. and Ireland. Employees may contribute a portion of their salaries
to the plans and we match a portion of the employee contributions. Our
contributions were $48 million in 1998, $43 million in 1997 and $36 million in
1996.
11 LEASE COMMITMENTS
We lease properties for use in our operations. In addition to rent, the leases
require us to pay directly for taxes, insurance, maintenance and other operating
expenses, or to pay higher rent when operating expenses increase. Rental
expense, net of sublease income, was $131 million in 1998, $127 million in 1997
and $110 million in 1996. This table shows future minimum rental commitments
under noncancellable leases at December 31, 1998:
- --------------------------------------------------------------------------------
After
(millions of dollars) 1999 2000 2001 2002 2003 2003
- --------------------------------------------------------------------------------
Lease commitments $47 $46 $36 $25 $25 $290
================================================================================
12 COMMON STOCK
We effected a two-for-one split of our common stock in the form of a 100% stock
dividend in 1997. The split followed a vote by shareholders to increase the
number of authorized common shares. All share and per share information in this
report reflects the split.
In September 1998, we completed a program under which we purchased 26.4
million shares of our common stock at a total cost of $2 billion. In that same
month, the Board of Directors approved a new share-purchase program with
authorization to purchase up to $5 billion of our company's common stock. In
1998, we purchased approximately 19.3 million shares of our common stock at an
average price of $99 per share under these share-purchase programs. Of the 19.3
million shares repurchased in 1998, 4.9 million shares were repurchased under
the share-purchase program which started in September 1998, for a total cost of
$525 million.
13 PREFERRED STOCK PURCHASE RIGHTS
Preferred Stock Purchase Rights have a scheduled term through October 2007,
although the term may be extended or the Rights may be redeemed prior to
expiration. One right was issued for each share of common stock issued by our
company. These rights are not exercisable unless certain change-in-control
events transpire, such as a person acquiring or obtaining the right to acquire
beneficial ownership of 15% or more of our outstanding common stock or an
announcement of a tender offer for at least 30% of our stock. The rights are
evidenced by corresponding common stock certificates and automatically trade
with the common stock unless an event transpires that makes them exercisable. If
the rights become exercisable, separate certificates evidencing the rights will
be distributed and each right will entitle the holder to purchase a new series
of preferred stock at a defined price from our company. The preferred stock, in
addition to preferred dividend and liquidation rights, will entitle the holder
to vote with the company's common stock.
The rights are redeemable by us at a fixed price until 10 days, or longer
as determined by the Board, after certain defined events, or at any time prior
to the expiration of the rights.
We have reserved 3.0 million preferred shares to be issued pursuant to
these rights. No such shares have yet been issued. At the present time, the
rights have no dilutive effect on the earnings per common share calculation.
14 EMPLOYEE BENEFIT TRUSTS
In 1993, we sold 40 million shares of treasury stock to the Pfizer Inc. Grantor
Trust in exchange for a $600 million note. The Trust is used primarily to fund
our benefit plans including the stock option plan. The Balance Sheet reflects
the fair value of shares owned by the Trust as a reduction of SHAREHOLDERS'
EQUITY, representing unearned benefit costs. This amount is reduced as benefits
are satisfied.
We record compensation expense for the benefit plans, other than stock
options, based on the fair value of the shares when released.
15 STOCK OPTION AND PERFORMANCE AWARDS
We may grant stock options to any employee, including officers, under our Stock
and Incentive Plan. Options are exercisable after five years or less, subject to
continuous employment and certain other conditions and expire 10 years after the
grant date. Once exercisable, the employee can purchase shares of our common
stock at the market price on the date we granted the option.
The Plan also allows for stock appreciation rights, stock awards and
performance awards. In 1996, shareholders approved amendments to increase the
shares available in the Plan and to extend its term through 2005.
53
The following table summarizes information concerning options outstanding
under the Plan at December 31, 1998:
- --------------------------------------------------------------------------------
(thousands
of shares) Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Term (Years) Price at 12/31/98 Price
- --------------------------------------------------------------------------------
$ 0-$20 20,842 4.3 $ 15.46 20,727 $ 15.46
20- 30 17,328 5.3 22.54 15,790 22.35
30- 50 14,254 7.6 37.27 8,498 37.26
50- 80 13,278 8.7 55.08 3,031 55.08
80-120 17,502 9.7 105.63 565 105.63
================================================================================
The following table summarizes the activity for the Plan:
- --------------------------------------------------------------------------------
Under Option
----------------------------------------
Shares Weighted
Available for Average Exercise
(thousands of shares) Grant Shares Price Per Share
- --------------------------------------------------------------------------------
Balance January 1, 1996 7,150 85,808 $ 18.37
Authorized 46,000 -- --
Granted (18,820) 18,820 37.25
Exercised -- (17,466) 13.44
Cancelled 684 (734) 24.00
- --------------------------------------------------------------------------------
Balance December 31, 1996 35,014 86,428 21.62
Granted (14,204) 14,204 55.04
Exercised -- (15,661) 16.15
Cancelled 653 (672) 38.68
- --------------------------------------------------------------------------------
Balance December 31, 1997 21,463 84,299 28.17
Granted (17,620) 17,620 105.63
Exercised -- (18,296) 21.11
Cancelled 404 (419) 59.73
- --------------------------------------------------------------------------------
Balance December 31, 1998 4,247 83,204 45.96
================================================================================
The weighted-average fair value per stock option granted was $33.92 for
1998 options, $16.77 for the 1997 options and $10.90 for the 1996 options. We
estimated the fair values using the Black-Scholes option pricing model, modified
for dividends and using the following assumptions:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield 1.02% 1.76% 1.97%
Risk-free interest rate 5.23% 6.23% 6.38%
Expected stock price volatility 26.29% 25.56% 25.45%
Expected term until exercise (years) 5.75 5.50 5.25
================================================================================
The following table summarizes results as if we had recorded compensation
expense for the 1998, 1997 and 1996 option grants:
- --------------------------------------------------------------------------------
(millions of dollars, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $3,351 $2,213 $1,929
Pro forma 3,149 2,087 1,860
Basic earnings per share:
As reported $ 2.65 $ 1.76 $ 1.55
Pro forma 2.49 1.66 1.49
Diluted earnings per share:
As reported $ 2.55 $ 1.70 $ 1.50
Pro forma 2.39 1.60 1.44
================================================================================
These figures reflect only the impact of grants since January 1, 1995, and
reflect only part of the possible compensation expense that we would amortize
over the vesting period of the grants (up to five years). In future years,
therefore, the effect on net income and earnings per common share may differ
from those shown above.
The Performance-Contingent Share Award Program was established effective in
1993 to provide executives and other key employees the right to earn common
stock awards. We determine the award payouts after the performance period ends,
based on specific performance criteria. Under the Program, up to 40 million
shares may be awarded. We awarded approximately 653,000 shares in 1998,
approximately 449,000 shares in 1997 and approximately 320,000 shares in 1996.
At December 31, 1998, program participants had the right to earn up to 5.1
million additional shares. Compensation expense related to the Program was $202
million in 1998, $74 million in 1997 and $31 million in 1996.
In 1998, we entered into two forward-purchase contracts for 1 million
shares of our common stock for $101 million to offset the potential impact on
income of our liability under the Program. These contracts mature within one
year. At settlement date we will, at the option of the counterparty to the
contract, either receive our own stock or settle the contracts for cash.
The financial statements include the following items related to these
contracts:
PREPAID EXPENSES, TAXES AND OTHER ASSETS include:
o fair value of these contracts
OTHER DEDUCTIONS--NET include:
o changes in the fair value of these contracts
16 INSURANCE
We maintain insurance coverage adequate for our needs. Under our insurance
contracts, we usually accept self-insured retentions appropriate for our
specific business risks.
54
17 LITIGATION
The Company is involved in a number of claims and litigations, including product
liability claims and litigations considered normal in the nature of its
businesses. These include suits involving various pharmaceutical and hospital
products that allege either reaction to or injury from use of the product. In
addition, from time to time the Company is involved in, or is the subject of,
various governmental or agency inquiries or investigations relating to its
businesses.
On June 9, 1997, the Company received notice of the filing of an
Abbreviated New Drug Application (ANDA) by Mylan Pharmaceuticals for a
sustained-release nifedipine product asserted to be bioequivalent to Procardia
XL. Mylan's notice asserted that the proposed formulation does not infringe
relevant licensed Alza and Bayer patents and thus that approval of their ANDA
should be granted before patent expiration. On July 18, 1997, the Company,
together with Bayer AG and Bayer Corporation, filed a patent-infringement suit
against Mylan Pharmaceuticals Inc. and Mylan Laboratories Inc. in the United
States District Court for the Western District of Pennsylvania with respect to
Mylan's ANDA. Suit was filed under Bayer AG's U.S. Patent No. 5,264,446,
licensed to the Company, relating to nifedipine of a specified particle size
range. Mylan has filed its answer denying infringement and a scheduling order
has been entered. Final discovery has been extended to May 3, 1999, with
disposition motions to be filed by May 21, 1999. On or about February 23, 1998,
Bayer AG received notice that Biovail Laboratories Incorporated had filed an
ANDA for a sustained-release nifedipine product asserted to be bioequivalent to
one dosage strength (60 mg.) of Procardia XL. The notice was subsequently
received by the Company as well. The notice asserts that the Biovail product
does not infringe Bayer's U.S. Patent No. 5,264,446. On March 26, 1998, the
Company received notice of the filing of an ANDA by Biovail Laboratory of a 30
mg. dosage formulation of nifedipine alleged to be bioequivalent to Procardia
XL. On April 2, 1998, Bayer and Pfizer filed a patent-infringement action
against Biovail, relating to their 60 mg. nifedipine product, in the United
States District Court for the District of Puerto Rico. On May 6, 1998, Bayer and
Pfizer filed a second patent infringement action in Puerto Rico against Biovail
under the same patent with respect to Biovail's 30 mg. nifedipine product. These
actions have been consolidated for discovery and trial. On April 24, 1998,
Biovail Laboratories Inc. brought suit in the United States District Court for
the Western District of Pennsylvania against the Company and Bayer seeking a
declaratory judgment of invalidity of and/or non-infringement of the 5,264,446
nifedipine patent as well as a finding of violation of the antitrust laws.
Biovail has also moved to transfer the patent infringement actions from Puerto
Rico to the Western District of Pennsylvania. Pfizer has opposed this motion to
transfer and on June 19, 1998, moved to dismiss Biovail's declaratory judgment
action and antitrust action in the Western District of Pennsylvania, or in the
alternative to stay the action pending the outcome of the infringement actions
in Puerto Rico. On January 4, 1999, the District Court in Pennsylvania granted
Pfizer's motion for a stay of the antitrust action pending the outcome of the
infringement actions in Puerto Rico. On January 29, 1999, the District Court in
Puerto Rico denied Biovail's motion to transfer the patent infringement actions
from Puerto Rico to the Western District of Pennsylvania.
On April 2, 1998, the Company received notice from Lek U.S.A. Inc. of its
filing of an ANDA for a 60 mg. formulation of nifedipine alleged to be
bioequivalent to Procardia XL. On May 14, 1998, Bayer and Pfizer commenced suit
against Lek for infringement of Bayer's U.S. Patent No. 5,264,446, as well as
for infringement of a second Bayer patent, No. 4,412,986 relating to
combinations of nifedipine with certain polymeric materials. On September 14,
1998, Lek was served with the summons and complaint. Plaintiffs amended the
complaint on November 10, 1998, limiting the action to infringement of U.S.
Patent 4,412,986. On January 19, 1999, Lek filed a motion to dismiss the
complaint alleging infringement of U.S. Patent 4,412,986. Pfizer's response to
this motion is due on February 25, 1999.
On November 9, 1998, Pfizer received an ANDA notice letter from Martec
Pharmaceutical, Inc. for generic versions (30 mg., 60 mg., 90 mg.) of Procardia
XL. On or about December 18, 1998, Pfizer received a new ANDA certification
letter stating that the ANDA had actually been filed in the name of Martec
Scientific, Inc. On December 23, 1998, Pfizer brought an action against Martec
Pharmaceutical, Inc. and Martec Scientific, Inc. in the Western District of
Missouri for infringement of Bayer's patent relating to nifedipine of a specific
particle size. On January 26, 1999, a second complaint was filed against Martec
Scientific in the Western District of Missouri based on Martec's new ANDA
certification letter.
Pfizer filed suit on july 8, 1997, against the FDA in the United States
District Court for the District of Columbia, seeking a declaratory judgment and
injunctive relief enjoining the FDA from processing Mylan's ANDA or any other
ANDA submission referencing Procardia XL that uses a different extended-release
mechanism. Pfizer's suit alleges that extended-release mechanisms that are not
identical to
55
the osmotic pump mechanism of Procardia XL constitute different dosage forms
requiring the filing and approval of suitability petitions under the Food Drug
and Cosmetics Act before the FDA can accept an ANDA for filing. Mylan intervened
in Pfizer's suit. On March 31, 1998, the U.S. district judge granted the
government's motion for summary judgment against the company. Pfizer has
appealed that decision to the D.C. Court of Appeals and arguments in the case
were heard on February 1, 1999. We are awaiting the decision.
As previously disclosed, a number of lawsuits and claims have been brought
against the Company and Shiley Incorporated, a wholly owned subsidiary, alleging
either personal injury from fracture of 60(degree) or 70(degree) Shiley Convexo
Concave ("C/C") heart valves, or anxiety that properly functioning implanted
valves might fracture in the future, or personal injury from a prophylactic
replacement of a functioning valve.
In an attempt to resolve all claims alleging anxiety that properly
functioning valves might fracture in the future, the Company entered into a
settlement agreement in January 1992 in Bowling v. Shiley, et al., a case
brought in the United States District Court for the Southern District of Ohio,
that established a worldwide settlement class of people with C/C heart valves
and their spouses, except those who elected to exclude themselves. The
settlement provided for a Consultation Fund of $90 million, which was fixed by
the number of claims filed, from which valve recipients received payments that
are intended to cover their cost of consultation with cardiologists or other
health care providers with respect to their valves. The settlement agreement
established a second fund of at least $75 million to support C/C valve-related
research, including the development of techniques to identify valve recipients
who may have significant risk of fracture, and to cover the unreimbursed medical
expenses that valve recipients may incur for certain procedures related to the
valves. The Company's obligation as to coverage of these unreimbursed medical
expenses is not subject to any dollar limitation. Following a hearing on the
fairness of the settlement, it was approved by the court on August 19, 1992, and
all appeals have been exhausted
Generally, the plaintiffs in all of the pending heart valve litigations
seek money damages. Based on the experience of the Company in defending these
claims to date, including insurance proceeds and reserves, the Company is of the
opinion that these actions should not have a material adverse effect on the
financial position or the results of operations of the Company. Litigation
involving insurance coverage for the Company's heart valve liabilities has been
resolved.
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations. Under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended ("CERCLA" or
"Superfund"), the Company has been designated as a potentially responsible party
by the United States Environmental Protection Agency with respect to certain
waste sites with which the Company may have had direct or indirect involvement.
Similar designations have been made by some state environmental agencies under
applicable state superfund laws. Such designations are made regardless of the
extent of the Company's involvement. There are also claims that the Company may
be a responsible party or participant with respect to several waste site matters
in foreign jurisdictions. Such claims have been made by the filing of a
complaint, the issuance of an administrative directive or order, or the issuance
of a notice or demand letter. These claims are in various stages of
administrative or judicial proceedings. They include demands for recovery of
past governmental costs and for future investigative or remedial actions. In
many cases, the dollar amount of the claim is not specified. In most cases,
claims have been asserted against a number of other entities for the same
recovery or other relief as was asserted against the Company. The Company is
currently participating in remedial action at a number of sites under federal,
state, local and foreign laws.
To the extent possible with the limited amount of information available at
this time, the Company has evaluated its responsibility for costs and related
liability with respect to the above sites and is of the opinion that the
Company's liability with respect to these sites should not have a material
adverse effect on the financial position or the results of operations of the
Company. In arriving at this conclusion, the Company has considered, among other
things, the payments that have been made with respect to the sites in the past;
the factors, such as volume and relative toxicity, ordinarily applied to
allocate defense and remedial costs at such sites; the probable costs to be paid
by the other potentially responsible parties; total projected remedial costs for
a site, if known; existing technology; and the currently enacted laws and
regulations. The Company anticipates that a portion of these costs and related
liability will be covered by available insurance.
The Company has entered into a consent decree, subject to court approval,
settling all matters with the United States Environmental Protection
Agency--Region I and the Department of Justice arising primarily out of a
December 1993 multimedia environmental inspection, as well as certain state
inspections, of the Company's Groton, Connecticut facility. The settlement
provides for the payment of $625,000 in fines, undertaking of an environmental
project at a cost of $150,000 and certain other operational provisions, the
implementation of which will not have a material adverse effect on the
operations of the Company.
56
Through the early 1970s, Pfizer Inc. (Minerals Division) and Quigley
Company, Inc. ("Quigley"), a wholly owned subsidiary, sold a minimal amount of
one construction product and several refractory products containing some
asbestos. These sales were discontinued thereafter. Although these sales
represented a minor market share, the Company has been named as one of a number
of defendants in numerous lawsuits. These actions, and actions related to the
Company's sale of talc products in the past, claim personal injury resulting
from exposure to asbestos-containing products, and nearly all seek general and
punitive damages. In these actions, the Company or Quigley is typically one of a
number of defendants, and both are members of the Center for Claims Resolution
(the "CCR"), a joint defense organization of twenty defendants that is defending
these claims. The Company and Quigley are responsible for varying percentages of
defense and liability payments for all members of the CCR. A number of cases
alleging property damage from asbestos-containing products installed in
buildings have also been brought against the Company, but most have been
resolved.
On January 15, 1993, a class action complaint and settlement agreement were
filed in the United States District Court for the Eastern District of
Pennsylvania involving all personal injury claims by persons who have been
exposed to asbestos-containing products but who have not yet filed a personal
injury action against the members of the CCR (Future Claims Settlement). The
District Court determined that the Future Claims Settlement was fair and
reasonable. Subsequently, the United States Court of Appeals for the Third
Circuit reversed the order of the District Court and on June 27, 1997, the U.S.
Supreme Court affirmed the Third Circuit's order and decertified the class. The
overturning of the settlement is not expected to have a material impact on the
Company's exposure or on the availability of insurance for the vast majority of
such cases. It is expected, too, that the CCR will attempt to resolve cases in
the same manner as heretofore.
At approximately the time it filed the Future Claims Settlement class
action, the CCR settled approximately 16,360 personal injury cases on behalf of
its members, including the Company and Quigley. The CCR has continued to settle
remaining and opt-out cases and claims on a similar basis to past settlements.
As of December 28, 1998, there were 57,819 personal injury claims pending
against Quigley (excluding those which are inactive or have been settled in
principle), 33,185 such claims against the Company, and 68 talc cases against
the Company.
The Company believes that its costs incurred in defending and ultimately
disposing of the asbestos personal injury claims, as well as the property damage
and talc claims, will be largely covered by insurance policies issued by several
primary insurance carriers and a number of excess carriers that have agreed to
provide coverage, subject to deductibles, exclusions, retentions and policy
limits. Litigation is pending against several excess insurance carriers seeking
damages and/or declaratory relief to secure their coverage obligations. Based on
the Company's experience in defending the claims to date and the amount of
insurance coverage available, the Company is of the opinion that the actions
should not ultimately have a material adverse effect on the financial position
or the results of operations of the Company.
The Company was named, together with numerous other manufacturers of
brand-name prescription drugs and certain companies that distribute brand-name
prescription drugs, in suits in federal and state courts brought by various
groups of retail pharmacy companies. The federal cases consist principally of a
class action by retail pharmacies (including approximately 30 named plaintiffs)
(the "Federal Class Action"), as well as additional actions by approximately
3,500 individual retail pharmacies and a group of chain and supermarket
pharmacies (the "individual actions"). These cases, which were transferred to
the United States District Court for the Northern District of Illinois and
coordinated for pretrial purposes, allege that the defendant drug manufacturers
violated the Sherman Act by unlawfully agreeing with each other (and, as alleged
in some cases, with wholesalers) not to extend to retail pharmacy companies the
same discounts allegedly extended to mail order pharmacies, managed care
companies and certain other customers, and by unlawfully discriminating against
retail pharmacy companies by not extending them such discounts. On November 15,
1994, the federal court certified a class (the Federal Class Action) consisting
of all persons or entities who, since October 15, 1989, bought brand-name
prescription drugs from any manufacturer or wholesaler defendant, but
specifically excluding government entities, mail order pharmacies, HMOs,
hospitals, clinics and nursing homes. Fifteen manufacturer defendants, including
the Company, agreed to settle the Federal Class Action subject to court
approval. The Company's share pursuant to an Agreement as of January 31, 1996,
was $31.25 million, payable in four annual installments without interest. The
Company continues to believe that there was no conspiracy and specifically
denied liability in the Settlement Agreement, but had agreed to settle to avoid
the monetary and other costs of litigation. The settlement was filed with the
Court on February 9, 1996 and went through preliminary and final fairness
hearings. By orders of April 4, 1996, the Court: (1) rejected the settlement;
(2) denied the motions of the manufacturers (including the Company) for summary
judgment; (3) granted
57
the motions of the wholesalers for summary judgment; and (4) denied the motion
to exclude purchases by other than direct purchasers. On August 15, 1997, the
Court of Appeals (1) reversed the denial of summary judgment for the
manufacturers excluding purchases by other than direct purchasers; (2) reversed
the grant of summary judgment dismissing the wholesalers; and (3) took action
regarding Alabama state cases, and DuPont-Merck. In May 1996, thirteen
manufacturer defendants, including the Company, entered into an Amendment to the
Settlement Agreement which was filed with the Court on May 6, 1996. The
Company's financial obligations under the Settlement Agreement were not
increased. The Settlement Agreement, as amended, received final approval on June
21, 1996. Appeals from this decision were dismissed by the U.S. Court of Appeals
for the Seventh Circuit in May 1997. Trial began in September 1998 for the class
case against the non-settlers, and the District Court also permitted the opt-out
plaintiffs to add the wholesalers as named defendants in their cases. The
District Court dismissed the case at the close of the plaintiffs' evidence. The
plaintiffs have appealed.
Retail pharmacy cases have also been filed in state courts in Alabama,
California, Minnesota, Mississippi and Wisconsin. Pharmacy classes have been
certified in California. The Company's motion to dismiss was granted in the
Wisconsin case, and that dismissal is under appeal.
Consumer class actions have been filed in Alabama, Arizona, California, the
District of Columbia, Florida, Kansas, Maine, Michigan, Minnesota, New York,
North Carolina, Tennessee, Washington and Wisconsin alleging injury to consumers
from the failure to give discounts to retail pharmacy companies. The New York
and Washington state cases were dismissed, and an appeal is pending in New York.
A case filed in Colorado state court was dismissed without appeal. A consumer
class has been certified in California, and a limited consumer class has been
certified in the District of Columbia. Class certification was denied in the
Michigan state case, and plaintiffs' subsequent petition for review was denied.
Class certification also was denied in the Maine case.
In addition to its settlement of the retailer Federal Class Action (see
above), the Company has also settled several major opt-out retail cases, and
along with other manufacturers: (1) has entered into an agreement to settle all
outstanding consumer class actions (except Alabama and California), which
settlement is going through the approval process in the various courts in which
the actions are pending; and (2) has entered into an agreement to settle the
California consumer case.
The Company believes that these brand-name prescription drug antitrust
cases, which generally seek damages and certain injunctive relief, are without
merit.
The Federal Trade Commission is conducting an investigation focusing on the
pricing practices at issue in the above pharmacy antitrust litigation. In July
1996, the Commission issued a subpoena for documents to the Company, among
others, to which the Company has responded. A second subpoena was issued to the
Company for documents in May 1997 and the Company has responded. This
investigation continues.
FDA administrative proceedings relating to Plax are pending, principally an
industry-wide call for data on all anti-plaque products by the FDA. The call for
data notice specified that products that have been marketed for a material time
and to a material extent may remain on the market pending FDA review of the
data, provided the manufacturer has a good faith belief that the product is
generally recognized as safe and effective and is not misbranded. The Company
believes that Plax satisfied these requirements and prepared a response to the
FDA's request, which was filed on June 17, 1991. This filing, as well as the
filings of other manufacturers, is still under review and is currently being
considered by an FDA Advisory Committee. The Committee has issued a draft report
recommending that plaque removal claims should not be permitted in the absence
of data establishing efficacy against gingivitis. The process of incorporating
the Advisory Committee recommendations into a final monograph is expected to
take several years. If the draft recommendation is ultimately accepted in the
final monograph, although it would have a negative impact on sales of Plax, it
will not have a material adverse effect on the sales, financial position or
operations of the Company.
On January 15, 1997, an action was filed in Circuit Court, Chambers County,
Alabama, purportedly on behalf of a class of consumers, variously defined by the
laws or types of laws governing their rights and encompassing residents of up to
47 states. The complaint alleges that the Company's claims for Plax were untrue,
entitling them to a refund of their purchase price for purchases since 1988. A
hearing on Plaintiffs' motion to certify the class was held on June 2, 1998. We
are awaiting the Court's decision. The Company believes the complaint is without
merit.
58
The Federal Trade Commission conducted an investigation of the advertising
of Rid, which was resolved by a Consent Decree made final in December, 1998. At
the same time, the New York State Attorney General's office is investigating the
same or similar matters.
Since December 1998, three actions have been filed, in state courts in
Houston, San Francisco, and Chicago, purportedly on behalf of statewide
(California) or nationwide (Houston) classes of consumers who allege that the
Company's and other manufacturers' advertising and promotional claims for Rid
and other pediculicides were untrue, entitling them to refunds, other damages
and/or injunctive relief. The Houston case has been removed to federal court; no
proceedings have yet occurred in the other cases. The Company believes the
complaints are without merit.
In April 1996, the Company received a Warning Letter from the FDA relating
to the timeliness and completeness of required post-marketing reports for
pharmaceutical products. The letter did not raise any safety issue about Pfizer
drugs. The Company has been implementing remedial actions designed to remedy the
issues raised in the letter. During 1997, the Company met with the FDA to
apprise them of the scope and status of these activities. A full examination of
the progress made by the Company in this area will occur in 1999.
During 1998, the Company completed the sale of all of the businesses and
companies that were part of the Medical Technology Group. As part of the sale
provisions, the Company has retained responsibility for certain items, including
matters related to the sale of MTG products sold by the Company before the sale
of the MTG businesses. A number of cases have been brought against Howmedica
Inc. (some of which also name the Company) alleging that P.C.A. one-piece
acetabular hip prostheses sold from 1983 through 1990 were defectively designed
and manufactured and pose undisclosed risks to implantees. The Company believes
that most if not all of these cases are without merit. Between 1994 and 1996,
seven class actions alleging various injuries arising from implantable penile
prostheses manufactured by American Medical Systems were filed and ultimately
dismissed or discontinued. Thereafter, between late 1996 and early 1998,
approximately 700 former members of one or more of the purported classes,
represented by some of the same lawyers who filed the class actions, filed
individual suits in Circuit Court in Minneapolis alleging damages from their use
of implantable penile prostheses. The Company believes that most if not all of
these cases are without merit.
In June 1993, the Ministry of Justice of the State of Sao Paulo, Brazil,
commenced a civil public action against the Company's Brazilian subsidiary,
Laboratorios Pfizer Ltda. ("Pfizer Brazil") asserting that during a period in
1991, Pfizer Brazil withheld sale of the pharmaceutical product Diabinese in
violation of antitrust and consumer protection laws. The action seeks the award
of moral, economic and personal damages to individuals and the payment to a
public reserve fund. On February 8, 1996, the trial court issued a decision
holding Pfizer Brazil liable. The award of damages to individuals and the
payment into the public reserve fund will be determined in a subsequent phase of
the proceedings. The trial court's opinion sets out a formula for calculating
the payment into the public reserve fund which could result in a sum of
approximately $88 million. The total amount of damages payable to eligible
individuals under the decision would depend on the number of persons eventually
making claims. Pfizer Brazil is appealing this decision. The Company believes
that this action is without merit and should not have a material adverse effect
on the financial position or the results of operations of the Company.
59
Pfizer Inc and Subsidiary Companies
18 SEGMENT INFORMATION AND GEOGRAPHIC DATA
As a result of adopting SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, we split the previously reported Health Care
unit into two segments, pharmaceutical and MTG and combined consumer health care
with pharmaceutical. We operate in the following two business segments:
o pharmaceutical--including treatments for heart diseases, infectious
diseases, central nervous system disorders, diabetes, arthritis, erectile
dysfunction and allergies, as well as self-medications
o animal health--products for food animals and companion animals, including
antibiotics and feed supplements, vaccines and other veterinary items
Each separately managed segment offers different products requiring
different marketing and distribution strategies.
We sell our products primarily to customers in the wholesale sector. In
1998, sales to our three largest wholesalers accounted for 14%, 12% and 10% of
total revenues. These sales were concentrated in the pharmaceutical segment.
Revenues were in excess of $100 million in each of 12 countries outside the
U.S. in 1998. The U.S. was the only country to contribute more than 10% to total
revenues. The following tables present segment and geographic information:
SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Animal Corporate/
(millions of dollars) Pharmaceutical Health Other Consolidated
- --------------------------------------------------------------------------------
Total revenues 1998 $12,230 $1,314 $ -- $13,544
1997 9,726 1,329 -- 11,055
1996 8,642 1,222 -- 9,864
- --------------------------------------------------------------------------------
Segment profit 1998 3,575 (77) (904)(1) 2,594(2)
1997 3,129 112 (374)(1) 2,867(2)
1996 2,833 101 (406)(1) 2,528(2)
- --------------------------------------------------------------------------------
Identifiable assets(3) 1998 7,556 2,108 8,638 18,302
1997 6,182 2,196 6,613(4) 14,991
1996 5,552 2,243 6,456(4) 14,251
- --------------------------------------------------------------------------------
Property, plant and
equipment additions(3) 1998 991 97 110 1,198
1997 687 69 122 878
1996 532 87 71 690
- --------------------------------------------------------------------------------
Depreciation and
amortization(3) 1998 386 82 21 489
1997 337 75 16 428
1996 263 82 14 359
- --------------------------------------------------------------------------------
GEOGRAPHIC DATA
- --------------------------------------------------------------------------------
All
United Other
(millions of dollars) States(5) Japan Countries Consolidated
- --------------------------------------------------------------------------------
Total revenues 1998 $8,205 $943 $4,396 $13,544
1997 6,089 949 4,017 11,055
1996 5,193 922 3,749 9,864
- --------------------------------------------------------------------------------
Long-lived assets 1998 2,905 369 2,499 5,773
1997 2,910 283 2,155 5,348
1996 2,500 247 2,292 5,039
(1) Includes interest income/(expense) and corporate expenses. Also
includes other income/(expense) of the financial subsidiaries (see note 3,
"financial subsidiaries").
(2) Consolidated total equals income from continuing operations before
provision for taxes on income and minority interests.
(3) Certain production facilities are shared by various segments.
Property, plant and equipment, as well as capital additions and
depreciation, are allocated based on physical production. Corporate assets
are primarily cash, short-term investments and long-term loans and
investments.
(4) Includes net assets of discontinued operations.
(5) Includes operations in Puerto Rico.
60
Pfizer Inc and Subsidiary Companies
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
Quarter
(millions of dollars, except per share data) First Second Third Fourth Year
---------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
1998
Net sales $ 2,886 $ 3,114 $ 3,110 $ 3,567 $ 12,677
Alliance revenue 150 198 220 299 867
- -----------------------------------------------------------------------------------------------------------------------
Total revenues 3,036 3,312 3,330 3,866 13,544
Costs and expenses 2,294 2,468 2,628 3,560 10,950
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before provision
for taxes on income and minority interests 742 844 702 306 2,594
Provision for taxes on income 206 249 186 1 642
Minority interests 1 1 1 (1) 2
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 535 594 515 306 1,950
Discontinued operations-- net of tax 157 34 882 328 1,401
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 692 $ 628 $ 1,397 $ 634 $ 3,351
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share-- basic
Income from continuing operations $ .42 $ .48 $ .40 $ .24 $ 1.54
Discontinued operations-- net of tax .13 .02 .70 .26 1.11
- -----------------------------------------------------------------------------------------------------------------------
Net income $ .55 $ .50 $ 1.10 $ .50 $ 2.65
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share -- diluted
Income from continuing operations $ .41 $ .45 $ .39 $ .23 $ 1.48
Discontinued operations-- net of tax .12 .02 .67 .26 1.07
- -----------------------------------------------------------------------------------------------------------------------
Net income $ .53 $ .47 $ 1.06 $ .49 $ 2.55
- -----------------------------------------------------------------------------------------------------------------------
Cash dividends paid per common share $ .19 $ .19 $ .19 $ .19 $ .76
- -----------------------------------------------------------------------------------------------------------------------
Stock prices*
High $ 97-1/2 $121-3/4 $120-5/8 $128-15/16 $128-15/16
Low $ 71-1/16 $ 96-3/8 $ 92 $ 86 $ 71-1/16
- -----------------------------------------------------------------------------------------------------------------------
1997
Net sales $ 2,686 $ 2,492 $ 2,652 $ 2,909 $ 10,739
Alliance revenue (1) 59 95 163 316
- -----------------------------------------------------------------------------------------------------------------------
Total revenues 2,685 2,551 2,747 3,072 11,055
Costs and expenses 1,868 1,973 1,968 2,379 8,188
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before provision
for taxes on income and minority interests 817 578 779 693 2,867
Provision for taxes on income 241 152 194 188 775
Minority interests 1 4 3 2 10
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 575 422 582 503 2,082
Discontinued operations-- net of tax 27 35 14 55 131
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 602 $ 457 $ 596 $ 558 $ 2,213
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share-- basic
Income from continuing operations $ .46 $ .33 $ .47 $ .40 $ 1.66
Discontinued operations-- net of tax .02 .03 .01 .04 .10
- -----------------------------------------------------------------------------------------------------------------------
Net income $ .48 $ .36 $ .48 $ .44 $ 1.76
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share -- diluted
Income from continuing operations $ .44 $ .32 $ .45 $ .39 $ 1.60
Discontinued operations-- net of tax .02 .03 .01 .04 .10
- -----------------------------------------------------------------------------------------------------------------------
Net income $ .46 $ .35 $ .46 $ .43 $ 1.70
- -----------------------------------------------------------------------------------------------------------------------
Cash dividends paid per common share $ .17 $ .17 $ .17 $ .17 $ .68
- -----------------------------------------------------------------------------------------------------------------------
Stock prices*
High $ 49-1/2 $61-9/16 $ 64-3/4 $ 80 $ 80
Low $ 40-5/16 $41-1/2 $ 51-1/16 $ 59-7/16 $ 40-5/16
- -----------------------------------------------------------------------------------------------------------------------
* As reported in the Wall Street Journal. As of January 29, 1999, there were
105,760 record holders of our common stock (SYMBOL PFE).
61
Pfizer Inc and Subsidiary Companies
FINANCIAL SUMMARY
Year Ended December 31
-------------------------------------------------------------------------------------------
(millions, except per share data) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $12,677 10,739 9,864 8,684 6,825 6,080 5,816 5,352 4,757 4,220 3,960
Alliance revenue 867 316 -- -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 13,544 11,055 9,864 8,684 6,825 6,080 5,816 5,352 4,757 4,220 3,960
Research and development 2,279 1,805 1,567 1,340 1,036 880 776 654 545 449 401
Other costs and expenses 8,671 6,383 5,769 5,327 4,212 3,822 3,829 3,675 3,288 3,045 2,692
Divestitures, restructuring and
unusual items-- net(1) -- -- -- -- -- 741 (141) 300 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes and minority
interests 2,594 2,867 2,528 2,017 1,577 637 1,352 723 924 726 867
Provision for taxes on income 642 775 758 609 445 106 368 141 235 171 228
Income from continuing operations
before cumulative effect
of accounting changes $ 1,950 2,082 1,764 1,401 1,127 529 981 579 684 551 636
Discontinued operations-- net
of tax 1,401 131 165 172 171 129 113 143 117 130 155
Cumulative effect of accounting
changes -- -- -- -- -- -- (283)(2) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,351 2,213 1,929 1,573 1,298 658 811 722 801 681 791
- --------------------------------------------------------------------------------------------------------------------------------
Effective tax rate-- continuing
operations 24.8% 27.0% 30.0% 30.2% 28.2% 16.6% 27.2% 19.5% 25.4% 23.6% 26.3%
Depreciation $ 420 363 309 277 236 206 209 183 167 160 158
Property, plant and equipment
additions 1,198 878 690 635 620 575 592 505 466 388 292
Cash dividends paid 976 881 771 659 594 536 487 437 397 364 330
- --------------------------------------------------------------------------------------------------------------------------------
As of December 31
- --------------------------------------------------------------------------------------------------------------------------------
Working capital(3) $ 2,739 2,448 1,914 1,787 1,582 1,875 2,749 1,978 1,920 2,026 2,111
Property, plant and equipment--
net 4,415 3,793 3,456 3,113 2,747 2,320 1,994 2,061 1,808 1,565 1,482
Total assets(3) 18,302 14,991 14,251 12,339 10,797 8,986 9,346 9,387 8,782 8,099 7,347
Long-term debt 527 725 681 828 604 571 571 393 189 181 213
Long-term capital(4) 9,551 8,819 7,907 6,518 5,150 4,643 5,453 5,725 5,643 5,034 4,834
Shareholders' equity 8,810 7,933 6,954 5,506 4,324 3,866 4,719 5,026 5,092 4,536 4,301
- --------------------------------------------------------------------------------------------------------------------------------
Per common share data:
Basic:
Income from continuing
operation before effect
of accounting changes $ 1.54 1.66 1.41 1.14 .92 .42 .75 .44 .52 .42 .48
Discontinued operations--
net of tax 1.11 .10 .14 .14 .14 .10 (.13) .11 .09 .09 .12
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.65 1.76 1.55 1.28 1.06 .52 .62 .55 .61 .51 .60
- --------------------------------------------------------------------------------------------------------------------------------
Diluted:
Income from continuing
operations before effect
of accounting changes $ 1.48 1.60 1.37 1.11 .91 .41 .73 .43 .51 .41 .47
Discontinued operations--
net of tax 1.07 .10 .13 .14 .13 .10 (.13) .10 .09 .09 .12
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.55 1.70 1.50 1.25 1.04 .51 .60 .53 .60 .50 .59
- --------------------------------------------------------------------------------------------------------------------------------
Market value
(December 31) $125.00 74.56 41.50 31.50 19.31 17.25 18.13 21.00 10.10 8.69 7.25
Return on shareholders'
equity 40.0% 29.7% 31.0% 32.0% 31.7% 15.3% 16.6% 14.3% 16.6% 15.4% 19.3%
Cash dividends paid per
share $ .76 .68 .60 .52 .47 .42 .37 .33 .30 .28 .25
Shareholders' equity
per share $ 7.00 6.30 5.54 4.45 3.55 3.11 3.63 3.82 3.86 3.43 3.25
Current ratio 1.38:1 1.49:1 1.36:1 1.37:1 1.35:1 1.60:1 1.92:1 1.62:1 1.67:1 1.75:1 2.01:1
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares used to
calculate:
Basic earnings per share
amounts 1,263 1,257 1,248 1,229 1,223 1,262 1,316 1,321 1,322 1,324 1,321
Diluted earnings per
share amounts 1,315 1,303 1,288 1,259 1,243 1,282 1,346 1,357 1,349 1,358 1,355
Employees of continuing operations
(thousands) 46 41 39 37 34 33 33 35 33 33 32
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues per employee
(thousands) $ 292 269 256 238 202 184 177 154 145 129 124
- --------------------------------------------------------------------------------------------------------------------------------
All financial information reflects the divestiture of our MTG businesses
completed in 1998 and the 1996 divestiture of our food science business as
discontinued operations.
We have restated all common share and per share data for the 1997, 1995 and 1991
stock splits.
(1) Divestitures, restructuring and unusual items -- net include the following:
1993 -- Pre-tax charges of approximately $745 million and $56 million to cover
worldwide restructuring programs, as well as unusual items and a gain of
approximately $60 million realized on the sale of our remaining interest in
Minerals Technologies Inc.
1992-- Pre-tax gain of $259 million on the sale of a business, offset by pre-tax
charges of $175 million for restructuring, consolidating and streamlining. In
addition, it includes pre-tax curtailment gains of $57 million associated with
postretirement benefits other than pensions of divested operations.
1991-- A pre-tax charge of $300 million for potential future Shiley C/C heart
valve fracture claims.
(2) Accounting changes adopted January 1, 1992: SFAS No. 106 -- $313 million or
$.23 per share; SFAS No. 109 -- credit of $30 million or $.02 per share.
(3) Includes net assets of discontinued operations of our MTG businesses.
(4) Defined as long-term debt, deferred taxes on income, minority interests and
shareholders' equity.