Exhibit 99.2
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2005
AND 2004 AND INDEPENDENT AUDITORS' REPORT THEREON
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
TABLE OF CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT 1
COMBINED FINANCIAL STATEMENTS
Combined Balance Sheets as of December 31, 2005 and 2004 2
Combined Statements of Income for the years ended December 31, 2005
and 2004 3
Combined Statements of Business Unit Equity for the years ended
December 31, 2005 and 2004 4
Combined Statements of Cash Flows for the years ended
December 31, 2005 and 2004 5
Notes to Combined Financial Statements 6-24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pfizer Inc.:
We have audited the accompanying combined balance sheets of Pfizer Consumer
Healthcare (a business unit within Pfizer Inc), as defined in Note 2 of the
combined financial statements, as of December 31, 2005 and 2004, and the related
combined statements of income, business unit equity, and cash flows for the
years then ended. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Pfizer Consumer
Healthcare as of December 31, 2005 and 2004, and the results of its operations
and its cash flows for the years then ended in conformity with U.S. generally
accepted accounting principles.
(KPMG LLP)
New York, New York
December 19, 2006
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
As of December 31,
-----------------------
2005 2004
---------- ----------
ASSETS
Current assets:
Cash $ 5,995 $ 7,415
Accounts receivable, less allowance for doubtful accounts:
2005 - $8,584; 2004 - $12,814 664,989 626,608
Inventories 585,223 537,346
Deferred income taxes 5,300 5,177
Prepaid expenses and other current assets 25,690 20,339
---------- ----------
Total current assets 1,287,197 1,196,885
Property, plant and equipment, net 742,189 703,950
Goodwill 2,790,755 2,724,158
Identifiable intangible assets, less accumulated amortization 1,541,193 1,719,195
Deferred income taxes 10,608 13,517
Other noncurrent assets 3,306 4,635
---------- ----------
Total assets $6,375,248 $6,362,340
========== ==========
LIABILITIES AND BUSINESS UNIT EQUITY
Current liabilities:
Accounts payable $ 152,813 $ 161,105
Income taxes payable 199,054 158,031
Deferred income taxes 2,406 5,944
Accrued compensation and related items 76,396 69,330
Other current liabilities 253,433 258,551
---------- ----------
Total current liabilities 684,102 652,961
Pension benefit obligations 12,219 12,031
Postretirement benefit obligations 18,789 14,943
Deferred income taxes 235,870 282,927
Other noncurrent liabilities 5,063 3,079
---------- ----------
Total liabilities 956,043 965,941
---------- ----------
Minority interest 9,989 6,001
---------- ----------
Business unit equity 5,250,336 5,090,186
Accumulated other comprehensive expense 158,880 300,212
---------- ----------
Total business unit equity 5,409,216 5,390,398
---------- ----------
Total liabilities and business unit equity $6,375,248 $6,362,340
========== ==========
See accompanying notes to combined financial statements.
2
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
Year Ended December 31,
-----------------------
2005 2004
---------- ----------
Revenues $3,891,099 $3,527,335
Costs and expenses:
Cost of sales 1,274,431 1,167,442
Marketing and distribution expenses 1,620,847 1,487,202
Research and development expenses 185,755 171,401
General and administrative expenses 178,574 152,441
Restructuring charges and merger-related costs 36,646 42,912
Other (income)/deductions - net (40,060) (42,677)
---------- ----------
Income from continuing operations before provision for taxes
on income and minority interests 634,906 548,614
Provision for taxes on income 214,889 185,582
Minority interests 3,988 2,827
---------- ----------
Income from continuing operations 416,029 360,205
Discontinued operations:
Income from discontinued operations - net of tax 164 15,598
Gains on sales of discontinued operations - net of tax -- 40,669
---------- ----------
Discontinued operations - net of tax 164 56,267
---------- ----------
Income before cumulative effect of a change in 416,193 416,472
accounting principle
Cumulative effect of a change in accounting
principle - net of tax (1,806) --
---------- ----------
Net income $ 414,387 $ 416,472
========== ==========
See accompanying notes to combined financial statements.
3
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
COMBINED STATEMENTS OF BUSINESS UNIT EQUITY
(DOLLARS IN THOUSANDS)
Accumulated
Other
Business Comprehensive
Unit Equity Expense Total
----------- ------------- ----------
Balance January 1, 2004 $5,060,450 $ 99,779 $5,160,229
Comprehensive income:
Net income 416,472 416,472
Other comprehensive income - currency translation
adjustment 200,433 200,433
----------
Total comprehensive income 616,905
Cash dividends paid to Pfizer (3,000) (3,000)
Other activity with Pfizer (383,736) (383,736)
---------- --------- ----------
Balance December 31, 2004 5,090,186 300,212 5,390,398
Comprehensive income:
Net income 414,387 414,387
Other comprehensive expense - currency translation
adjustment (141,332) (141,332)
----------
Total comprehensive income 273,055
Cash dividends paid to Pfizer (2,422) (2,422)
Other activity with Pfizer (251,815) (251,815)
---------- --------- ----------
Balance December 31, 2005 $5,250,336 $ 158,880 $5,409,216
========== ========= ==========
See accompanying notes to combined financial statements.
4
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year
ended December 31,
---------------------
2005 2004
--------- ---------
OPERATING ACTIVITIES
Net income $ 414,387 $ 416,472
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 73,705 72,731
Amortization of other intangible assets 10,159 12,033
(Gain)/loss on disposals of property, plant and equipment (242) 43
(Gain) on sale of miscellaneous other assets (1,304) (11,158)
(Gains) on sales of discontinued operations -- (40,669)
Asset impairments 16,859 11,478
Cumulative effect of a change in accounting principle 2,671 --
Minority interest 3,988 2,827
Deferred taxes (2,326) (8,219)
Other non-cash adjustments 6,811 2,315
Changes in assets and liabilities net of effect of
acquired/divested businesses:
Accounts receivable (77,004) (21,914)
Inventories (72,104) (820)
Prepaid expenses and other current assets (6,160) 2,971
Other noncurrent assets 1,346 (1,714)
Accounts payable and accrued liabilities 19,249 59,984
Income taxes payable 41,068 46,036
Other noncurrent liabilities 7,579 5,300
--------- ---------
Net cash provided by operating activities 438,682 547,696
--------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (174,297) (101,874)
Proceeds from sales of miscellaneous other assets 6,404 175,796
Purchases of product lines/businesses -- (141,521)
--------- ---------
Net cash used in investing activities (167,893) (67,599)
--------- ---------
FINANCING ACTIVITIES
Cash dividend paid to Pfizer (2,422) (3,000)
Other cash activity with Pfizer - net (269,936) (475,614)
--------- ---------
Net cash used in financing activities (272,358) (478,614)
--------- ---------
Effect of exchange-rate changes on cash 149 679
Net increase/(decrease) in cash (1,420) 2,162
Cash at beginning of year 7,415 5,253
--------- ---------
Cash at end of year $ 5,995 $ 7,415
========= =========
See accompanying notes to combined financial statements.
5
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BUSINESS DESCRIPTION
ORGANIZATION
Pfizer Consumer Healthcare ("PCH") is a business unit within Pfizer Inc
("Pfizer"). PCH is comprised of approximately one hundred wholly-owned Pfizer
subsidiaries that are either completely dedicated to consumer healthcare or
contain certain assets and operations that are dedicated to the business.
Collectively, these entities constitute the consumer healthcare business unit,
as defined by Pfizer. As more fully discussed in Note 16, on June 26, 2006
Pfizer announced it had reached a definitive agreement to sell the PCH business
to Johnson & Johnson.
BUSINESS DESCRIPTION
PCH manufactures, markets, sells and distributes self-medications for oral care,
upper respiratory health, tobacco dependence, gastrointestinal health, skin
care, eye care and hair growth. PCH's products are sold in most major countries
around the world and appear in a variety of channels including mass
merchandisers, chain food, drug, convenience and wholesale outlets. Around the
world, PCH manufacturing and distribution is performed by Pfizer's manufacturing
division.
2005 2004
---------- ----------
Revenues
United States(a) $1,946,581 $1,785,337
All other countries 1,944,518 1,741,998
---------- ----------
Total combined $3,891,099 $3,527,335
========== ==========
2005 2004
---------- ----------
Long-lived assets(b)
United States(a) $1,002,857 $ 962,054
Sweden 970,284 1,154,653
All other countries 310,241 306,438
---------- ----------
Total combined $2,283,382 $2,423,145
========== ==========
(a) Includes operations in Puerto Rico.
(b) Long-lived assets include identifiable intangible assets (excluding
goodwill) and property, plant and equipment.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) and present the
financial position, results of operations and cash flows for PCH. The PCH
combined financial statements were prepared according to the legal entity deal
structure as contemplated in the agreement referenced in Note 16 and reflect:
1) all assets and liabilities of subsidiary companies where the entire
legal entity is expected to be conveyed to a buyer as part of the sale
of PCH
6
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
2) assets and liabilities that either legally belong to PCH or are
expected to transfer to a buyer as part of the sale of PCH but are not
part of a conveyed subsidiary (Asset-selling location)
3) costs associated with PCH employees and approximately 3,500 employees
in Pfizer's manufacturing division dedicated primarily to the PCH
business (costs associated with other Pfizer employees who may
ultimately be identified as dedicated primarily to PCH are not
included)
4) costs associated with PCH products made at seven manufacturing
facilities and three distribution centers which are primarily PCH
dedicated facilities and are deemed to be wholly PCH assets expected
to transfer to a buyer as part of the sale of PCH (Conveyed
Facilities)
5) costs associated with PCH products made at 27 facilities that are
shared with other Pfizer businesses and are not deemed to be wholly
PCH assets expected to transfer to a buyer as part of the sale of PCH
(Non-Conveyed Facilities)
6) costs associated with PCH products made at one manufacturing facility
that is primarily PCH dedicated; however, only selected assets (mainly
machinery and equipment) and not the entire facility are deemed to be
wholly PCH assets expected to transfer to a buyer as part of the sale
of PCH.
All significant intercompany transactions and balances have been eliminated.
Generally, operations outside the U.S. are included on a fiscal year basis
ending November 30.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts and disclosures. For
example, estimates are used when accounting for deductions from revenues (such
as rebates, discounts, incentives and product returns), depreciation,
amortization, employee benefits, contingencies and asset and liability
valuations. Management's estimates are often based on complex judgments,
probabilities and assumptions that it believes to be reasonable but that are
inherently uncertain and unpredictable. Assumptions may be incomplete or
inaccurate and unanticipated events and circumstances may occur. It is also
possible that other professionals, applying reasonable judgment to the same
facts and circumstances, could develop and support a range of alternative
estimated amounts. There are other risks and uncertainties that may cause actual
results to differ from estimated amounts, such as changes in the healthcare
environment, competition, foreign exchange, litigation, legislation and
regulations.
These combined financial statements have been extracted from the Pfizer
accounting records on the basis of the accounting policies and procedures
described below in the section entitled, Summary of Significant Accounting
Policies. Although PCH is accounted for by Pfizer as a separate operating
segment, its operations are integrated with those of Pfizer. These combined
financial statements are not intended to be a complete representation of the
financial position or results of operations of PCH had it been a stand-alone
company. The accompanying combined balance sheets primarily reflect the assets
and liabilities directly attributable to the business. The assets and
liabilities that have been excluded from the accompanying combined balance sheet
consist primarily of:
- Cash from PCH operations at subsidiaries that are not completely
PCH dedicated is generally not included in "Cash" in the
accompanying combined balance sheet at December 31, 2005 and 2004
since this cash is swept into Pfizer's centralized cash
management systems. Accordingly, PCH's cash balance at December
31, 2005 and 2004 is not representative of an independent
company. The interest income associated with cash is not included
in the accompanying combined statements of income. PCH's
financing requirements and settlement of intercompany
transactions are represented by cash transactions with Pfizer and
are reflected in business unit equity. The cash that is reported
in the accompanying combined balance sheets is the cash held by
those subsidiaries that are completely PCH dedicated
- Current and deferred tax assets and liabilities at subsidiary
companies that are not completely PCH dedicated
- Pension liabilities at subsidiary companies that are not
completely PCH dedicated
- Assets and liabilities of the Non-Conveyed Facilities that are
not considered part of the PCH business or are not expected to
transfer to a buyer as part of the sale of PCH
7
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
- Other assets and liabilities at Asset-selling locations that are
not specifically owned by or commitments of the PCH business or
that are expected to transfer to a buyer upon the sale of PCH
The accompanying combined statements of income include the accounts specifically
attributed to PCH and allocations of expenses relating to shared services and
administrative functions incurred at various divisional levels of Pfizer. Pfizer
operating divisions perform certain administrative, logistical and manufacturing
services for PCH. In addition, PCH operating divisions perform certain
administrative and logistical services for other Pfizer locations. The cost of
these services is charged to either PCH or Pfizer operations either on a
specific identification basis or using proportional cost allocation methods
(i.e., headcount, occupied office space, third party sales, etc.) depending on
the nature of the service. PCH and Pfizer management believes the above
allocations are reasonable; however, there can be no assurance that such
allocations are indicative of future results of operations of the PCH business
nor reflective of historical results had the PCH business been a separate,
stand-alone entity. Pfizer does not routinely allocate various other corporate
level activity expenses such as senior corporate executives, corporate
accounting, treasury and corporate level tax to its operating divisions.
Accordingly, the costs of such corporate functions have not been included in the
accompanying combined statements of income.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - PCH records revenue from product sales when the goods are
shipped and title passes to the customer.
DEDUCTIONS FROM REVENUES--Gross product sales are subject to a variety of
deductions such as sales rebates, discounts, coupons, incentives, and product
returns, that are generally estimated and recorded in the same period that the
revenue is recognized. PCH records sales incentives as a reduction of revenues
at the time the related revenues are recorded or when the incentive is offered,
whichever is later. PCH estimates the cost of its sales incentives based on its
historical experience with similar incentive programs.
COST OF SALES AND INVENTORIES - PCH values inventories at cost or fair value, if
lower. Cost is determined as follows:
- finished goods and work in process at average actual cost; and
- raw materials and supplies at average or latest actual cost.
ADVERTISING EXPENSE - Advertising expenses related to production costs are
expensed as incurred and the costs of radio time, television time and space in
publications are expensed when the related advertising occurs. Advertising and
promotion expenses were $832,210 and $771,374 for 2005 and 2004 and are included
in Marketing and distribution expenses in the accompanying combined statements
of income.
SHIPPING AND HANDLING EXPENSE - Shipping and handling costs are expensed as
incurred. Shipping and handling expenses were approximately $81,098 and $69,241
for 2005 and 2004 and are included in Marketing and distribution expenses in the
accompanying combined statements of income.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development (R&D) expenses are
expensed as incurred. R&D expenses were $185,755 and $171,401 for 2005 and 2004.
PCH has its own R&D resources with its primary research facilities in New Jersey
and Sweden.
INCOME TAXES - As an operating unit of Pfizer, PCH - U.S. does not file separate
U.S. Federal tax returns, but rather is included as part of the various returns
filed by Pfizer or its subsidiaries. For the purpose of these combined financial
statements, the PCH tax provision was computed as if it were a separate company
using the effective tax
8
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
rates in effect in the locations where the income was recorded. Permanent items
and credits were considered when determining the provision but were not included
due to immateriality. For entities having losses on a stand alone basis,
financial statement benefit was provided for those losses. Deferred tax assets
and liabilities are recognized for the expected future tax consequences of
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws.
SHARE-BASED PAYMENTS - Compensation programs can include share-based payments.
Stock options, which entitle the holder to purchase shares of Pfizer stock at a
pre-determined price at the end of a vesting term, are accounted for under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, an elective accounting policy permitted by SFAS No. 123, Accounting
for Stock-Based Compensation. Under this policy, since the exercise price of
stock options granted is set equal to the market price on the date of the grant,
PCH does not record any expense to the income statement related to the grants of
stock options, unless certain original grant-date terms are subsequently
modified.
For disclosure purposes only, the fair value of employee stock options was
estimated, as required under GAAP, using the Black-Scholes-Merton option-pricing
model and using the assumptions described in Note 13, Share-Based Payments. The
following table shows the effect on results for 2005 and 2004 if PCH had applied
the fair-value-based recognition provisions of SFAS 123 to measure stock-based
compensation expense for option grants:
2005 2004
-------- --------
Net income as reported under GAAP(a) $414,387 $416,472
Compensation expense-net of tax (16,015) (22,406)
-------- --------
Net income pro forma $398,372 $394,066
======== ========
(a) Includes stock-based compensation expense, net of related tax effects, of
$4,141 in 2005 (of which $3,364 is related to Restricted Stock Units) and
$1,407 in 2004.
Restricted stock units, which entitle holders to receive shares of Pfizer stock
at the end of a vesting period, are recorded at fair value at the date of grant
and are generally amortized on an even basis over the vesting term into Cost of
sales and General and administrative expenses, as appropriate.
Performance-contingent share awards, which entitle the holders to receive shares
of Pfizer stock at the end of a vesting period, are awarded based on a
non-discretionary formula measuring defined performance standards. They are
recorded evenly at fair value over the performance period of the award, based on
an estimate of probable performance. They are then adjusted for changes in the
fair value of the shares and changes in probable performance.
BUSINESS UNIT EQUITY - Business unit equity includes balances and transactions
among PCH, Pfizer and other Pfizer subsidiaries. PCH participates in Pfizer's
centralized cash management systems and generally all excess cash is transferred
to Pfizer. In addition, PCH entities will occasionally declare and pay dividends
to other Pfizer companies.
9
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
AMORTIZATION OF INTANGIBLE ASSETS, DEPRECIATION AND CERTAIN LONG-LIVED ASSETS -
Long-lived assets include:
- Goodwill - Goodwill represents the difference between the purchase
price of a business acquisition and the fair value of its net assets.
Goodwill is not amortized.
- Identifiable intangible assets - These acquired assets are recorded at
cost. Intangible assets with finite lives are amortized evenly over
their estimated useful lives. Intangible assets with indefinite lives
are not amortized.
- Property, plant and equipment - These assets are recorded at original
cost and increased by the cost of significant improvements after
purchase. The cost is depreciated evenly over the assets' estimated
useful lives. For tax purposes, accelerated depreciation methods are
used as allowed by tax laws. Depreciation is computed generally on a
straight-line basis over the following estimated useful lives:
Buildings and building improvements 20-50 years
Machinery and equipment 8-12 years
Furniture, fixtures and other 3-12 years
Amortization expense related to acquired intangible assets that contribute to
our ability to sell, manufacture, research, market and distribute products,
compounds and intellectual property are included in Other
(income)/deductions-net as they benefit multiple business functions.
Amortization expense related to intangible assets that are associated with a
single function and depreciation of property, plant and equipment are included
in Cost of sales, General and administrative expenses and Research and
development expenses, as appropriate.
PCH reviews all of its long-lived assets, including goodwill and other
intangible assets, for impairment at least annually and whenever events or
circumstances present an indication of impairment. When necessary, PCH records
charges for impairments of long-lived assets for the amount by which the present
value of future cash flows, or some other fair value measure, is less than the
carrying value of these assets.
FOREIGN CURRENCY TRANSLATION - The financial statements of operations outside
the U.S. are maintained in their local currency. PCH translates assets and
liabilities to their U.S. dollar equivalents at rates in effect at the balance
sheet date. Income and expense items are translated into their U.S. dollar
equivalents at average rates of exchange for the period. Translation gains and
losses are accumulated in a separate component of business unit equity. Gains
and losses on foreign currency transactions are included in earnings.
FINANCIAL INSTRUMENTS - The carrying values of PCH's financial instruments
approximate their estimated fair values. At December 31, 2005 and 2004, the cost
of each type of financial instrument, primarily accounts receivable and accounts
payable, approximates fair value because of the short term nature of these
instruments.
CONCENTRATION OF CREDIT RISK - PCH does not have significant concentrations of
credit risk from its customers, except from one customer which represents about
12% of total sales in 2005 and in 2004. Periodically, PCH reviews the credit
quality of its customers' financial condition. In general, there is no
requirement for collateral from customers.
BENEFIT PLANS - Substantially all active PCH employees participate in Pfizer,
legacy Warner-Lambert and legacy Pharmacia benefit plans (collectively, "Pfizer
benefit plans"). In the U.S., PCH employees participate in qualified and
supplemental defined benefit pension plans and defined contribution plans, as
well as other postretirement benefit plans, consisting primarily of healthcare
for retirees. Outside the U.S., PCH employees participate in defined benefit
plans that Pfizer generally funds to the extent that tax or other incentives
exist. A measurement date of December 31 is used for a majority of the U.S.
pension and postretirement plans and November 30 for a majority of the
international plans.
10
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
Only the pension assets and liabilities at those subsidiaries that are
completely dedicated to PCH business have been reflected in the accompanying
combined balance sheets since only those assets and liabilities legally belong
to PCH and are expected to transfer to a buyer as part of the sale of PCH.
Only liabilities related to PCH employees participating in other postretirement
benefit plans in the U.S. that are expected to transfer to a buyer as part of
the sale of PCH have been reflected in the accompanying combined balance sheets.
The combined statements of income include an allocation from Pfizer for the
pension and postretirement benefit costs associated with all PCH employees who
participate in the pension and postretirement benefit plans.
NEW ACCOUNTING STANDARDS - As of December 31, 2005, PCH adopted the provisions
of Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that
conditional obligations meet the definition of an asset retirement obligation in
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations (SFAS 143), and therefore should be recognized if their
fair value is reasonably estimable. As a result of adopting FIN 47, PCH recorded
a non-cash pre-tax charge of $2,671 ($1,806 net of tax). This charge was
reported in Cumulative effect of a change in accounting principle--net of tax in
2005. As of January 1, 2003, PCH adopted the provisions of SFAS 143, which
broadly addresses financial accounting requirements for retirement obligations
associated with tangible long-lived assets. The adoption of SFAS 143 did not
have a material impact on PCH's combined financial statements. In accordance
with FIN 47 and SFAS 143, PCH records accruals for legal obligations associated
with the retirement of tangible long-lived assets, including obligations under
the doctrine of promissory estoppel and those that are conditioned upon the
occurrence of future events. PCH recognizes these obligations using management's
best estimate of fair value.
As of January 1, 2004, PCH adopted the provisions of FASB Interpretation No. 46R
(FIN 46R), Consolidation of Variable Interest Entities. FIN 46R provides
additional guidance as to when certain entities need to be consolidated for
financial reporting purposes. The adoption of FIN 46R did not have a material
impact on PCH's combined financial statements.
11
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
3. ADAPTING TO SCALE INITIATIVE
In the first quarter of 2005, Pfizer launched a multi-year productivity
initiative, called Adapting to Scale (AtS), to increase efficiency and
streamline decision-making across Pfizer. This initiative, announced in April
2005, follows the integration of Warner-Lambert and Pharmacia. PCH incurred the
following costs in connection with the AtS productivity initiative:
2005
-------
Implementation costs (a) $ 5,684
Restructuring charges (b) 11,438
-------
Total AtS costs $17,122
=======
(a) Included in Marketing and distribution expenses ($507) and General and
administrative expenses ($5,177).
(b) Included in Restructuring charges and merger-related costs.
Actions associated with the AtS productivity initiatives include implementation
costs primarily for consulting activities and restructuring charges primarily
related to asset impairments, exit costs and employee termination costs at our
manufacturing facilities and marketing and worldwide research operations. The
components of restructuring charges associated with AtS follow:
UTILIZATION ACCRUAL
COSTS THROUGH AS OF
INCURRED DECEMBER 31, DECEMBER 31,
2005 2005 2005(a)
-------- ------------ ------------
Employee termination costs $ 2,349 $ (1,197) $1,152
Asset impairments 8,777 (8,777) --
Other 312 (312) --
------- -------- ------
Total $11,438 $(10,286) $1,152
======= ======== ======
(a) Included in Other current liabilities.
Through December 31, 2005, Employee termination costs represent the reduction of
the PCH workforce by 17 employees, mainly in manufacturing, sales and research.
We notified affected individuals and 15 employees were terminated as of December
31, 2005. Employee termination costs are recorded as incurred and include
accrued severance benefits, pension and postretirement benefits. Asset
impairments reflect charges to write down property, plant and equipment. Other
primarily includes costs to exit certain activities.
12
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
4. MERGER-RELATED COSTS
On April 16, 2003, Pfizer completed its merger with Pharmacia Corporation
(Pharmacia). PCH recorded the following merger-related charges primarily in
connection with the acquisition of Pharmacia:
2005 2004
------- -------
Integration costs:
Pharmacia $ 5,014 $19,023
Purell 977 28
Other -- (95)
Restructuring costs:
Pharmacia 19,217 24,429
Other -- (473)
------- -------
Total merger-related costs expensed(a) $25,208 $42,912
======= =======
Total merger-related costs capitalized(b) $ -- $ 4,882
======= =======
(a) Included in Restructuring charges and merger-related costs.
(b) Included in Goodwill.
INTEGRATION COSTS
Integration costs represent external, incremental costs directly related to an
acquisition, including expenditures for consulting and systems integration.
RESTRUCTURING COSTS-PHARMACIA
In connection with the acquisition of Pharmacia, Pfizer management approved
plans to restructure the operations of both legacy Pfizer and legacy Pharmacia
to eliminate duplicative facilities and reduce costs. As of December 31, 2005,
the restructuring activities resulting from Pfizer's acquisition of Pharmacia is
substantially complete.
Restructuring Costs Associated with Legacy Pharmacia-Capitalized
Through April 15, 2004, restructuring costs were associated primarily with
employee terminations and exiting certain activities of legacy Pharmacia. These
costs were recognized as liabilities assumed in the purchase business
combination. Accordingly, the restructuring costs incurred in the first year
after acquisition are considered part of the purchase price of Pharmacia and
have been recorded as an increase to goodwill. These restructuring costs also
include costs associated with relocation. Restructuring costs after April 15,
2004 that are associated with legacy Pharmacia are charged to the results of
operations. Changes to previous estimates of restructuring costs included as
part of the purchase price allocation of Pharmacia are recorded as a reduction
to goodwill or as an expense to operations, as appropriate.
13
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
The components of the PCH restructuring costs capitalized as a cost of the
acquisition of Pharmacia follow:
COSTS
INCURRED UTILIZATION
COSTS PRIOR TO COSTS THROUGH ACCRUAL AS OF
INCURRED JANUARY 1, INCURRED DECEMBER 31, DECEMBER 31,
2004 2004 TOTAL 2005 2005
-------- ---------- -------- ------------ -------------
Costs capitalized through
April 15, 2004:
Employee
termination costs $3,745 $26,965 $30,710 $(30,710) $--
Other 1,137 5,687 6,824 (6,824) --
------ ------- ------- -------- ---
$4,882 $32,652 $37,534 $(37,534) $--
====== ======= ======= ======== ===
The majority of the restructuring costs related to employee terminations.
Through December 31, 2005, Employee termination costs represent the approved
reduction of the legacy Pharmacia workforce by 251 people mainly in corporate,
manufacturing, distribution, sales and research functions. The affected
individuals were notified and 251 people were terminated as of December 31,
2005. Employee termination costs include accrued severance benefits. Other
includes asset write-offs, relocation and exit costs.
Restructuring Costs Associated with Legacy Pfizer and Legacy Pharmacia-Expensed
Restructuring costs associated with exiting certain activities of the consumer
healthcare business of legacy Pfizer (PCH) and legacy Pharmacia (from April 16,
2004), including severance, costs of vacating duplicative facilities, contract
termination and other exit costs, have been recorded as a charge to the results
of operations and are included in Restructuring charges and merger-related
costs.
The components of the restructuring costs associated with the acquisition of
Pharmacia, which were expensed, follow:
PROVISIONS UTILIZATION
PRIOR TO THROUGH ACCRUAL AS OF
PROVISIONS PROVISIONS JANUARY 1, PROVISIONS DECEMBER 31, DECEMBER 31,
2005 2004 2004 TOTAL 2005 2005(a)
---------- ---------- ---------- ---------- ------------ -------------
Employee termination costs $ 3,969 $12,409 $ 9,447 $25,825 $(25,497) $ 328
Property, plant and
equipment 8,082 5,046 133 13,261 (13,261) --
Other 7,166 6,974 1,580 15,720 (8,656) 7,064
------- ------- ------- ------- -------- ------
Total $19,217 $24,429 $11,160 $54,806 $(47,414) $7,392
======= ======= ======= ======= ======== ======
(a) included in Other current liabilities.
Through December 31, 2005, the charges for Employee termination costs represent
the approved reduction of PCH's workforce by 237 people mainly in corporate,
manufacturing, distribution, sales and research functions. PCH notified these
people and 232 people were terminated as of December 31, 2005. Employee
termination costs include accrued severance benefits. Other restructuring costs
in 2005 and 2004 include charges for contract termination payments.
14
PFIZER CONSUMER HEALTH CARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
5. ACQUISITIONS AND DIVESTITURES
On November 15, 2004, PCH purchased the assets of Purell, a hand sanitizer from
GoJo for approximately $141.5 million. In connection with this acquisition, PCH
recorded approximately $132.5 million of intangible assets, primarily for
indefinite-lived brand assets.
In the third quarter of 2004, PCH sold certain non-core consumer product lines
marketed in Europe for 135 million euro (approximately $163 million) in cash.
PCH recorded a gain of $58 million ($41 million, net of tax) in Gains on sales
of discontinued operations-net of tax in the combined statement of income for
2004. The majority of these products were small brands sold in single markets
only and included certain products that became part of PCH in April 2003 in
connection with Pfizer's acquisition of Pharmacia.
6. INVENTORIES
2005 2004
-------- --------
Finished goods $478,933 $422,844
Work in process 38,778 39,607
Raw materials 67,512 74,895
-------- --------
Total inventories $585,223 $537,346
======== ========
7. PROPERTY, PLANT AND EQUIPMENT
2005 2004
---------- ----------
Land $ 9,666 $ 8,897
Buildings and building improvements 424,474 424,382
Machinery and equipment 586,807 598,801
Furniture, fixtures and other 172,365 171,429
Construction in progress 110,547 62,100
---------- ----------
1,303,859 1,265,609
Less: accumulated depreciation (561,670) (561,659)
---------- ----------
Net property, plant and equipment $ 742,189 $ 703,950
========== ==========
Depreciation expense totaled $73,705 and $72,731 for the years ended December
31, 2005 and 2004.
15
PFIZER CONSUMER HEALTH CARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
8. GOODWILL AND OTHER INTANGIBLE ASSETS
A. GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31,
2005 and 2004 follow:
Balance, January 1, 2004 $2,637,702
Pharmacia goodwill adjustments(a) 155,000
Foreign currency impact (43,468)
Other (25,076)
----------
Balance, December 31, 2004 2,724,158
Foreign currency impact 64,150
Other 2,447
----------
Balance, December 31, 2005 $2,790,755
==========
(a) adjustments resulted from finalization of the purchase price allocation in
2004 which resulted in revisions to the estimates relating to the initial
allocation of the purchase price in 2003.
B. OTHER INTANGIBLE ASSETS
The components of identifiable intangible assets as of December 31 follow:
2005 2004
------------------------- -------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ ---------- ------------
Finite-lived intangible assets:
Developed technology rights(a) $ 51,496 $ (8,690) $ 52,645 $ (3,209)
Brands(b) 136,659 (8,888) 121,513 (3,169)
License agreements 8,582 (3,214) 7,862 (2,802)
Trademarks 44,287 (24,142) 42,477 (25,214)
Other(c) 9,157 (3,600) 17,739 (10,758)
---------- ----------- ---------- --------
Total amortized finite-lived intangible assets 250,181 (48,534) 242,236 (45,152)
---------- ----------- ---------- --------
Indefinite-lived intangible assets:
Brands(b) 873,579 -- 989,044 --
License agreements 295,892 -- 356,223 --
Trademarks 148,131 -- 155,105 --
Other 21,944 -- 21,739 --
---------- ----------- ---------- --------
Total indefinite-lived intangible assets 1,339,546 -- 1,522,111 --
---------- ----------- ---------- --------
Total identifiable intangible assets 1,589,727 (48,534) 1,764,347 (45,152)
---------- ----------- ---------- --------
Total identifiable intangible assets, less
accumulated amortization $1,541,193 $1,719,195
========== ==========
(a) developed technology rights represent the amortized value associated with
developed technology, which has been acquired from third parties and which
can include the right to develop, use, market, sell and/or offer for sale
the product, compounds and intellectual property that has been acquired
with respect to products, compounds and/or processes that have been
completed. These rights are subject to the impairment review process
described in Note 2.
(b) brands represent the amortized value associated with tradenames, as the
products themselves no longer receive patent protection. The significant
components of the indefinite-lived brands include values determined for
tobacco dependence products and Rogaine.
(c) includes patents, non-compete agreements and other intangible assets.
16
PFIZER CONSUMER HEALTH CARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
The weighted-average life of our total finite-lived intangible assets is
approximately 24 years, which includes developed technology rights at 16 years.
Total amortization expense for finite-lived intangible assets was $10,159 in
2005 and $12,033 in 2004.
The annual amortization expense expected for the years 2006 through 2010 is as
follows:
2006 2007 2008 2009 2010
------- ------- ------ ------ ------
Amortization expense $10,437 $10,110 $9,875 $9,781 $9,763
9. OTHER CURRENT LIABILITIES
2005 2004
-------- --------
Advertising and promotional accruals $ 62,492 $ 74,766
Merger-related restructuring accruals 7,392 4,504
Inventory accruals 25,632 23,430
Freight accruals 3,143 2,245
Coupon accruals 10,416 9,101
Selling accruals 6,491 4,219
Royalties accruals 11,226 9,880
Returns accruals 40,419 45,816
Rebate accruals 11,318 12,608
Production accruals 6,405 2,084
R&D accruals 11,071 18,556
Property and other tax accruals 2,758 3,456
Legal accruals 5,992 17,656
Environmental accruals 1,500 1,500
Other marketing accruals 8,586 10,340
Other 38,592 18,390
-------- --------
Total $253,433 $258,551
======== ========
10. OTHER (INCOME)/DEDUCTIONS - NET
2005 2004
-------- --------
Amortization of intangibles $ 10,052 $ 11,919
Royalties income(a) (49,097) (46,948)
Loss on disposal of PP&E (242) 43
Impairment of long-lived assets(b) -- 6,432
Gain on sales of businesses/product lines(c) (1,304) (11,158)
Net exchange losses 1,529 2,358
Other, net(d) (998) (5,323)
-------- --------
Total other (income)/deductions - net $(40,060) $(42,677)
======== ========
(a) PCH has granted Glaxo SmithKline Consumer Healthcare (GSKCH) exclusive
distribution rights in the U.S. to Nicotine Polacrilex Gum ("Gum"),
including exclusive rights to the Nicorette name to be used on Gum and in
conjunction with GSKCH's Commit Lozenge but PCH only supplies Gum (the
Lozenge is supplied by a third party). Although the distribution agreement
terminates on December 31, 2010, GSK may renew the agreement at their
option for successive 3 year terms giving not less than 6 months prior
written notice. GSKCH purchases the
17
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
finished packaged products from PCH. GSKCH pays PCH a supply price and a
royalty which taken together are capped at 30% of GSKCH's net selling price
to the trade. PCH recorded royalty income from the agreement of $39,042 in
2005 and $34,525 in 2004 in Other (income)/deductions-net. PCH holds rights
to its entire Nicorette range of products in basically all other locations
where they are sold except for Japan where there is a collaboration with
Takeda. In addition, PCH has rights to the NicoDerm Patch in Canada. Pfizer
Inc will continue to hold rights to Nicotrol Inhaler and Nasal Spray in the
U.S.
(b) In 2004, PCH recorded an impairment charge for the write-down of
manufacturing assets associated with the reduced manufacturing of the
Listerine PocketPaks product line.
(c) In 2005, PCH recorded a gain of $1,273 on the sale of certain product lines
in Australia. In 2004, PCH recorded a gain of $10,658 on the sale of its
haircare business in Mexico.
(d) In 2005, Other, net includes income from a legal settlement of $1,396 and
the recovery of a trade receivable previously written off of $1,276 as well
as deductions for bank charges of $1,180 and expenses related to failed
acquisition and divestiture activities of $3,375. In 2004, Other, net
includes income from the recovery of an amount due from supplier of $1,650
and the recovery of a trade receivable previously written off of $1,887 as
well as deductions for bank charges of $980 and litigation matters of
$2,800.
11. INCOME TAXES
The components of the income tax provision/(benefit) are:
2005 2004
-------- --------
Current:
Federal $ 99,750 $ 93,267
State and local 19,911 18,701
Foreign taxes 97,554 81,833
-------- --------
Total current 217,215 193,801
Deferred:
Federal -- --
State and local -- --
Foreign taxes (2,326) (8,219)
-------- --------
Total deferred (2,326) (8,219)
-------- --------
Total $214,889 $185,582
======== ========
As of December 31, 2005, no U.S. tax provision was made on approximately $5,572
in PCH unremitted earnings. As of December 31, 2005, these earnings are intended
to be permanently reinvested overseas. Because of complexity, it is not
practical to compute the estimated deferred tax liability on these permanently
reinvested earnings.
Reconciliation of the U.S. income tax rate to PCH's effective tax rate is as
follows:
2005 2004
----- -----
Federal statutory income tax rate 35.00% 35.00%
U.S. state and local taxes 2.04 2.22
Effect of foreign operations (3.19) (3.39)
----- -----
Effective income tax rate 33.85% 33.83%
===== =====
18
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of PCH assets and liabilities. The
tax effects of the major items recorded as deferred tax assets and liabilities
are:
2005 2004
Assets Assets
(Liabilities) (Liabilities)
------------- -------------
Prepaid/deferred items $ 204 $ 1,101
Inventories (2,038) (5,043)
Intangibles (232,195) (280,519)
Property, plant and equipment 958 2,161
Accruals 3,509 3,648
Allowance for doubtful accounts 415 390
Net operating loss/credit carryforwards 2,798 3,576
Unfunded pensions 3,233 5,964
Other 748 (1,455)
--------- ---------
Net deferred tax liability $(222,368) $(270,177)
========= =========
PCH's net deferred tax liability position at December 31, 2005 and 2004 is
primarily due to the deferred taxes recorded in connection with Pfizer's
acquisition of Pharmacia.
Valuation allowances are provided when it is believed that the deferred tax
assets are not recoverable based on an assessment of estimated future taxable
income that incorporates ongoing, prudent, feasible tax planning strategies.
Deferred tax assets and (liabilities) in the preceding table, netted by taxing
jurisdiction, are in the combined balance sheet as follows:
2005 2004
---------- ---------
Deferred income taxes-current $ 5,300 $ 5,177
Deferred income taxes-noncurrent 10,608 13,517
Deferred income taxes-current (2,406) (5,944)
Deferred income taxes-noncurrent (235,870) (282,927)
--------- ---------
$(222,368) $(270,177)
========= =========
12. PENSION AND POSTRETIREMENT BENEFITS
Generally, most PCH employees participate in Pfizer's pension plans for
employees worldwide. For all the plans, plan benefits depend on years of service
and employee final average earnings. Participants vest in their benefits after
as few as five years of service. Pfizer does not fund postretirement plans, but
contributes to the plans as benefits are paid. The portion of the pension and
postretirement benefit cost allocated to PCH in the U.S. and certain significant
international locations was approximately $43,018 in 2005 and $46,043 in 2004.
Only the pension assets and liabilities at those subsidiaries that are
completely dedicated to the PCH business have been reflected in the accompanying
combined balance sheets since only those assets and liabilities legally belong
to PCH and are expected to transfer to a buyer as part of the sale of PCH.
Only the postretirement benefit obligations for employees who are not retirement
eligible at January 1, 2006 and which are expected to transfer to a buyer as
part of the sale of PCH are included in the accompanying combined balance
sheets.
19
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
Actuarial Assumptions
The following table provides the weighted average actuarial assumptions for the
pension plans that are expected to transfer to a buyer as part of the sale of
PCH:
2005 2004
---- ----
(Percentages)
Weighted average assumptions used to determine
benefit obligations:
Discount rate 4.25% 5.02%
Rate of compensation increase 3.72% 3.73%
Weighted average assumptions used to determine net
benefit cost:
Discount rate 5.02% 5.45%
Rate of compensation increase 3.73% 3.92%
The assumptions above are used to develop the benefit obligations at fiscal year
end and to develop the net periodic benefit cost for the following fiscal year.
The net periodic benefit cost and the benefit obligations are based on actuarial
assumptions that are reviewed on an annual basis. The assumptions are revised
based on annual evaluation of long-term trends, as well as market conditions
that may have an impact on the cost of providing retirement benefits.
The healthcare cost trend rate assumptions for the U.S. postretirement benefit
plan are as follows:
2005 2004
---- ----
Healthcare cost trend rate assumed for next year 9.8% 10.0%
Rate to which the cost trend rate is assumed to
decline 5.0% 5.0%
Year that the rate reaches the ultimate trend rate 2013 2012
A one percentage point increase or decrease in the healthcare cost trend rate
assumed for postretirement benefits that are expected to transfer to a buyer as
part of the sale of PCH would have the following effects as of December 31,
2005:
INCREASE DECREASE
-------- --------
Effect on total service and interest cost components $181 $(151)
Effect on postretirement benefit obligation 784 (672)
20
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
Information about pension plans at subsidiaries in Germany, France and Italy
that are dedicated solely to PCH and are expected to transfer to a buyer as part
of the sale of PCH is provided in the tables below:
2005 2004
------ ------
Service cost $ 771 $ 755
Interest cost 627 582
Amortization of:
Prior service costs 23 22
Net transition obligation 33 32
Actuarial losses 66 40
------ ------
Net periodic benefit costs $1,520 $1,431
====== ======
Obligations and Funded Status - Pension Plans Expected to Transfer to a Buyer
The following tables present an analysis of the changes in 2005 and 2004 in the
benefit obligations, the plan assets and the funded status of the pension plans
of subsidiaries in Germany, France and Italy that are dedicated solely to PCH
and are expected to transfer to a buyer as part of the sale of PCH:
2005 2004
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 13,334 $ 10,749
Service cost 771 755
Interest cost 627 582
Increases arising primarily from changes in
actuarial assumptions 1,579 269
Acquisitions 112 66
Divestitures (34) --
Special termination benefits -- 240
Foreign exchange impact (1,716) 1,105
Benefits paid (454) (432)
-------- --------
Benefit obligation at end of year(a) $ 14,219 $ 13,334
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ --
Company contributions 454 432
Benefits paid from plan assets (454) (432)
-------- --------
Fair value of plan assets at end of year $ -- $ --
-------- --------
Funded status (plan assets less than benefit obligation $(14,219) (13,334)
Net transition obligation 31 70
Actuarial losses 3,298 1,097
Prior service costs/(benefits) (739) 221
-------- --------
Net liability recorded in the combined balance sheet $(11,629) $(11,946)
======== ========
(a) The benefit obligation is the projected benefit obligation.
21
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
The components of the net liability recorded in the combined balance sheet as of
December 31 follow:
2005 2004
-------- --------
Balance sheet components:
Accrued benefit liability(a) $(12,219) $(12,031)
Intangible pension asset(b) 205 --
Accumulated other comprehensive income 385 85
-------- --------
Net amount recorded in combined balance sheet $(11,629) $(11,946)
======== ========
(a) included in Pension benefit obligations.
(b) included in Identifiable intangible assets, less accumulated amortization.
2005 2004
------- -------
Pension plans with an accumulated benefit obligation
in excess of plan assets:
Fair value of plan assets $ -- $ --
Accumulated benefit obligation 11,171 10,620
Pension plans with a projected benefit obligation in
excess of plan assets:
Fair value of plan assets -- --
Projected benefit obligation 14,219 13,334
It is Pfizer's practice to fund amounts for its pension plans at least
sufficient to meet the minimum requirements set forth in applicable employee
benefit laws and local tax laws. The following table reflects the plan benefits
projected to be paid from the plans or from the general assets of the
subsidiaries in Germany, France and Italy under the current actuarial
assumptions used for the calculation of the projected benefit obligation and
therefore, actual benefit payments may differ from projected benefit payments.
Employer Contributions:
2006 (estimated) $ 291
Expected Benefit Payments:
2006 $ 291
2007 327
2008 430
2009 439
2010 453
2011-2015 2,921
22
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
Obligations and Funded Status - Postretirement Benefit Obligations Expected to
Transfer to a Buyer
The following tables present an analysis of the changes in 2005 and 2004 in the
benefit obligations, the plan assets and the funded status of the postretirement
benefit obligations in the U.S. for those PCH colleagues who are not retirement
eligible as of January 1, 2006 and which are expected to transfer to a buyer as
part of the sale of PCH:
2005 2004
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 14,943 $ 11,460
Service cost 2,847 2,696
Interest cost 999 787
-------- --------
Benefit obligation at end of year 18,789 14,943
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year
Company contributions -- --
Benefits paid from plan assets -- --
-------- --------
Fair value of plan assets at end of year -- --
-------- --------
Funded status (plan assets less than benefit obligation) (18,789) (14,943)
-------- --------
Net liability recorded in the combined balance sheet* $(18,789) $(14,943)
======== ========
(*) included in Postretirement benefit obligations.
13. SHARED-BASED PAYMENTS
Stock options are granted to employees under the Pfizer Inc. Stock and Incentive
Plan. Options are exercisable after five years or less subject to continuous
employment and certain other conditions, and generally expire 10 years after the
grant date. Once options are exercisable, the employee can purchase shares of
Pfizer common stock at the market price on the date the option was granted.
The weighted-average fair value per stock option granted was $5.15 for 2005 and
$6.88 for 2004. The fair values were estimated using the Black-Scholes-Merton
option pricing model and using the following assumptions:
2005 2004
------ ------
Expected dividend yield 2.90% 2.90%
Risk-free interest rate 3.96% 3.32%
Expected stock price volatility 21.93% 22.15%
Expected term until exercise (years) 5.75 5.75
In 2005, 2,358,665 options were granted to PCH employees with a weighted average
exercise price of $26.21 and in 2004, 4,194,973 options were granted with a
weighted average exercise price of $37.02
23
PFIZER CONSUMER HEALTHCARE
(A BUSINESS UNIT OF PFIZER INC)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
14. CONTINGENT LIABILITIES AND COMMITMENTS
PCH leases facilities, vehicles and office equipment under various
noncancellable operating leases with third parties. Total rent expense under
operating leases was approximately $15,276 and $13,594 for the years ended
December 31, 2005 and 2004, respectively. Future minimum lease payments under
noncancellable operating leases which are expected to transfer to a buyer as
part of the sale of PCH are:
2006 $ 6,941
2007 6,304
2008 4,395
2009 3,332
2010 2,529
After 2010 8,003
-------
Total minimum lease payments $31,504
=======
PCH has purchase obligations for agreements to purchase goods and services that
are enforceable and legally binding and include amounts primarily related to
advertising. The payments due under these purchase obligations at December 31,
2005 mature as follows:
Over 3
Within 1 Over 1 to to 5 After 5
Total Year 3 Years Years Years
-------- -------- --------- ------ -------
Purchase obligations $136,919 109,420 17,664 9,456 379
15. LEGAL PROCEEDINGS AND CONTINGENCIES
PCH is involved in various patent, product liability, consumer, environmental
and tax claims and litigations that arise from time to time in the ordinary
course of business. PCH believes that they have a valid defense with respect to
the legal matters pending against them and, taking into account insurance and
reserves, PCH believes that the ultimate resolution of these matters will not
have a material adverse impact on financial condition, results of operations, or
cash flows. It is possible; however, that cash flows or results of operations
could be affected in any particular period by the resolution of one or more of
these contingencies.
In the combined balance sheet, Other current liabilities include $1.5 million
for estimated environmental remediation at PCH facilities in Australia.
16. SUBSEQUENT EVENTS
On June 26, 2006, Pfizer announced that it reached a definitive agreement to
sell PCH to Johnson & Johnson for $16.6 billion in cash. Pfizer expects to close
the transaction by the end of 2006. The transaction is subject to customary
closing conditions, including regulatory approvals. This decision completes a
review of strategic options for the consumer business that Pfizer initiated in
February 2006.
24