-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LbbA2q5XZaaYPw6yYdI+X6ziOmkAk0I5MbNB+sjsbyILz1AhMN36gBB9Q7gg0V6/ IsQpMXBd9HGxQvVR2XHWVw== 0000930413-00-000548.txt : 20000328 0000930413-00-000548.hdr.sgml : 20000328 ACCESSION NUMBER: 0000930413-00-000548 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PFIZER INC CENTRAL INDEX KEY: 0000078003 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 135315170 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03619 FILM NUMBER: 578968 BUSINESS ADDRESS: STREET 1: 235 E 42ND ST CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2125732323 MAIL ADDRESS: STREET 1: 235 E 42ND ST CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: PFIZER CHARLES & CO INC DATE OF NAME CHANGE: 19710908 10-K 1 ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10 - K - -------------------------------------------------------------------------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER 1-3619 PFIZER INC. (Exact name of registrant as specified in its charter) DELAWARE 13-5315170 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 235 East 42nd Street New York, New York 10017-5755 (Address of principal executive offices) (Zip Code) (212) 573-2323 (Registrant's telephone number including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: ================================================================================ TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - -------------------------------------------------------------------------------- Common Stock, $.05 par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange ================================================================================ SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the closing price at which the stock was sold as of February 29, 2000 was approximately $120.6 billion. The number of shares outstanding (voting) of each of the registrant's classes of common stock as of February 29, 2000 WAS 3,849,002,705 shares of common stock, all of one class. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1999 Annual Report to Shareholders Parts I, II and IV Portions of the joint proxy statement/prospectus for the 2000 Annual Meeting of Shareholders Parts I and III ================================================================================ TABLE OF CONTENTS ----------------- PAGE PART I ...................................................................... 1 ITEM 1. BUSINESS ........................................................... 1 General .................................................................. 1 Recent Development ....................................................... 1 Business Segments ........................................................ 1 Pharmaceutical Segment ................................................ 2 Animal Health Segment ................................................. 3 Research and Product Development ......................................... 4 International Operations ................................................. 5 Marketing ................................................................ 6 Patents and Intellectual Property Rights ................................. 7 Competition .............................................................. 8 Raw Materials ............................................................ 10 Government Regulation and Price Constraints .............................. 11 Environmental Law Compliance ............................................. 12 Year 2000 ................................................................ 12 Corporate/Financial Subsidiaries ......................................... 12 Tax Matters .............................................................. 13 Employees ................................................................ 13 Cautionary Factors That May Affect Future Results ........................ 13 ITEM 2. PROPERTIES ......................................................... 17 ITEM 3. LEGAL PROCEEDINGS .................................................. 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE .................................... 27 EXECUTIVE OFFICERS OF THE COMPANY ........................................ 28 PART II ..................................................................... 31 ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........................................ 31 ITEM 6. SELECTED FINANCIAL DATA ............................................ 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...................... 31 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................................................. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................ 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ............................. 32 PART III .................................................................... 32 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY .................... 32 ITEM 11. EXECUTIVE COMPENSATION ............................................. 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ..................................................... 32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..................... 32 PART IV ..................................................................... 33 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ............................................ 33 14(a)(1) Financial Statements .......................................... 33 14(a)(2) Financial Statement Schedules ................................. 33 14(a)(3) Exhibits ...................................................... 33 14(b) Reports on Form 8-K ........................................... 34 PART I ITEM 1. BUSINESS GENERAL Pfizer Inc. (the COMPANY, which may be referred to as WE, US, or OUR) is a research-based, global pharmaceutical company. We discover, develop, manufacture and market innovative medicines for humans and animals. Our home page on the Internet is at www.pfizer.com. You can learn about us by visiting that site. NOTE THAT THROUGHOUT THIS 1999 10-K REPORT, WE "INCORPORATE BY REFERENCE" CERTAIN INFORMATION IN PARTS OF OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEC ALLOWS US TO DISCLOSE IMPORTANT INFORMATION BY REFERRING TO IT IN THAT MANNER. PLEASE REFER TO SUCH INFORMATION. RECENT DEVELOPMENT On February 7, 2000, we announced an agreement to merge with Warner-Lambert Company (Warner-Lambert). Under the terms of the merger agreement, which has been approved by the Board of Directors of both Pfizer and Warner-Lambert, we will exchange 2.75 shares of Pfizer voting common stock for each outstanding share of Warner-Lambert voting common stock in a tax-free transaction valued at $98.31 per Warner-Lambert share, or an equity value of $90 billion based on the closing price of our stock on February 4, 2000 of $35.75 per share. Customary and usual provisions will be made for outstanding options and warrants. The combined company, which will be called Pfizer Inc., is expected to have (excluding any impact of anticipated restructuring charges and transaction fees of $1.7 billion to $2.2 billion): o compounded annual revenue growth of 13% and earnings growth of 25% through 2002 o $4.7 billion in annual research and development expenses in 2000 o anticipated annual cost savings and efficiencies totaling $1.6 billion by 2002 ($200 million of these savings are expected to be achieved in 2000, $1 billion in 2001 and $1.6 billion in 2002) o diluted earnings per share of $.98 on a pro forma basis in 2000, $1.27 for 2001 and $1.56 for 2002 (these numbers include the $1.6 billion of cost savings phased in over this time period, but do not include any increased sales from collaborative activities and the $1.8 billion termination fee paid by Warner-Lambert to American Home Products Corporation). This transaction is subject to customary conditions, including the use of pooling-of-interests accounting, qualifying as a tax-free reorganization, shareholder approval at both companies and usual regulatory approvals. The transaction is expected to close in mid-2000. BUSINESS SEGMENTS We operate in two business segments: o PHARMACEUTICAL, which includes prescription pharmaceuticals for treating cardiovascular diseases, infectious diseases, central nervous system disorders, diabetes, erectile dysfunction, allergies, arthritis and other disorders, as well as non-prescription self-medications, and; o ANIMAL HEALTH, which includes antiparasitic, anti-infective and anti-inflammatory medicines, and vaccines for livestock, poultry and companion animals. These businesses derive synergies in certain research and regulatory matters, but each requires different marketing and distribution strategies and sales organizations. Comparative segment revenues, profits and related financial information for 1999, 1998 and 1997 are given in the table entitled SEGMENT INFORMATION on page 60 of our 1999 Annual report. A table captioned PERCENTAGE CHANGE IN TOTAL REVENUES and a graph captioned TOTAL REVENUES BY BUSINESS SEGMENT on page 29 of our 1999 Annual Report give segment information over the past three years. The information from those sections of our Annual Report is considered to be incorporated in this 1999 10-K report. Our businesses are heavily regulated in most of the countries where we operate. in the U.S., the main regulatory authority we deal with is the Food and Drug Administration (FDA). The FDA regulates the safety and efficacy of the products we offer, our research quality, our manufacturing processes and our promotion and advertising. Similar Government authorities act in most other countries, and in many cases also regulate our prices. See GOVERNMENT REGULATION AND PRICE CONSTRAINTS, below. PHARMACEUTICAL SEGMENT Our Pharmaceutical segment is comprised of the Pfizer Pharmaceuticals Group and the Consumer Health Care Group. PFIZER PHARMACEUTICALS GROUP Most of our pharmaceutical sales come from products in three major therapeutic classes: cardiovascular diseases, infectious diseases and central nervous system disorders. We also have products for treatment of diabetes, erectile dysfunction and allergies, as well as a co-promoted product for arthritis. In 1999, prescription pharmaceuticals contributed 88% of our revenues, as compared to 86% in 1998 and 83% in 1997. In 1999, we had seven products, including alliance products, with sales to third parties in excess of $1 billion each. Sales of our major in-line pharmaceutical products - NORVASC, CARDURA, ZITHROMAX, DIFLUCAN, ZOLOFT, VIAGRA AND ZYRTEC - comprised 60% of our revenues. A table captioned NET SALES - MAJOR PHARMACEUTICAL PRODUCTS on page 29 of our 1999 Annual Report is incorporated by reference. Cardiovascular disease products that treat problems affecting the heart and the blood circulatory system are our largest therapeutic product line. NORVASC, our largest-selling product, is a once-a-day medication for hypertension (high blood pressure) and angina (heart pain). It is the largest-selling high blood pressure medicine in the world. Our other cardiovascular products include PROCARDIA XL, also a once-a-day product for hypertension and angina, and CARDURA, which is used to treat hypertension and benign prostatic hyperplasia (enlarged prostate gland). Sales of PROCARDIA XL continued to decrease during 1999, due, at least in part, to the medical community's increasing emphasis on NORVASC. Also included in our cardiovascular disease product line is our alliance product, LIPITOR, for treatment of high LIPIDS (cholesterol and, triglycerides) in the bloodstream. We participated in the 1997 launch of LIPITOR under co-promotion and licensing arrangements with the Parke-Davis Division of Warner-Lambert Company, which discovered and developed the drug. Pfizer and Warner-Lambert are continuing a broad clinical program for LIPITOR, as well as planning the development of a single product that contains the cholesterol and high blood pressure lowering medications in LIPITOR and NORVASC, respectively. We will add to our cardiovascular product line with the first-quarter 2000 launch of Tikosyn. This product is used for the treatment of atrial fibrillation (rapid and irregular heartbeats in the atria or upper chambers of the heart). In the infectious disease medicine category, our major products are ZITHROMAX and DIFLUCAN. ZITHROMAX is an oral or injectable antibiotic. During 1999, ZITHROMAX continued to be the most prescribed brand-name oral antibiotic in the U.S. sales of ZITHROMAX increased in 1999 due to the increasing recognition by physicians of the product's effectiveness in treating a broad array of infections. DIFLUCAN is used to treat various fungal infections, including vaginal infections and certain infections that afflict AIDS and cancer patients with weakened immune systems. In June 1999, the European Union's Committee for Proprietary Medicinal Products suspended the European Union ("EU") licenses of the oral and intravenous formulations of our 2 antibiotic TROVAN for 12 months. In the rest of the world, including the U.S., the use of TROVAN is limited to serious infections in institutionalized patients (see Item 3, LEGAL PROCEEDINGS, below). For treatment of central nervous system disorders, we offer ZOLOFT and co-promote ARICEPT. ZOLOFT is used for treatment of depression, obsessive-compulsive disorder, panic disorder and posttraumatic stress disorder. In 1999, Zoloft became the second Pfizer-developed product to achieve $2 billion in annual sales. We participated in the 1997 launch of ARICEPT for treatment of mild-to-moderate Alzheimer's disease. ARICEPT substantially expanded the prior market for pharmaceutical treatment of that disease. The drug was discovered and developed by Eisai Co., Ltd. which contracted with us to license and co-promote the product in the U.S. and several other countries. In October 1999, we received an approvable letter from the FDA for RELPAX, for the treatment of migraine. Regulatory review is continuing in Europe. In 1998, we introduced VIAGRA, our oral medication for the treatment of erectile dysfunction. Since launch, doctors have written over 17 million prescriptions for Viagra tablets for more than 6 million patients in the U.S. alone. More than 150 million tablets have been dispensed worldwide. Our other major pharmaceutical products include GLUCOTROL XL, for the treatment of diabetes, and ZYRTEC, which is used for the treatment of allergies and related problems. ZYRTEC is licensed to us by the Belgian company UCB S.A. for sales in the U.S. and Canada. We co-promote ZYRTEC in the U.S. with a subsidiary of UCB S.A. In February 1999, we participated in the launch of CELEBREX with G.D. Searle & Co. (Searle), a division of Monsanto Company, the discoverer and developer of CELEBREX. CELEBREX is used for the relief of symptoms of adult rheumatoid arthritis and osteoarthritis. We co-promote CELEBREX with Searle in all world markets except Japan. CONSUMER HEALTH CARE GROUP Our Consumer Health Care Group products include non-prescription over-the-counter (OTC) medications, therapeutic skin care products and personal care products. Among our better-known brands in the U.S. are: o VISINE eye care o BENGAY topical analgesics o CORTIZONE hydrocortisone skin cream o RID anti-lice products o UNISOM sleep aids o DESITIN ointments for treatment of diaper rash o PLAX pre-brushing dental rinse o BARBASOL shave creams and gels Several product-line extensions building on these brands have been introduced in recent years. Other products are sold only in selected international markets. Sales of the Consumer Health Care Group accounted for about 4% of our total revenues in 1999 and 1998 and 5% in 1997. Our Consumer Health Care Group can extend the life of some of our prescription medications by converting them to OTC medications. For example, an OTC formulation of DIFLUCAN, known as DIFLUCAN ONE, is sold in the U.K. as a treatment for vaginal candidiasis. Similarly, ZYRTEC is sold as an OTC product in Canada under the brand name REACTINE. As market conditions permit, and when we have necessary approval from drug regulatory authorities, we plan to pursue similar launches for other products. ANIMAL HEALTH SEGMENT Pfizer's Animal Health Group discovers, develops, manufactures and sells products for the prevention and treatment of diseases in livestock, poultry and companion animals. Among the products we produce are antibiotics, antiparasitics, anti-inflammatories, vaccines and related products for livestock and companion animals. Our Animal Health Group 3 revenues grew 2% to $1.3 billion in 1999, in part due to the successful launch of the new antiparasitic for dogs and cats, REVOLUTION (marketed as STRONGHOLD in Europe), and continued growth from the canine anti-arthritic Rimadyl. These benefits were offset by continuing weakness in the livestock market in the U.S. and Europe. Animal Health sales accounted for approximately 8% of our total revenues in 1999, 10% of our total revenues in 1998 and 12% of our total revenues in 1997. The $1.3 billion worldwide pet antiparasitic market consists of medicines for external parasites such as fleas and ticks, treatments for gastrointestinal worms, and heartworm preventatives. Our product REVOLUTION is the first product to treat all three problems. This once-a-month, simple-to-administer, topical liquid protects against internal and external parasites, including heartworm, fleas, and ear mites in both dogs and cats; American dog ticks and sarcoptic mange in dogs; and hookworm and roundworm in cats. The U. S. launch of REVOLUTION was one of the most successful in the history of animal health. Since its introduction in 1997, nearly five million arthritic dogs worldwide have been treated with RIMADYL to relieve acute and chronic pain associated with osteoarthritis, a condition that afflicts about 15% of all dogs. The new chewable form provides the pet owner with greater convenience of administration. Other important Pfizer companion animal products include VANGUARD vaccines for canine enteric disease, LEUKOCELL vaccines for feline leukemia, CLAVAMOX/SYNULOX anti-infectives, and ANIPRYL for Cushing's disease and Cognitive Dysfunction Syndrome in dogs. Our Animal Health Group produces leading antiparasitic products, vaccines and anti-infectives for cattle, swine and poultry. Among these are DECTOMAX to protect cattle, swine and sheep from internal and external parasites, and RESPISURE/STELLAMUNE vaccines to prevent a type of pneumonia and the related problems of slow weight gains, decreased feed efficiency, and lack of uniformity in size in swine. Other products for livestock include TERRAMYCIN LA-200, an injectable version of the TERRAMYCIN broad-spectrum antibiotic used for various animal diseases; VALBAZEN and PARATECT products to treat internal parasites and BOVISHIELD vaccine for cattle respiratory disease. The council of European Agricultural Ministers voted to ban the use of our antibiotic feed additive STAFAC (virginiamycin) throughout the European Union after June 1999. We do not expect the ban on sales of STAFAC to have a material effect on the Company's future results of operations. RESEARCH AND PRODUCT DEVELOPMENT Innovation by our research and development operations is very important to the success of our businesses. Our goal is to discover, develop and bring to market innovative products that address major unmet medical needs. This goal has been supported by our substantial research and development investments. We spent approximately $2.8 billion in 1999, $2.3 billion in 1998 and $1.8 billion in 1997 on research and development. We are planning for future growth of our research operations. Current construction at our three major research centers will add approximately two million square feet of laboratory space. Other research facilities are also being added or expanded. We conduct research internally, and also through contracts with third parties, through collaborations with universities and biotechnology companies and in cooperation with other pharmaceutical firms. We also seek out innovative technologies developed by third parties to acquire or incorporate into our product lines through licensing or other arrangements. Drug development is time consuming, expensive and unpredictable. On average, only one out of many thousands of chemical compounds discovered by researchers proves to be both medically effective and safe enough to become an approved medicine. The process from discovery to regulatory approval can take more than ten years. Candidates can fail at any 4 stage of the process, and even late-stage product candidates could fail to receive regulatory approval. In view of the limited period of patent protection, and to gain the marketing advantage of being first to market in a particular therapeutic category, we try to be efficient as well as careful in our new product development. We strive to minimize delays in handling new product candidates and look for opportunities such as contracting studies to outside researchers, to move development forward effectively and efficiently. We feel that our investments in research have been rewarded by the number of pharmaceutical compounds and new therapies we have in all stages of development. In recent years, our discovery scientists have delivered dozens of new chemical compounds to early development. While each new candidate is far from regulatory approval, new drug candidates are the foundation for future products. A table and discussion of supplemental filings for existing products and drug candidates in development are set out under the heading PRODUCT DEVELOPMENTS beginning on page 30 of our 1999 Annual Report. That discussion is incorporated by reference. Our research operations add value to our existing products by improving their effectiveness and by discovering new uses for them. In 1999, for example, the FDA approved the additional use of ZOLOFT for the treatment of posttraumatic stress disorder. Our competitors also devote substantial sums and resources to research and development. In addition, the consolidation that has occurred in our industry has created companies with substantial research and development resources. The competition fostered by the fruits of this research could result in erosion of sales and unanticipated product obsolescence. INTERNATIONAL OPERATIONS We have significant operations outside the United States. They are conducted both through our subsidiaries and through distributors, and involve the same business segments - pharmaceutical and animal health - as our U.S. operations. Japan is our second-largest single national market, with 8% of our total revenues in 1999, 7% in 1998 and 9% in 1997. No single country outside the U.S. had revenues of 10% of our total revenues. For a geographic breakdown of revenues, see the table GEOGRAPHIC DATA on page 60 of our 1999 Annual Report. That information is incorporated by reference. Our international businesses are subject, in varying degrees, to a number of risks inherent in carrying on business in other countries. These include: o currency fluctuations o capital and exchange control regulations o expropriation and nationalization o other restrictive government actions Our international businesses are also subject to government-imposed constraints, including laws on pricing or reimbursement for use of products. See the section under the heading GOVERNMENT REGULATION AND PRICE CONSTRAINTS for discussion of those matters. Revenue growth in 1999 was not significantly impacted by foreign exchange. In 1998, currency movements relative to the U.S. dollar reduced our reported revenues in many countries. Depending on the direction of change relative to the U.S. dollar, foreign currency values can either improve or reduce the reported dollar value of our net assets and results of operations. We cannot predict with certainty future changes in foreign exchange rates or the effect they will have on us. We attempt to anticipate such changes, however, and try to mitigate their effects. See Note 4-D to our financial statements, DERIVATIVE FINANCIAL INSTRUMENTS, on pages 46 and 47 in our 1999 Annual Report. That discussion is incorporated 5 by reference. Related information about valuation and risks associated with such financial instruments in parts E and F of that same Note is also incorporated by reference. MARKETING In our global pharmaceuticals business, we promote our products to health care providers such as doctors, nurse practitioners and hospitals, Pharmacy Benefit Managers and Managed Care Organizations (MCOs). We also market directly to consumers in the United States through direct-to-consumer print and television advertising. In addition, we sponsor general advertising to educate the public about our innovative medical research. Our operations include several pharmaceutical sales organizations. Each sales organization markets a distinct group of products. We increased our sales force over the past several years so that our recently introduced products and late-stage candidates will reach their full potential. Our U.S. pharmaceutical sales representatives total approximately 5,400. This number reflects the creation of a new primary-care sales force and a specialty sales force dedicated largely to rheumatology, as well as the expansion of other specialty sales forces in the U.S. Overseas operations employ about 11,300 sales representatives. Our prescription pharmaceutical products are sold principally to wholesalers, but we also sell directly to retailers, including hospitals, clinics, government agencies and pharmacies. Through our marketing organizations, we explain the approved uses and advantages of our products to medical professionals. We work to gain access to MCO formularies (lists of recommended or approved medicines and other products compiled by pharmacists and physicians) by demonstrating the qualities and treatment benefits of our products. We also work with MCOs to assist them with disease management, patient education and other tools that help their medical treatment routines. Marketing of prescription pharmaceuticals depends to a degree on complex decisions about the scope of clinical trials made years before product approval. All drugs must complete clinical trials required by regulatory authorities to show they are safe and effective for treating one or more particular medical problems. A manufacturer may choose, however, to undertake additional studies to demonstrate additional advantages of a compound, including comparative clinical trials with competitive products. Those studies can be costly, can take years to complete and the results are uncertain. Balancing these considerations makes it difficult to decide whether and when to undertake such additional studies. But, when they are successful, such studies can have a major impact on approved marketing claims and strategies. Our Consumer Health Care Group uses its own representatives to promote its products. We use print and television consumer advertising for our consumer health care products. Those products are sold through various retailers. Separate sales organizations also are used by our Animal Health business to promote its products. Its advertising and promotion are generally targeted to health professionals, directly and through medical journals. Animal health and nutrition products are sold through veterinarians, drug wholesalers, distributors, retail outlets and directly to users. Where appropriate, these products are also marketed through print and television advertising. During 1999, pharmaceutical sales to our three largest pharmaceutical and consumer health care products wholesalers were: o McKesson HBOC, Inc. - 14% of our total revenues; o Cardinal Health, Inc. - 12% of our total revenues; and o Bindley Western Industries, Inc. - 7% of our total revenues. Those sales were concentrated in the Pharmaceutical segment. Apart from these 6 instances, none of our business segments is dependent on any one or group of related customers. PATENTS AND INTELLECTUAL PROPERTY RIGHTS Our products are sold around the world under brand-name trademarks we consider in the aggregate to be of material importance. Trademark protection continues in some countries as long as the mark is used; in other countries, as long as it is registered. Registrations generally are for fixed, but renewable, terms. We own or license a number of U.S. and foreign patents. These patents cover: o pharmaceutical products and their uses o pharmaceutical formulations o product manufacturing processes o intermediate chemical compounds used in manufacturing Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. In the aggregate, our patent and related rights are of material importance to our businesses in the United States and most other countries. Based on current product sales, and considering the vigorous competition with products sold by others, the patent rights we consider significant in relation to our business as a whole are those for NORVASC, CARDURA, ZYRTEC, ZITHROMAX, ZOLOFT, DIFLUCAN, GLUCOTROL XL and VIAGRA. Our basic U.S. patents relating to NORVASC, ZOLOFT, DIFLUCAN, GLUCOTROL XL and VIAGRA expire between 2004 and 2011. The U.S. patent on CARDURA expires in 2000. PROCARDIA XL employs a novel sustained-release drug-delivery system developed and patented by Alza Corporation. We hold an exclusive license to use this delivery system with the active ingredient in PROCARDIA XL. The patents on the system run until 2003. Other companies also offer sustained-release forms of that ingredient or have filed applications with the FDA seeking approval of such products. One such product that has been approved has not been rated by the FDA to be appropriate for substitution in place of PROCARDIA XL. Another product was approved by the FDA in December, 1999, and rated therapeutically equivalent. Additional products were filed for FDA approval in 1998 which appear to infringe our patents (see the discussion of all of these matters in Item 3, LEGAL PROCEEDINGS, below. Also see the discussion below about PROCARDIA XL sales in the section CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS). It is not possible to predict the timing and impact on sales of PROCARDIA XL of competition from other products. ZITHROMAX is patented by Pliva, a Croatian pharmaceutical company. The drug is licensed exclusively to us by Pliva for sales and marketing in major countries, and we purchase the compound in bulk crude form from Pliva. Pliva's U.S. patent on ZITHROMAX expires in 2005. ZYRTEC is patented by the Belgian company, UCB S.A. The drug is licensed exclusively to us for sales in the U.S. and semi-exclusively with UCB S.A. For sales in Canada. The U.S. patent on ZYRTEC held by UCB S.A. expires in 2007. We have other patent rights covering additional products that have smaller sales revenues. We expect that the patents on some of our newest products and late-stage product candidates could become significant to our business as a whole in the future. The expiration of a product patent normally results in significant competition from generic products against the covered product and, particularly in the U.S., can result in a dramatic 7 reduction in sales of the pioneering product. In some cases, however, we can continue to obtain commercial benefits from: o product manufacturing trade secrets o patents on uses for products o patents on processes and intermediates for the economical manufacture of the active ingredients o patents for special formulations of the product or delivery mechanisms o conversion of the active ingredient to over-the-counter products The effect of product patent expiration also depends upon: o the nature of the market and the position of the product in it o the growth of the market o the complexities and economics of manufacture of the product o the requirements of generic drug laws One of the main limitations on our operations in some countries outside the U.S. is the lack of effective intellectual property protection of our products. Under international agreements in recent years, global protection of intellectual property rights is improving. The General Agreement on Tariffs and Trade requires participant countries to amend their intellectual property laws to provide patent protection for pharmaceutical products by the end of a ten-year transition period. A number of countries are doing this. We have experienced significant growth in our businesses in some of those nations and our continued business expansion in those countries depends to a large degree on further patent protection improvement. COMPETITION Competition is intense in all of our businesses, and includes many large and small competitors. The principal means of competition varies among product categories and business groups. Technological innovations affecting: o efficacy o safety o patients' ease of use o cost effectiveness are important to success in all of our businesses. Our businesses also focus on unmet medical needs and therapeutic improvements. Our emphasis on innovation has led to our multi-billion-dollar research and development investments over the past decade. Our pharmaceutical business competes with worldwide research-based drug companies, many smaller research companies with more limited therapeutic focus and generic drug manufacturers. Our pharmaceutical operations are among the largest in the world. In recent years, a comparison of the total cost of medical treatments using pharmaceuticals versus alternative treatments for the same condition has become an important basis of competition. Managed Care Organizations and Pharmacy Benefit Managers look to cost advantages as well as medical benefits in making their drug formulary decisions. Our pharmaceutical sales and marketing organization is a valuable competitive asset. Our salespeople's ability to reach medical professionals with information about our products helps us respond to competitive efforts and launch new products. Many other companies, large and small, manufacture and sell one or more products that are similar to our consumer health care products. Sources of competitive advantage in the OTC market include: o product quality and efficacy 8 o brand identity o advertising and promotion o product innovation o broad distribution capabilities o customer satisfaction o price Significant expenditures for advertising, promotion and marketing are generally required to achieve consumer acceptance of consumer health care products. We have a significant presence in the animal health marketplace, but many other companies offer competitive products. Altogether, there are hundreds of producers of animal health products throughout the world. The principal methods of competition vary somewhat depending on the particular product. They include: o product innovation o service o price o quality o effective promotion to veterinary professionals and consumers We promote our products directly through our sales representatives as well as through advertising. In the current environment of competitive pressures on profit margins, we continue efforts to control the growth of our expenses. Although research and development budgets have grown significantly, we have kept our costs down in other areas such as manufacturing, distribution and sales administration by restructuring and consolidating facilities. These measures have brought us new efficiencies and reduced or contained our operating expenses. MANAGED CARE ORGANIZATIONS The growth of Managed Care Organizations in the U.S. has been a major factor in the competitive make-up of the health care marketplace. Over half the U.S. population now participates in some version of managed care. Because of the size of the patient population covered by MCOs, marketing of prescription drugs to them and the Pharmacy Benefit Managers (PBMs) that serve many of those organizations has become important to our business. MCOs can include medical insurance companies, medical plan administrators, health-maintenance organizations, alliances of hospitals and physicians and other physician organizations. The purchasing power of MCOs has been increasing in recent years due to their growing numbers of enrolled patients. At the same time, those organizations have been consolidating into fewer, even larger entities. This enhances their purchasing strength and importance to us. A major objective of MCOs is to contain and, where possible, reduce health care expenditures. They typically use formularies, volume purchases and long-term contracts to negotiate discounts from pharmaceutical providers. They use their purchasing power to bargain for lower supplier prices. They also emphasize primary and preventive care, out-patient treatment, and procedures performed at doctors' offices and clinics. Hospitalization and surgery, typically the most expensive forms of treatment, are carefully managed. As discussed above in MARKETING, MCOs and PBMs typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower cost, generic medicines are often favored. The breadth of the products covered by formularies can vary considerably from one MCO to another, and many formularies include alternative and competitive products for treatment of particular medical problems. MCOs use a variety of means to encourage patients' use of products listed on their formularies. Exclusion of a product from a formulary can lead to its sharply reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete aggressively to have their products included. Where possible, 9 companies compete for inclusion based upon unique features of their products, such as greater efficacy, better patient ease of use or fewer side effects. A lower overall cost of therapy is also an important factor. Products that demonstrate fewer therapeutic advantages must compete for inclusion based primarily on price. The growth of MCOs also appears to have led to greater usage of some drugs. The use of certain drugs can prevent the need for more costly treatments such as hospitalization, professional therapy or even surgery. Because of these advantages, such drugs can become favored first-line treatments. In addition, the current trend of some patients to opt for managed care alternatives to Medicare may increase overall pharmaceutical usage among that elderly population. Medicare generally does not pay for medicines, so patients who do not have another source of prescription drug coverage must bear that cost. MCOs, however, often offer drug benefits for their participants. These developments have not only created pressure on prices, but also have increased sales of products on formularies. We have been generally, although not universally, successful in having our major products included on MCO formularies. Another way we address the interests of MCOs is by developing disease management programs. These programs can be attractive to MCOs by improving patient communications and compliance with dosage directions, which are important for effective disease treatment. They can help MCOs address various aspects of disease management, such as prevention, diagnosis and treatment of certain diseases, including use of pharmaceutical products. This comprehensive approach can improve the quality of care and lower costly complications of chronic diseases. GENERIC PRODUCTS One of the biggest competitive challenges we face in the U.S. is from generic pharmaceutical manufacturers. Upon the expiration of U.S. patent protection on an important product, we can lose the major portion of U.S. sales of the product within a year. Generic competitors operate without our large research and development expenses and our costs of conveying medical information about the product to the medical community. In addition, the FDA approval process exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, and allows generic manufacturers to rely on the safety and efficacy of the pioneer product. Generic products need only demonstrate a level of availability in the blood stream equivalent to that of the pioneer product. This means that after we have borne the expenses of discovering, developing and testing a medicine for safety and efficacy, obtaining regulatory approval and informing the medical community about its therapeutic benefits, generic competitors can charge much less for a competing version of our product and still be profitable. As noted above, MCOs that focus primarily on the immediate cost of drugs may favor generics over brand-name drugs. Many governments also encourage the use of generics as alternatives to brand-name drugs in their health care programs, including Medicaid in the U.S. Laws in the U.S. generally allow, and in some cases require, pharmacists to substitute generic drugs that have been rated under government procedures to be therapeutically equivalent to a brand-name drug. The substitution must be made unless the prescribing physician expressly forbids it. RAW MATERIALS Raw materials essential to our businesses are purchased worldwide in the ordinary course of business from numerous suppliers. In general, these materials are available from multiple sources. No serious shortages or delays were encountered in 1999, and none are expected in 2000. 10 GOVERNMENT REGULATION AND PRICE CONSTRAINTS Pharmaceutical companies are subject to heavy regulation by a number of national, state and local agencies. Of particular importance is the FDA in the United States. It has jurisdiction over all our businesses and administers requirements covering the testing, safety, effectiveness, approval, manufacturing, labeling and marketing of our pharmaceutical products. In some cases, FDA requirements and/or reviews have increased the amount of time and money necessary to develop new products and bring them to market. The FDA also regulates our consumer health care products and, along with the U.S. Department of Agriculture and the Environmental Protection Agency, our animal health products. Some regulatory actions pertaining to our products are discussed in Item 3, LEGAL PROCEEDINGS, below. Since the beginning of 1998, the approval of new drugs across the EU is possible only using the European Medicines Evaluation Agency's (EMEA) mutual recognition or central approval processes. The use of either of these procedures should provide a more rapid and consistent approval across all fifteen member states than was the case when the approval processes were operating independently within each member state. Further, on January 1, 2000, Norway and Iceland became full participants in the EU central approval processes. In addition, the agreement between the EU and ten Eastern European states to base their approvals on the centralized EU approval will significantly speed the regulatory process in those countries. The EMEA does not have jurisdiction over patient reimbursement or pricing matters in EU member countries, however. We will continue to deal with individual countries on such issues. In recent years, various legislative proposals have been offered in Congress and in some state legislatures that would bring about major changes in the affected health care systems. Some states have passed such legislation, and further federal and state proposals are possible. These could include price or patient reimbursement constraints on medicines and restrictions on access to certain products. Similar issues exist in many foreign countries where we do business. We cannot predict the outcome of such initiatives, but we will work to maintain patient access to our products and to oppose price constraints. Also in the U.S., proposals have called for substantial changes in the Medicare and Medicaid programs. If such changes are enacted, they may require significant reductions from currently projected government expenditures for these programs. Driven by budget concerns, Medicaid managed care systems have been implemented in several states. If the Medicare and Medicaid programs implement changes that restrict the access of a significant population of patients to our innovative medicines, our business could be materially affected. On the other hand, relatively little pharmaceutical use is currently covered by Medicare. As noted above, if changes to these programs shift patients to MCOs that cover pharmaceuticals, or drug coverage for Medicare beneficiaries is expanded, usage of pharmaceuticals could increase. Legislation in the U.S. requires us to give rebates to state Medicaid agencies based on each state's reimbursement of pharmaceutical products under the Medicaid program. We also must give discounts or rebates on purchases or reimbursements of pharmaceutical products by certain other federal and state agencies and programs. See the discussion regarding rebates on page 30 of our 1999 Annual Report for details on the cost to us of such discounts and rebates, which is incorporated by reference. We encounter similar regulatory and legislative issues in most other countries. For example, in 1997, Japan announced a price reduction on drugs. In Europe and some other international markets, the government provides health care at low direct cost to consumers and regulates pharmaceutical prices or patient 11 reimbursement levels to control costs for the government-sponsored health care system. This international patchwork of price regulation has led to inconsistent prices and some third-party trade in our products from markets with low prices. Such trade exploiting price differences between countries can undermine our sales in markets with higher prices. We are also subject to the jurisdiction of various other regulatory and enforcement departments and agencies, such as the Department of Health and Human Services, the Federal Trade Commission and the Department of Justice in the U.S., and are, therefore, subject to possible administrative and legal proceedings and actions by those organizations (see Item 3, LEGAL PROCEEDINGS, below). Such actions may include product recalls, seizures and other civil and criminal sanctions. In some cases, we have initiated product recalls voluntarily. It is difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting us. ENVIRONMENTAL LAW COMPLIANCE Most of our manufacturing and certain research operations are affected by federal, state and local environmental laws. We have made, and intend to continue to make, necessary expenditures for compliance with applicable laws. We are also cleaning up environmental contamination from past industrial activity at certain sites (see Item 3, LEGAL PROCEEDINGS, below). As a result, we incurred capital and operational expenditures in 1999 for environmental protection and clean-up of certain past industrial activity as follows: o environmental-related capital expenditures -- $66 million o other environmental-related expenses -- $88 million While we cannot predict with certainty the future costs of such clean-up activities, capital expenditures, or operating costs for environmental compliance, we do not believe they will have a material effect on our capital expenditures, earnings or competitive position. YEAR 2000 We have not experienced any operational problems as a result of Year 2000 issues, and Year 2000 had no material effect on our revenues. Although the transition from 1999 to 2000 did not adversely impact our Company, there can be no assurances that we will not experience any negative effects or disruptions in our businesses in the future as a result of Year 2000 issues. The total cost of our Year 2000 Program was $130 million, of which we incurred $94 million in 1999, $31 million in 1998 and $5 million in 1997. These costs were expensed as incurred, except for capitalizable hardware of approximately $8 million in 1999, $4 million in 1998 and $1 million in 1997, and were funded through operating cash flows. Such costs did not include normal system upgrades and replacements. CORPORATE/FINANCIAL SUBSIDIARIES We conduct international banking operations through a subsidiary, Pfizer International Bank Europe (PIBE), based in Dublin, Ireland. PIBE, incorporated under the laws of Ireland, operates under a banking license from the Central Bank of Ireland. It makes loans and accepts deposits in several currencies in international markets. PIBE is an active Euromarket lender to high quality corporations and governments through its portfolio of loans and money market instruments. Loans are made primarily on a short and medium term basis, typically with floating interest rates. We also own an insurance operation, The Kodiak Company Limited, which reinsures certain assets, inland transport and marine cargo of our international operations. Financial data for these subsidiaries are set out in Note 3 to our financial statements, FINANCIAL SUBSIDIARIES, on pages 44 and 45 in our 1999 Annual Report, which is incorporated by reference. 12 TAX MATTERS The discussion of tax-related matters (including certain proceedings involving proposed tax adjustments relating to prior years) in Note 9 to our financial statements, TAXES ON INCOME, on pages 49 and 50 in our 1999 Annual Report is incorporated by reference. EMPLOYEES In our innovation-intensive business, our employees are vital to our success. We believe we have good relationships with our employees. As of December 31, 1999, we employed approximately 50,900 people in our operations throughout the world. Geographically, this total breaks down as follows: o United States, 19,300 o Europe, 14,400 o Asia, 6,600 o Canada/Latin America, 5,900 o Africa/Middle East, 4,700 CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS (CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) OUR DISCLOSURE AND ANALYSIS IN THIS REPORT AND IN OUR 1999 ANNUAL REPORT TO SHAREHOLDERS CONTAIN SOME FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS GIVE OUR CURRENT EXPECTATIONS OR FORECASTS OF FUTURE EVENTS. YOU CAN IDENTIFY THESE STATEMENTS BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. THEY USE WORDS SUCH AS "ANTICIPATE," "ESTIMATE," "EXPECT," "PROJECT," "INTEND," "PLAN," "BELIEVE," AND OTHER WORDS AND TERMS OF SIMILAR MEANING IN CONNECTION WITH ANY DISCUSSION OF FUTURE OPERATING OR FINANCIAL PERFORMANCE. IN PARTICULAR, THESE INCLUDE STATEMENTS RELATING TO FUTURE ACTIONS, PROSPECTIVE PRODUCTS OR PRODUCT APPROVALS, FUTURE PERFORMANCE OR RESULTS OF CURRENT AND ANTICIPATED PRODUCTS, SALES EFFORTS, EXPENSES, THE OUTCOME OF CONTINGENCIES SUCH AS LEGAL PROCEEDINGS, ANTICIPATED EFFECTS OF THE MERGER WITH WARNER-LAMBERT DISCUSSED UNDER THE HEADING RECENT DEVELOPMENTS AND FINANCIAL RESULTS. FROM TIME TO TIME, WE ALSO MAY PROVIDE ORAL OR WRITTEN FORWARD-LOOKING STATEMENTS IN OTHER MATERIALS WE RELEASE TO THE PUBLIC. ANY OR ALL OF OUR FORWARD-LOOKING STATEMENTS IN THIS REPORT, IN THE 1999 ANNUAL REPORT AND IN ANY OTHER PUBLIC STATEMENTS WE MAKE MAY TURN OUT TO BE WRONG. THEY CAN BE AFFECTED BY INACCURATE ASSUMPTIONS WE MIGHT MAKE OR BY KNOWN OR UNKNOWN RISKS AND UNCERTAINTIES. MANY FACTORS MENTIONED IN THE DISCUSSION ABOVE - FOR EXAMPLE, GOVERNMENT REGULATIONS AROUND THE WORLD, YEAR 2000 SYSTEMS COMPLIANCE, GENERIC PRODUCT COMPETITION AND THE COMPETITIVE ENVIRONMENT - WILL BE IMPORTANT IN DETERMINING FUTURE RESULTS. CONSEQUENTLY, NO FORWARD-LOOKING STATEMENT CAN BE GUARANTEED. ACTUAL FUTURE RESULTS MAY VARY MATERIALLY. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. YOU ARE ADVISED, HOWEVER, TO CONSULT ANY FURTHER DISCLOSURES WE MAKE ON RELATED SUBJECTS IN OUR 10-Q AND 8-K REPORTS TO THE SEC. ALSO NOTE THAT WE PROVIDE THE FOLLOWING CAUTIONARY DISCUSSION OF RISKS, UNCERTAINTIES AND POSSIBLY INACCURATE ASSUMPTIONS RELEVANT TO OUR BUSINESSES. THESE ARE FACTORS THAT WE THINK COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTED AND HISTORICAL RESULTS. OTHER FACTORS BESIDES THOSE LISTED HERE COULD ALSO ADVERSELY AFFECT THE COMPANY. THIS DISCUSSION IS PROVIDED AS PERMITTED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ^ Balancing current growth and investment for the future remains a major challenge. Our ongoing investments in new product introductions and research and development for future products could exceed corresponding sales growth. This could produce higher costs without a proportional increase in revenues. ^ In the U.S., many of our pharmaceutical products are subject to increasing pricing pressures, which could be significantly impacted 13 by the outcome of the current national debate over Medicare reform. If the Medicare program provided outpatient pharmaceutical coverage for its beneficiaries, the federal government, through its enormous purchasing power under the program, could demand discounts from pharmaceutical companies that may implicitly create price controls on prescription drugs. On the other hand, a Medicare drug reimbursement provision may increase the volume of pharmaceutical drug purchases, offsetting, at least in part, these potential price discounts. In addition, managed care organizations, institutions and other government agencies continue to 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. ^ Thirty-nine percent of our 1999 revenues arose from international operations, and we expect revenue and net income growth in 2000 to be impacted by changes in foreign exchange rates. Revenues from Asia comprised approximately 11% of total revenues in 1999, including 8% from Japan. These international-based revenues as well as our substantial international assets result in our exposure to currency exchange rate changes. In addition, our interest-bearing investments, loans and borrowings are subject to interest rate change risk. The risks of such changes and the measures we have taken to help contain those risks are discussed in the section entitled FINANCIAL RISK MANAGEMENT on page 36 in our 1999 Annual Report. For additional details, see Note 4-D to our financial statements, DERIVATIVE FINANCIAL INSTRUMENTS, on pages 46 and 47 in our 1999 Annual Report. Those sections of the Annual Report are incorporated by reference. Notwithstanding our efforts to foresee and mitigate the effects of changes in fiscal circumstances, we cannot predict with certainty all changes in currency and interest rates, inflation or other related factors affecting our businesses. These factors could affect future results. ^ A new European currency (euro) was introduced in January 1999 to replace the separate currencies of eleven individual countries. The major changes during its first year of existence have occurred in the banking and financial sectors. The impact at the commercial and retail level has been limited but is expected to increase during the next two years through December 31, 2001, when the separate currencies will cease to exist. We are modifying systems and commercial arrangements to deal with the new currency, including the availability of dual currency processes to permit transactions to be denominated in the separate currencies, as well as the euro. The cost of this effort is not expected to have a material effect on our businesses or results of operations. We continue to evaluate the economic and operational impact of the euro, including its impact on competition, pricing and foreign currency exchange risks. There is no guarantee, however, that all problems have been foreseen and corrected, or that no material disruption will occur in our businesses. ^ International operations could be affected by changes in intellectual property legal protections and remedies, trade regulations and procedures and actions affecting approval, production, pricing, reimbursement and marketing of products, as well as by unstable governments and legal systems, intergovernmental disputes and possible nationalization. ^ Cost-containment measures employed by governments that have the effect of limiting patient access to medicines and related issues described above in GOVERNMENT REGULATION AND PRICE CONSTRAINTS affect the growth and profitability of our operations in some countries. Those factors could affect future results. ^ Business combinations among our competitors could affect our competitive position in the pharmaceutical, consumer health care and animal health businesses. Similarly, 14 combinations among our major customers could increase their purchasing power in dealing with us. In addition, our proposed merger with Warner-Lambert could affect our business, finances and capital structure. While we anticipate earnings and revenues growth, as well as substantial cost savings and operating efficiencies to be achieved in connection with the merger with Warner-Lambert, we cannot give any assurance that these results will be realized in the combined company within the time periods contemplated or even if they will be realized at all. ^ Generic competition is a major challenge in the U.S. Loss of patent protection typically leads to dramatic loss of sales in the U.S. market and could affect future results. ^ Risks and uncertainties particularly apply with respect to product-related forward-looking statements. The outcome of the lengthy and complex process of identifying new compounds and developing new products is inherently uncertain. Prospective products can fail to receive regulatory approval. There are also many considerations that can affect marketing of pharmaceutical products around the world. Regulatory delays, the inability to successfully complete clinical trials, claims and concerns about safety and efficacy, new discoveries, patents and products by competitors and related patent disputes and claims about adverse side effects are a few of the factors that could adversely affect the realization of research and development and product-related forward-looking statements. ^ As discussed above in MARKETING, decisions about research studies made early in the development process of a drug candidate can have a substantial impact on the marketing strategy once the drug receives approval. More detailed studies may demonstrate additional benefits that can help in the marketing, but they consume time and resources and can delay submitting the drug candidate for initial approval. We try to plan clinical trials prudently, but there is no guarantee that a proper balance of speed and testing will be made in each case. The quality of our decisions in this area can affect our future results. ^ Difficulties or delays in product manufacturing or marketing, including, but not limited to, the inability to build up production capacity commensurate with demand, or the failure to predict market demand for or to gain market acceptance of approved products could affect future results. ^ We currently have seven products with annual sales to third parties exceeding one billion dollars. In this group are five medicines discovered by PFIZER - NORVASC, ZITHROMAX, ZOLOFT, VIAGRA and DIFLUCAN - and our alliance products LIPITOR and CELEBREX. Those products accounted for more than half of our 1999 revenues. If these or any of our other major products were to become subject to a problem such as loss of patent protection, unexpected side effects, regulatory proceedings, publicity affecting doctor or patient confidence or pressure from competitive products, or if a new, more effective treatment should be introduced, the impact on our revenues could be significant. ^ We cannot always predict with accuracy the timing or impact of possible future competition on sales of our products. for example, PROCARDIA XL, our patented form of sustained-release nifedipine, has been an important product for us, but its sales have been declining, and we expect that to continue. Sales of PROCARDIA XL were $822 million in 1997, $714 million in 1998 and $521 million in 1999. This decline has been due, at least in part, to the medical community's increased emphasis on our more advanced product, NORVASC. It is also partly attributable to the fact that there has been another form of sustained-release nifedipine available on the market since 1993, although it is not approved for treatment of all the same indications as PROCARDIA XL. Additional potentially competitive products have been filed for FDA approval, one of which was approved by the FDA in December, 1999 (see the discussion in Item 3, LEGAL PROCEEDINGS, below). This indicates that the number of medicines that compete with PROCARDIA XL may increase, and 15 the sales of competing products may affect our expected results. ^ During 1995, the authors of some non-clinical 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 and decisions by two national regulatory authorities, plus newly published National Institutes of Health guidelines, were all supportive of the safety of long-acting CCBs like NORVASC AND PROCARDIA XL and of their appropriateness as 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. ^ Growth in costs and expenses, changes in product mix and the impact of divestitures, restructuring and other unusual items that could result from evolving business strategies, evaluation of asset realization and organizational restructuring could affect future results. For example, we may be unable to maintain or further enhance those margin improvements achieved in recent years, which would affect future results. ^ In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. This pronouncement requires us to adopt SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, on January 1, 2001. 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. Such new or revised accounting standards and rules are issued from time to time. Although the standard mentioned above is not expected to have a material impact on our reported financial results, future standards and rules could have such an effect. ^ As described above in the section YEAR 2000, we have not experienced any operational problems as a result of Year 2000 issues, and Year 2000 had no material effect on our revenues. Although the transition from 1999 to 2000 did not adversely impact our Company, there can be no assurances that we will not experience any negative effects or disruptions in our businesses in the future as a result of Year 2000 issues. ^ Changes in the U.S. Tax Code and the tax laws of other countries can affect our net earnings. For example, pursuant to the Small Jobs Protection Act of 1996 (the ACT), Section 936 of the Internal Revenue Code was repealed for tax years beginning after December 31, 1995. Section 936 had created the U.S. possessions corporation income tax credit, which gave us tax benefits for certain operations in Puerto Rico. The Act provided that as an existing credit claimant, we are eligible to continue using the credit against the tax arising from our manufacturing income earned in Puerto Rico for an additional ten-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 Puerto Rico. This ten-year extension does not apply to investment income earned in Puerto Rico, the credit on which expired as of 16 July 1, 1996. The Act did not affect the amendments made to Section 936 by the Omnibus Budget Reconciliation Act of 1993, which provided for a five-year phase-down of the U.S. possession tax credit from 100% to 40%. In addition, the 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, and in 1999, it was further extended to June 30, 2004. ^ Claims have been brought against us and our subsidiaries for various legal, environmental and tax matters, and additional claims arise from time to time. 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 current 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 upon in the discussion of such matters in LEGAL PROCEEDINGS in Item 3 in this report, in TAX MATTERS above and in Note 9 to our financial statements, TAXES ON INCOME, on pages 49 and 50 in our 1999 Annual Report, which is incorporated by reference. ITEM 2. PROPERTIES Our world headquarters is located in several buildings in New York City. We own two of these buildings, including our main 33-story office tower, and rent space in others nearby. The 33-story office tower is located on a site we have leased under a long-term ground lease. Altogether, our headquarters operations occupy over 1.6 million square feet of owned and leased office space in New York City. Our pharmaceutical business owns and leases space for sales and marketing, administrative support and customer service functions around the world. Our major research and development facilities are located in manufacturing/R&D complexes that we own containing multiple buildings in Groton, Connecticut; Sandwich, England and Nagoya, Japan. The buildings at our Groton facility currently contain approximately 3.5 million square feet of floor space. Approximately 1 million square feet is used for manufacturing, and the rest is used for research and development. The Company also began construction in 1998 on an additional 750,000 square-foot facility on a 24-acre site in nearby New London, Connecticut, to initially house 1,300 employees from the Company's research operations. Buildings on our 334-acre Sandwich, England campus house research, our U.K. pharmaceutical sales office and a production plant. These facilities contain almost 2 million square feet of floor space, approximately half of which is used for research and development. An additional 900,000 square feet of new research space is under construction. At our facility in Nagoya, Japan, the buildings contain 790,000 square feet of floor space, of which 300,000 square feet is used for research. We own other important research facilities in Amboise, France and Terre Haute, Indiana. A number of smaller research and development operations around the world focus principally on their local markets. As discussed above, we have been expanding our research and development facilities in recent years to meet the challenges of handling growing research activities. In 1999, over 2.3 million square feet of research facilities was under construction at our sites in Groton, Sandwich and Nagoya. Our Global Manufacturing Division operates 32 plants that produce products for our pharmaceutical, consumer and animal health businesses around the world. Twenty of these are major facilities. These plants handle one or more of three basic types of production processes: o fermentation o organic synthesis o product production 17 We have four major fermentation plants: o Rixensart, Belgium o Sao Paulo, Brazil o Nagoya, Japan o Sandwich, England, U.K. Our major organic synthesis facilities are in four locations: o Barceloneta, Puerto Rico, U.S. o Groton, Connecticut, U.S. o Ringaskiddy, Ireland o Sandwich, England, U.K. We have major product production plants at seventeen sites in eleven countries: o Amboise, France o Barceloneta, Puerto Rico, U.S. o Brooklyn, New York, U.S. o Dalian, China o Illertissen, Germany o Latina, Italy o Lee's Summit, Missouri, U.S. o Lincoln, Nebraska, U.S. o Louvain-la-Neuve, Belgium o Nagoya, Japan o Parsippany, New Jersey, U.S. o Sandwich, England, U.K. o San Jose Iturbide, Mexico o Sao Paulo, Brazil o Terre Haute, Indiana, U.S. o Toluca, Mexico o Valencia, Venezuela Our Consumer Health Care and Animal Health Groups have their principal executive offices in leased facilities one block away from the Company's world headquarters. Consumer Health Care has its principal research operations in Parsippany, New Jersey. Consumer Health Care's sales and marketing offices are generally leased and shared with local pharmaceutical sales offices, except in Mexico and the U.K., where Consumer Health has separate offices. Animal Health owns its North American headquarters in Exton, Pennsylvania, and leases some additional space in a nearby office building. It also owns office space in Zaventem, Belgium, for support of its international operations. Most of Animal Health's research facilities are shared with our pharmaceutical business. Our distribution operations in the U.S. include our large, state-of-the-art distribution and order fulfillment operation in a 450,000 square-foot building on a 20-acre site in Memphis, Tennessee, a new 190,000 square-foot distribution center at our plant site in Parsippany, New Jersey, and a facility in Irvine, California. A new West Coast distribution facility is under construction in Reno, Nevada. The Animal Health Group also operates its own distribution facilities. We also operate distribution facilities in major markets around the world. In general, our properties are well maintained, adequate and suitable to their purposes. The growth of our businesses has created space pressures for certain operations, however. We have responded to such challenges with plans to provide appropriate facilities as needs are demonstrated. Note 7 to our financial statements, PROPERTY, PLANT AND EQUIPMENT on page 48 in our 1999 Annual Report, which discloses amounts invested in land, buildings and equipment, and the discussion of investing activities under the heading SUMMARY OF CASH FLOWS on page 34 of our Annual Report, which describes our capital expenditures, are incorporated by reference. See also the discussion under Note 11 entitled LEASE COMMITMENTS on page 52 of our Annual Report, which is also incorporated by reference. ITEM 3. LEGAL PROCEEDINGS 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 18 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. FORMER FOOD SCIENCE DIVISION In 1999, the Company pleaded guilty to one count of price fixing of sodium erythorbate from July 1992 until December 1994, and one count of market allocation of maltols from December 1989 until December 1995, and paid a total fine of $20 million. The activities at issue involved the Company's former Food Science Group, a division that manufactured food additives and that the Company divested in 1996. The Department of Justice has stated that no further antitrust charges will be brought against the Company relating to the former Food Science Group, that no antitrust charges will be brought against any current director, officer or employee of the Company for conduct related to the products of the former Food Science Group, and that none of the Company's current directors, officers or employees was aware of any aspect of the activity that gave rise to the violations. Five purported class action suits involving these products have been filed against the Company; two in California State Court, and three in New York Federal Court. The Company does not believe that this plea and settlement, or civil litigation involving these products, will have a material effect on its business or results of operations. NIFEDIPINE PATENTS 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. On March 16, 1999, the United States District Court granted Mylan's motion to file an amended answer and antitrust counterclaims. On December 17, 1999, Mylan received final approval from the FDA for its 30 mg. extended-release nifedipine tablet. On February 28, 2000, a settlement agreement was entered into between Mylan and the Company under which the litigation was terminated and Mylan will market a generic sustained-release nifedipine product manufactured by the Company under its own trademark. 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 Laboratories 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 19 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 12, 1999, Biovail filed a motion for summary judgment also based in part on the summary judgment motion granted to Elan in the Bayer v. Elan litigation in the Northern District of Georgia. Pfizer and Bayer's response was filed on April 26, 1999. On September 20, 1999, the United States District Court in Puerto Rico denied Biovail's motion for summary judgment without prejudice to their refiling after completion of discovery in the PROCARDIA XL patent-infringement litigation. The court set an expedited discovery schedule with a deadline of December 30, 1999, to complete discovery of parties and fact witnesses and February 29, 2000, to complete discovery of expert witnesses. On December 20, 1999, the court extended the date to complete fact discovery to January 28, 2000, and that of expert discovery to March 15, 2000. A status conference with the court scheduled for March 17, 2000, has been postponed and a new date is awaited. 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 responded to this motion and oral argument has been held in abeyance pending a settlement conference. In September 1999, a settlement agreement was entered into among the parties staying this litigation until the expiration of U.S. Patent No. 4,412,986 on November 2, 2000. On February 10, 1999, the Company received a notice from Lek U.S.A. of its filing of an ANDA for a 90 mg. formulation of nifedipine alleged to be bioequivalent to PROCARDIA XL. On March 25, 1999, Bayer and Pfizer commenced suit against Lek for infringement of the same two Bayer patents originally asserted against Lek's 60 mg. formulation. This case was also the subject of a settlement conference. In September, 1999, a settlement agreement was entered into among the parties staying this litigation until the expiration of U.S. Patent No. 4,412,986 on November 2, 2000. 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. Martec filed its response to this complaint on February 26, 1999. A hearing to determine claim scope is scheduled for June 1, 2000. 20 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 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. On July 16, 1999, the D.C. Court of Appeals dismissed the appeal on the ground that since the FDA had not approved any ANDA referencing PROCARDIA XL that uses a different extended-release mechanism than the osmotic pump mechanism of PROCARDIA XL, it was premature to maintain this action, stating that Pfizer has the right to bring such an action if, and when, the FDA approves such an ANDA. Subsequent to FDA's final approval of Mylan's ANDA, on December 18, 1999 Pfizer filed suit against FDA in the United States District Court for the District of Delaware. The suit alleges that FDA unlawfully approved Mylan's 30 mg. extended release product because FDA had not granted an ANDA suitability petition reflecting a difference in dosage form from PROCARDIA XL. As a result of the settlement agreement with Mylan, Pfizer and the FDA have agreed to dismiss this suit without prejudice. DOXAZOSIN PATENT On March 31, 1999, the Company received notice from TorPharm of its filing, through its U.S. agent Apotex Corp., of an ANDA for 1 mg., 2 mg., 4 mg. and 8 mg. tablets alleged to be bioequivalent to CARDURA (doxazosin mesylate). The notice letter alleges that Pfizer's patent on doxazosin is invalid in view of certain prior art references. Following a review of these allegations, suit was filed in the United States District Court for the Northern District of Illinois against TorPharm and Apotex Corp. on May 14, 1999. The defendants requested a 90-day period in which to file their answer. The request was granted and TorPharm/Apotex's answer was filed by August 19, 1999. Discovery is in progress. On June 2, 1999, FDA was notified that given the patent litigation and pursuant to provisions of the Federal Food Drug and Cosmetic Act, the FDA may not approve the TorPharm application for thirty months from filing or resolution of the litigation. DRUG SCREENING PATENTS On May 5, 1999, the Company filed an action against Sibia Neurosciences, Inc. in the United States District Court for the District of Delaware seeking a declaratory judgment that two Sibia patents claiming reporter gene drug screening assays are invalid, not infringed by the Company, and unenforceable due to Sibia's misuse of its patent rights in seeking certain license terms. On May 27, 1999, Sibia Neurosciences, Inc. filed an answer to the Company's declaratory judgment action in which Sibia denies that a prior case or controversy existed, but admits that a case or controversy does now exist regarding at least one patent in suit, denies the invalidity, unenforceability and non-infringement of the patents in suit, and asserts various jurisdictional and equitable defenses, affirmative defenses, and lack of standing by the Company to assert patent misuse. Sibia Neurosciences also filed a counterclaim alleging willful infringement by the Company of one of the patents in suit. A reply to that counterclaim denying Sibia's allegation has been filed. The parties submitted a joint status report to the court on December 14, 1999, in which the parties agreed to complete fact discovery by August 21, 2000, and commence trial on January 8, 2001. TROVAFLOXACIN PATENT On May 19, 1999, Abbott Laboratories filed an action against the Company in the United States District Court of the Northern District of Illinois alleging that the Company's use, sale or manufacture of trovafloxacin infringes Abbott's United States Patent No. 21 4,616,019 claiming naphthyriding antibiotics and seeking a permanent injunction and damages. An answer denying these allegations was filed on June 9, 1999. Discovery is in progress. ZOLOFT PATENTS On December 17, 1999, the Company received notice of the filing of an ANDA by Zenith Goldline Pharmaceuticals for 50 mg. and 100 mg. tablets of sertraline hydrochloride alleged to be bioequivalent to ZOLOFT. Zenith has certified to the FDA that it will not engage in the manufacture, use or sale of sertraline hydrochloride until the expiration of Pfizer's U.S. Patent 4,536,518, which covers sertraline per se and expires December 30, 2005. Zenith has also alleged in its certification to the FDA that the manufacture, use and sale of Zenith's product will not infringe Pfizer's U.S. Patent 4,962,128, which covers methods of treating an anxiety-related disorder or Pfizer's U.S. Patent 5,248,699, which covers a crystalline polymorph of sertraline hydrochloride. These patents expire in November 2009 and August 2012, respectively. On January 28, 2000 the Company filed a patent infringement action against Zenith Goldline and its parent Ivax Corporation in the United States District Court for the District of New Jersey for infringement of the `128 and `699 patents. FLUCONAZOLE PATENT On February 1, 2000 the Company received notice of the filing of an ANDA by Novopharm Limited for 50 mg, 100 mg, 150 mg and 200 mg tablets of fluconazole alleged to be bioequivalent to DIFLUCAN. Novopharm has certified to the FDA its position that the Company's U.S. Patent 4,404,216, which covers fluconazole, is invalid. This patent expires in January 2004. On March 10, 2000, the Company filed a patent infringement action under the '216 patent against Novopharm in the United States District Court for the Northern District of Illinois. HYBRID CORN SEED LITIGATION In pre-existing litigation between Pioneer Hi-Bred International, Inc. and DeKalb Genetics Corporation in the United States District Court for the Southern District of Iowa, the court granted on October 8, 1999 Pioneer's motion to add additional parties, including Pfizer Inc. and Monsanto Co. (the present owner of DeKalb Genetics Corporation), as codefendant parties. The amended complaint, which claims violations of the federal Lanham Act and Iowa state law stemming from the codefendants' alleged use of Pioneer's corn seed germplasm in the development of competitive corn seed products, was served on the Company on October 19. The Company filed its answer on December 15, 1999. TROVAN TRADEMARK On September 22, 1999, the jury in a trademark-infringement litigation brought against the Company by Trovan Ltd. and Electronic Identification Devices, Ltd. relating to use of the TROVAN mark for trovafloxacin issued a verdict in favor of the plaintiffs with respect to liability, holding that the Company had infringed Trovan Ltd.'s mark and had acted in bad faith. Following a further damage trial, on October 12, 1999, the jury awarded Trovan Ltd. a total of $143 million in damages, comprised of $5 million actual damages, $3 million as a reasonable royalty and $135 million in punitive damages. The court held a hearing on December 27, 1999, on whether to award the plaintiffs profits based on the company's sales of TROVAN and, if so, the amount of same. On February 24, 2000, the court entered judgment on the jury verdict and enjoined the company's use of the TROVAN mark effective October 16, 2000. The plaintiff's request to be awarded the company's profits from TROVAN sales and for treble damages was denied. The Company's motion for mistrial remains outstanding and will be considered with additional post-trial motions to overturn the jury verdicts and the damage award. 22 SHILEY INCORPORATED 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. ENVIRONMENTAL MATTERS 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 23 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. ASBESTOS MATTERS 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 sixteen 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. As of January 29, 2000, there were 57,328 personal injury claims pending against Quigley and 26,890 such claims against the Company (excluding those that are inactive or have been settled in principle), 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 against excess insurance carriers seeking damages and/or declaratory relief to secure their coverage obligations has now been largely resolved, although claims against several of such insureds do remain pending. 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. BRAND-NAME PRESCRIPTION DRUGS ANTITRUST LITIGATION In 1993, 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, alleging that the manufacturers violated the Sherman Act by agreeing not to give retailers certain discounts and that the failure to give such discounts violated the Robinson Patman Act. A class action was brought on the Sherman Act claim, as well as additional actions by approximately 3,500 individual retail pharmacies and a group of chain and supermarket pharmacies (the "individual actions") on both the Sherman Act and Robinson Patman Act claims. A retailer class was certified in 1994 (the "Federal Class Action"). In 1996, fifteen manufacturer defendants, including the Company, settled the Federal Class Action. The Company's share was $31.25 million, payable in four annual installments without interest. 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 24 wholesalers as named defendants in their cases. The District Court dismissed the case at the close of the plaintiffs' evidence. The plaintiffs appealed and, on July 13, 1999, the Court of Appeals upheld most of the dismissal but remanded on one issue, while expressing doubts that the plaintiffs could prove any damages. The District Court has since opined that the plaintiffs cannot prove such damages. Retail pharmacy cases also have been filed in state courts in five states, and consumer class actions were filed in state courts in fourteen states and the District of Columbia alleging injury to consumers from the failure to give discounts to retail pharmacy companies. 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, California, New Mexico, North Dakota, South Dakota and West Virginia), 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, which has been approved by the Court there. 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 opened 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 responded. A second subpoena was issued to the Company for documents in May 1997 and the Company again responded. We are not aware of any further activity. PLAX 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. RID Since December 1998, four actions have been filed, in state courts in Houston, San Francisco, Chicago and New Orleans, purportedly on behalf of statewide (California) or nationwide (Houston, Chicago and New Orleans) classes of consumers who allege that 25 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 voluntarily dismissed and proceedings in the San Francisco, Chicago and New Orleans cases are still in early stages of the proceedings. The Company believes the complaints are without merit. DESITIN In December, 1999 and January, 2000, two suits were filed in California state courts against the Company and other manufacturers of zinc oxide-containing powders. The first suit was filed by the Center for Environmental Health and the second was filed by an individual plaintiff on behalf of a purported class of purchasers of baby powder products. The suits generally allege that the label of DESITIN powder violates California's "Proposition 65" by failing to warn of the presence of lead, which is alleged to be a carcinogen. In January, 2000, the Company received a notice from a California environmental group alleging that the labeling of DESITIN ointment and powder violates Proposition 65 by failing to warn of the presence of cadmium, which is alleged to be a carcinogen. Several other manufacturers of zinc oxide-containing topical baby products have received similar notices. The Company believes that the labeling for DESITIN complies with applicable legal requirements. FDA REQUIRED POST-MARKETING REPORTS 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 review of the Company's new procedures was undertaken by FDA in 1999. The Company and Agency met to review the findings of this review and agreed that commitments and remedial measures undertaken by the Company related to the Warning Letter have been accomplished. The Company agreed to keep the Agency informed of its activities as it continues to modify its processes and procedures. TROVAN During May and June, 1999, the FDA and the European Union's Committee for Proprietary Medicinal Products (CPMP) reconsidered the approvals to market Trovan, a broad-spectrum antibiotic, following post-market reports of severe adverse liver reactions to the drug. On June 9, the company announced that, regarding the marketing of TROVAN in the United States, it had agreed to restrict the indications, limit product distribution, make certain other labeling changes and to communicate revised warnings to health care professionals in the United States. On July 1, Pfizer received the opinion of the CPMP recommending a one-year suspension of the licenses to market TROVAN in the European Union. The CPMP opinion has been finalized in a Final Decision by the European Commission. Since June, 1999, three suits and several claims have been received by the Company alleging liver injuries due to the ingestion of TROVAN. The majority of these claims have been resolved without litigation. In June and July, 1999, two of the lawsuits were filed in the Circuit Court, Hampton County, South Carolina on behalf of a purported class of all persons who received TROVAN, seeking compensatory and punitive damages and injunctive relief. One of the suits, seeking injunctive relief, has been dismissed. No substantive proceedings have yet occurred in the other suit and the Company believes that it is not properly maintainable as a class action, and will defend against it accordingly. RIMADYL In October 1999 the Company was sued in an action seeking unspecified damages, costs and attorney's fees on behalf of a purported class of people whose dogs had suffered injury or death after ingesting RIMADYL, an antiarthritic medication for older dogs. The suit, which was filed in state court in South Carolina, is in the 26 early pretrial stages. The Company believes it is without merit. MEDICAL TECHNOLOGY GROUP 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. These cases have now been resolved. 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. Most of these claims, along with a number of filed and unfiled claims from other jurisdictions, have now been resolved. The Company believes that most if not all of these cases are without merit. DIABINESE (BRAZIL) In June, 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 sought the award of moral, economic and personal damages to individuals and the payment to a public reserve fund. In February 1996, the trial court issued a decision holding Pfizer Brazil liable. The trial court's opinion also established the amount of moral damages for individuals who might make claims later in the proceeding and set out a formula for calculating the payment into the public reserve fund which could have resulted in a sum of approximately $88 million. Pfizer Brazil appealed this decision. In September 1999, the appeals court issued a ruling upholding the trial court's decision as to liability. However, the appeals court decision overturned the trial court's decision concerning damages, ruling that criteria to apply in the calculation of damages, both as to individuals and as to payment of any amounts to the reserve fund, should be established only in a later stage of the proceeding. The Company believes that this action should not have a material adverse effect on the financial position or the results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 27 EXECUTIVE OFFICERS OF THE COMPANY As of March 10, 2000, the following executive officers of the Company hold the offices indicated until their successors are chosen and qualified after the next annual meeting of shareholders. NAME AGE POSITION Brian W. Barrett........ 60 Vice President; President - Animal Health Group M. Kenneth Bowler....... 57 Vice President - Federal Government Relations Loretta V. Cangialosi... 41 Vice President; Corporate Controller C. L. Clemente.......... 62 Executive Vice President, Corporate Affairs; Secretary and Corporate Counsel; Member of the Corporate Management Committee Gary N. Jortner......... 54 Vice President; Senior Vice President, Product Development- Pfizer Pharmaceuticals Group Karen L. Katen.......... 51 Senior Vice President; Executive Vice President - Pfizer Pharmaceuticals Group and President - U.S. Pharmaceuticals; Member of the Corporate Management Committee J. Patrick Kelly........ 42 Vice President; Senior Vice President - Worldwide Marketing - Pfizer Pharmaceuticals Group Alan G. Levin........... 37 Vice President; Treasurer Henry A. McKinnell...... 57 President and Chief Operating Officer; President - Pfizer Pharmaceuticals Group; Member of the Corporate Management Committee Paul S. Miller.......... 60 Executive Vice President; General Counsel; Member of the Corporate Management Committee George M. Milne, Jr..... 56 Senior Vice President; President - Central Research; Member of the Corporate Management Committee John F. Niblack......... 61 Vice Chairman; Member of the Corporate Management Committee William J. Robison...... 64 Executive Vice President - Corporate Employee Resources; Member of the Corporate Management Committee Craig Saxton............ 57 Vice President; Executive Vice President - Central Research David L. Shedlarz....... 51 Executive Vice President and Chief Financial Officer; Member of the Corporate Management Committee Mohand Sidi Said........ 61 Vice President; Senior Vice President - Pfizer Pharmaceuticals Group and Area President - Asia/Africa/Middle East William C. Steere, Jr... 63 Chairman of the Board and Chief Executive Officer; Chair of the Corporate Management Committee Frederick W. Telling.... 48 Vice President, Corporate Strategic Planning and Policy 28 Information concerning Messrs. Steere, Clemente and Miller and Drs. McKinnell and Niblack is incorporated by reference from the discussion under the captions NOMINEES FOR DIRECTORS WHOSE TERMS EXPIRE IN 2003, DIRECTORS WHOSE TERMS EXPIRE IN 2001 AND NAMED EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS in Chapter Five of our joint proxy statement/prospectus for the 2000 Annual Meeting of Shareholders. BRIAN W. BARRETT Mr. Barrett joined us in 1966 and has held various financial positions, including Chief Financial Officer of Pfizer Canada. In 1971, he was appointed Assistant Controller of Pfizer International in New York; in 1973, Director of International Planning and in 1976, Director of Planning. In 1980, Mr. Barrett was appointed Vice President - Corporate Strategic Planning; in 1983, he became Vice President - Finance for Pfizer International; in 1985, President - -Africa/Middle East; and in 1991, President - Asia/Canada. In 1992, Mr. Barrett was elected one of our Vice Presidents and in 1993, became President, Northern Asia, Australasia and Canada - International Pharmaceuticals Group. Mr. Barrett was named Executive Vice President, International Pharmaceuticals Group, in 1995 and President - Animal Health Group in April 1996. M. KENNETH BOWLER Dr. Bowler joined us in 1989 and was elected Vice President - Federal Government Relations in 1990. He formerly served as Staff Director for the House Ways and Means Committee. Dr. Bowler also was on the faculty of the University of Maryland as an Assistant Professor in the Political Science Department. LORETTA V. CANGIALOSI Ms. Cangialosi joined us in 1993 as Assistant Manager, Corporate Ledger in the Controllers Division. In 1995 she was named Manager, External Financial Reporting and in 1997 became Director, Accounting Advisory Services. Ms. Cangialosi was named Senior Director, Corporate Accounting in January 1999, and in September 1999 was elected our Vice President; Corporate Controller. GARY N. JORTNER Mr. Jortner joined us in 1973 as a Systems Analyst for Pfizer Pharmaceuticals. In 1974, he transferred to product management and progressed through a series of promotions that resulted in his being named Group Product Manager for Pfizer Labs in 1978. In 1981, he became Vice President of Marketing for Pfizer Labs. In 1986, he was promoted to Vice President of Operations for Pfizer Labs. In 1991, he was named Vice President and General Manager, Pfizer Labs Division. In 1992, Mr. Jortner was elected one of our Vice Presidents. In 1994, he was named Vice President; Group Vice President, Disease Management - U.S. Pharmaceuticals Group. In 1997, he became Vice President, Product Development -Pfizer Pharmaceuticals Group, and in 1998, he was promoted to Senior Vice President, Product Development - Pfizer Pharmaceuticals Group. KAREN L. KATEN Ms. Katen joined us in 1974 as a Marketing Associate for Pfizer Pharmaceuticals. Beginning in 1975, she progressed through a number of positions of increasing responsibility in the Roerig product management group which resulted in her being named Group Product Manager in 1978. In 1980, she transferred to Pfizer Labs as a Group Product Manager and later became Director, Product Management. In 1983, she returned to Roerig as Vice President-Marketing. In 1986, she was named Vice President and General Manager-Roerig Division. In 1992, she was elected one of our Vice Presidents, and in 1993, became Executive Vice President of the U.S. Pharmaceuticals Group. In 1995 Ms. Katen was named President of the U.S. Pharmaceuticals Group, and in 1997 became Executive Vice President - Pfizer Pharmaceuticals Group. In May 1999 Ms. Katen was elected a Senior Vice President of the Company. Ms. Katen is a Director of General Motors Corporation and Harris Corporation and serves 29 on the International Council of J.P. Morgan & Co. J. PATRICK KELLY Mr. Kelly joined us in 1981 as a Marketing Research Associate in the Pharmaceuticals Division. He became Product Analyst in 1982 and, in 1983, was made Marketing Associate in the Roerig Division. He progressed through a series of positions of increasing responsibility and became Group Product Manager for Roerig in 1989. In 1992, he was named Vice President-Marketing, Roerig in the U.S. Pharmaceuticals Group and, in 1994, became its Group Vice President, Disease Management. In 1996, he was elected one of our Vice Presidents and, in 1997, was named Senior Vice President, Disease Management U.S. Pharmaceuticals, and later that year became Vice President - Pfizer Pharmaceuticals Group and Senior Vice President - U.S. Pharmaceuticals. In 1998, Mr. Kelly was named Senior Vice President-Worldwide Marketing - Pfizer Pharmaceuticals Group. ALAN G. LEVIN Mr. Levin joined us in 1987 as Senior Operations Auditor for the Controller's Division. In 1988, he joined the Treasurer's Division as Controller of the Pfizer International Bank in San Juan, Puerto Rico. He returned to New York in 1991 as Director-Finance, Asia, and in 1993 was named Senior Director-Finance, Asia. In 1995, Mr. Levin was elected our Treasurer. In 1997, he was elected Vice President; Treasurer. GEORGE M. MILNE, JR. Dr. Milne joined us in 1970 as a Research Scientist and was promoted to Senior Research Scientist and then Project Manager in 1973 and 1974, respectively. In 1978, Dr. Milne became a Discovery Manager with responsibility for research programs targeting inflammation, pain and mental disease. Following additional postdoctoral training and research in pharmacology, he was promoted to Director and then Executive Director of the Department of Immunology and Infectious Diseases. In 1985, Dr. Milne was appointed the Vice President of global Research and Development Operations before becoming the Senior Vice President of Research and Development in 1988. In 1993, Dr. Milne was elected one of our Vice Presidents and, since that same year, has been President of our Central Research Division. In May 1999 Dr. Milne was elected a Senior Vice President of the Company. Dr. Milne is a Director of Mettler-Toledo Corporation, Inc. WILLIAM J. ROBISON Mr. Robison joined us in 1961 as a Sales Representative for Pfizer Labs. After serving in a number of positions of increasing responsibility in the Labs division, he was appointed Vice President of Sales in 1980, and Senior Vice President - Pfizer Labs in 1986. In 1990, he was appointed Vice President and General Manager of Pratt Pharmaceuticals. In 1992, he was named President of the Consumer Health Care Group, and was elected one of our Vice Presidents. In 1996, Mr. Robison was elected Senior Vice President - Corporate Employee Resources, and in May 1999 was elected an Executive Vice President of the Company. CRAIG SAXTON Dr. Saxton joined us in 1976 as Clinical Projects Director for the Central Research Division of Pfizer Limited in Sandwich, England. In 1981, he was named Senior Associate Medical Director for the International Division of Pfizer Inc and, in 1982, became the Division's Vice President, Medical Director. Dr. Saxton became Senior Vice President, Clinical Research and Development for the Central Research Division in 1988. In 1993, he was named Executive Vice President - Central Research and was elected one of our Vice Presidents. DAVID L. SHEDLARZ Mr. Shedlarz joined us in 1976 as Senior Financial Analyst in the Pharmaceuticals Division. Following a series of positions of increasing responsibility, including service as financial manager and controller of the Marketing/Sales/Production, Diagnostics 30 Division, he was promoted to Production Controller of the U.S. Pharmaceuticals Division in 1979. He was appointed Assistant Group Controller - U.S. Pharmaceuticals Division in 1981. In 1984, Mr. Shedlarz assumed responsibilities as Group Controller and was promoted to Vice President of Finance of the U.S. Pharmaceuticals Group in 1989. He was elected our Vice President - Finance in 1992, and was named our Chief Financial Officer in 1995. Mr. Shedlarz became our Senior Vice President in 1997, and in May 1999 was elected an Executive Vice President of the Company. MOHAND SIDI SAID Mr. Sidi Said joined us in 1965 as a professional sales representative. During his career, he has held a variety of management assignments in Algeria, Morocco, Kenya, Egypt, France, Belgium and the United States. In 1996, he was elected one of our Vice Presidents and was also named Senior Vice President - Pfizer Pharmaceuticals Group and Area President -Asia/Africa/Middle East. FREDERICK W. TELLING Dr. Telling joined Pfizer Pharmaceuticals and Diagnostic Products Group in 1977 and progressed through a number of positions of increasing responsibility before being named Director of Planning for the Pharmaceuticals Division in 1981. In 1987, he was named Vice President of Planning and Policy and, in 1994, Senior Vice President of Planning and Policy for the U.S. Pharmaceuticals Group. In October 1994, Dr. Telling was elected our Vice President, Corporate Strategic Planning and Policy. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market for our Common Stock is the New York Stock Exchange. It is also listed on the London, Paris, Brussels and Swiss Stock Exchanges and is traded on various United States regional stock exchanges. Additional information required by this item is incorporated by reference from the table QUARTERLY CONSOLIDATED FINANCIAL DATA on page 61 of our 1999 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Historical financial information is incorporated by reference from the FINANCIAL SUMMARY on page 62 of our 1999 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is incorporated by reference from the FINANCIAL REVIEW on pages 28 through 37 of our 1999 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this item is incorporated by reference from the discussion under the heading FINANCIAL RISK MANAGEMENT on page 36 of our 1999 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is incorporated by reference from the INDEPENDENT AUDITORS' REPORT found on page 38 and from the consolidated financial statements, related notes and supplementary data on pages 39 through 61 of our 1999 Annual Report. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information about our Directors is incorporated by reference from the discussion under Item 3 in Chapter Five of our joint proxy statement/prospectus for the 2000 Annual Meeting of Shareholders. The balance of the response to this item is contained in the discussion entitled EXECUTIVE OFFICERS OF THE COMPANY in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Information about executive compensation is incorporated by reference from the discussion under the heading EXECUTIVE COMPENSATION OF PFIZER in Chapter Five of our joint proxy statement/prospectus for the 2000 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information about security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading SECURITY OWNERSHIP OF PFIZER'S OFFICERS AND DIRECTORS in Chapter Five of our joint proxy statement/prospectus for the 2000 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information about certain relationships and transactions with related parties is incorporated by reference from the discussion under the heading RELATED TRANSACTIONS in Chapter Five of our joint proxy statement/prospectus for the 2000 Annual Meeting of Shareholders. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 14 (a)(1) FINANCIAL STATEMENTS The following consolidated financial statements, related notes and independent auditors' report from the 1999 Annual Report to Shareholders are incorporated by reference into Item 8 of Part II of this report: PAGE(S) IN OUR 1999 ANNUAL REPORT Independent Auditors' Report..................................... 38 Segment Information.............................................. 60 Geographic Data.................................................. 60 Consolidated Statement of Income................................. 39 Consolidated Balance Sheet....................................... 40 Consolidated Statement of Shareholders' Equity................... 41 Consolidated Statement of Cash Flows............................. 42 Notes to Consolidated Financial Statements....................... 43-60 Quarterly Consolidated Financial Data (unaudited)................ 61 14(a)(2) FINANCIAL STATEMENT SCHEDULES Schedules are omitted because they are not required or the information is given elsewhere in the financial statements. The financial statements of unconsolidated subsidiaries are omitted because, considered in the aggregate, they would not constitute a significant subsidiary. 14(a)(3) EXHIBITS THESE EXHIBITS ARE AVAILABLE UPON REQUEST. REQUESTS SHOULD BE DIRECTED TO C.L. CLEMENTE, SECRETARY, PFIZER INC., 235 EAST 42ND STREET, NEW YORK, NY 10017-5755. 3(i) - Our Restated Certificate of Incorporation as of April 22, 1999, is incorporated by reference from our 10-Q report for the period ended April 4, 1999. 3(ii) - Our By-laws as amended June 24, 1999, are incorporated by reference from Exhibit 3(ii) of our 10-Q report for the period ended July 4, 1999. 4(i) - Our Rights Agreement dated as of October 6, 1997, with ChaseMellon Shareholders Services, L.L.C. is incorporated by reference from our report on Form 8-K dated October 6, 1997. 10(i) - Stock and Incentive Plan as amended through July 1, 1999. 10(ii) - Pfizer Retirement Annuity Plan as amended through November 6, 1997 is incorporated by reference from our 1997 10-K report. 10(iii) - The form of severance agreement with the Named Executive Officers identified in our Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated by reference from 33 our 1994 10-K report. 10(iv) - Nonfunded Deferred Compensation and Supplemental Savings Plan is incorporated by reference from our 1996 10-K report. 10(v) - Executive Annual Incentive Plan is incorporated by reference from the exhibit to our Proxy Statement for the 1997 Annual Meeting of Shareholders. 10(vi) - Performance-Contingent Share Award Program is incorporated by reference from Exhibit 10.3 to our 10-Q report for the period ended September 29, 1996. 10(vii) - Nonfunded Supplemental Retirement Plan is incorporated by reference from our 1996 10-K report. 10(viii) - The form of Indemnification Agreement with Directors is incorporated by reference from our 1996 10-K report. 10(ix) - The form of Indemnification Agreement with Named Executive Officers is incorporated by reference from our 1997 10-K report. 10(x) - Non-Employee Directors' Retirement Plan (frozen as of October 1996) is incorporated by reference from our 1996 10-K report. 10(xi) - Annual Retainer Unit Award Plan (for Non-Employee Directors) is incorporated by reference from Exhibit 10.1 to our 10-Q report for the period ended September 29, 1996. 10(xii) - Nonfunded Deferred Compensation and Unit Award Plan for Non-Employee Directors is incorporated by reference from Exhibit 10.2 to our 10-Q report for the period ended September 29, 1996. 10(xiii) - Restricted Stock Plan for Non-Employee Directors is incorporated by reference from our 1996 10-K report. 10(xiv) - Deferred Compensation Plan is incorporated by reference from our 1997 10-K report. 10(xv) - Summary of Annual Incentive Plan. 12 - Computation of Ratio of Earnings to Fixed Charges. 13(a) - The 1999 Annual Report to Shareholders, which, except for those portions incorporated by reference, is furnished solely for the information of the Commission and is not to be deemed "filed." 21 - Subsidiaries of the Company. 23 - Consent of KPMG LLP, independent certified public accountants. 27.1 - Financial Data Schedule for Period Ended December 31, 1999. 27.2 - Financial Data Schedule for Period Ended December 31, 1998. 27.3 - Financial Data Schedule for Period Ended December 31, 1997. 14(b) REPORTS ON FORM 8-K The Company filed reports on Form 8-K during the last quarter of 1999 dated November 8, 1999; November 12, 1999; November 16, 1999; December 1, 1999; December 8, 1999; December 14, 1999 and December 15, 1999. All reports include information reportable under Item 5 of Form 8-K that related to our proposed merger with Warner-Lambert. 34 SIGNATURES Under the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report was signed on behalf of the Registrant by the authorized person named below. Pfizer Inc. BY: /S/ C.L. CLEMENTE Dated: March ___, 2000 ------------------------------------- C.L. Clemente, Executive Vice President, Secretary and Corporate Counsel Under the requirements of the Securities Exchange Act of 1934, this report was signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE ---------- ----- ---- /S/ WILLIAM C. STEERE, JR. Chairman of the Board, Director March 24, 2000 - -------------------------- (William C. Steere, Jr.) (Principal Executive Officer) /S/ DAVID L. SHEDLARZ Executive Vice President March 24, 2000 - -------------------------- and Chief Financial Officer (David L. Shedlarz) (Principal Financial Officer) /S/ LORETTA V. CANGIALOSI Vice President - Controller March 24, 2000 - -------------------------- (Principal Accounting Officer) (Loretta V. Cangialosi) /S/ MICHAEL S. BROWN Director March 24, 2000 - -------------------------- (Michael S. Brown) Director March 24, 2000 - -------------------------- (M. Anthony Burns) /S/ W. DON CORNWELL Director March 24, 2000 - -------------------------- (W. Don Cornwell) SIGNATURES TITLE DATE ---------- ----- ---- Director March 24, 2000 - -------------------------- (George B. Harvey) /S/ CONSTANCE J. HORNER Director March 24, 2000 - -------------------------- (Constance J. Horner) /S/ STANLEY O. IKENBERRY Director March 24, 2000 - -------------------------- (Stanley O. Ikenberry) /S/ HARRY P. KAMEN Director March 24, 2000 - -------------------------- (Harry P. Kamen) /S/ THOMAS G. LABRECQUE Director March 24, 2000 - -------------------------- (Thomas G. Labrecque) /S/ DANA G. MEAD Director March 24, 2000 - -------------------------- (Dana G. Mead) /S/ HENRY A. MCKINNELL President, Chief Operating March 24, 2000 - -------------------------- Officer and Director (Henry A. McKinnell) /S/ JOHN F. NIBLACK Vice Chairman and Director March 24, 2000 - -------------------------- (John F. Niblack) /S/ FRANKLIN D. RAINES Director March 24, 2000 - -------------------------- (Franklin D. Raines) 36 SIGNATURES TITLE DATE ---------- ----- ---- /S/ RUTH J. SIMMONS Director March 24, 2000 - -------------------------- (Ruth J. Simmons) /S/ JEAN PAUL VALLES Director March 24, 2000 - -------------------------- (Jean-Paul Valles) EX-10.(I) 2 STOCK AND INCENTIVE PLAN EXHIBIT 10(i) PFIZER INC. STOCK AND INCENTIVE PLAN --------------------------------- (AS AMENDED THROUGH JULY 1, 1999) 1. PURPOSE The purpose of the Stock and Incentive Plan (known as the "Stock Option and Incentive Plan of 1965 as amended" prior to the 1980 amendment thereof and hereinafter called the "Plan") is to furnish a material incentive to employees of the Company and its subsidiaries by making available to them the benefits of a larger Common Stock ownership in the Company through stock options and otherwise. It is believed that these increased incentives will not only induce the continued service of employees but will also stimulate their efforts towards the continued success of the Company and its subsidiaries, as well as assist in the recruitment of new employees. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any subsidiary to terminate any participant's employment at any time, nor confer upon any participant any right to continue in the employ of the Company or any subsidiary. No employee shall have the right to be selected to receive an option or other award under this Plan or having been so selected, to be selected to receive a future award grant or option. Neither the award nor any benefits arising out of this Plan shall constitute part of a participant's employment contract with the Company or any subsidiary and, accordingly, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Company without giving rise to liability on the part of the Company or any subsidiary for severance payments. 2. ADMINISTRATION Except to the extent otherwise provided in Section 4 and Section 15, the Plan shall be administered by the Employee Compensation and Management Development Committee, which shall make, in its sole discretion, all determinations arising in the administration, construction or interpretation of the Plan including the right to construe disputed or doubtful Plan terms and provisions, and any such determination shall be conclusive and binding on all persons, except as otherwise provided by law. 3. TOTAL NUMBER OF SHARES Subject to the provisions of Section 6(g), the maximum amount of stock which may be issued under the Plan is 1,179,000,000* shares of the Common Stock of the Company (comprised of 72,000,000* shares authorized in 1965, 72,000,000* shares authorized in 1969, 72,000,000** shares authorized in 1972, 72,000,000** shares authorized in 1975, 72,000,000** shares authorized in 1980, 120,000,000*** shares authorized in 1983, 132,000,000*** shares authorized in 1986, 132,000,000*** shares authorized in 1989, 132,000,000**** shares authorized in 1992, 138,000,000***** shares authorized in 1996 and 165,000,000****** shares authorized in 1999). No participant shall be granted (i) options which would result in such participant receiving more than 1,440,000* shares of the total number of shares authorized in 1965, more than 1,440,000* shares of the total number of shares authorized in 1969, or more than 1,440,000** shares of the total number of shares authorized in 1972, or (ii) options or awards which would result in such participant receiving more than 1,440,000** shares of the total number of shares authorized in 1975, more than 2,400,000** shares of the total number of shares authorized in 1980, more than 2,400,000*** shares of the total number of shares authorized in 1983, more than 3,600,000*** shares of the total number of shares authorized in 1986, more than 3,600,000*** shares of the total number of shares authorized in 1989, more than 3,600,000**** shares of the total number of shares authorized in 1992, more than 3,600,000***** shares of the total number of shares authorized in 1996, or more than 4,500,000****** shares of the total number of shares authorized in 1999, or (iii) any option, stock award or performance unit award which would result in ownership by such participant of more than ten percent of the stock of the Company within the meaning of Section 422 of the Internal Revenue Code, or (iv) any incentive stock option, as defined in Section 422 of the Internal Revenue Code, granted after December 31, 1986, which would result in such participant receiving a grant of incentive stock options for stock that would have an aggregate fair market value in excess of $100,000, determined as of the time that the option is granted, that would be exercisable for the first time by such participant during any calendar year. No option with respect to any shares authorized in 1975 shall be granted to the extent that shares authorized in 1972 are available therefor, or with respect to any shares authorized in 1980 to the extent that shares authorized in 1972 or shares authorized in 1975 are available therefor, or with respect to any shares authorized in 1983 to the extent that shares authorized in 1972, 1975 or 1980 are available therefor, or with respect to any shares authorized in 1986 to the extent that shares authorized in 1972, 1975, 1980 or 1983 are available therefor, or with respect to any shares authorized in 1989 to the extent that shares authorized in 1972, 1975, 1980, 1983, or 1986 are available therefor, or with respect to any shares authorized in 1992 to the extent that shares authorized in 1972, 1975, 1980, 1983, 1986 or 1989 are available therefor or with respect to any shares authorized in 1996 to the extent that shares authorized in 1972, 1975, 1980, 1983, 1986, 1989, or 1992 are available therefor, or with respect to any shares authorized in 1999 to the extent that shares authorized in 1972, 1975, 1980, 1983, 1986, 1989, 1992, or 1996 are available therefor. With respect to all options and stock awards granted on or after January 1, 1972, the records of the Company shall specify the number of shares authorized in 1965, the number of shares authorized in 1969, the number of shares authorized in 1972, the number of shares authorized in 1975, the number of shares authorized in 1980, the number of shares authorized in 1983, the number of shares authorized in 1986, the number of shares authorized in 1989, the number of shares authorized in 1992, the number of shares authorized in 1996 and the number of shares authorized in 1999 covered by such options or awards. None of the shares authorized in 1965, 1969 or 1972 shall be available for stock awards. - ---------- * Adjusted for the three-for-one stock split in 1970, the two-for-one stock split in 1983, the two-for-one stock split in 1991, the two-for-one stock split in 1995, the two-for-one stock split in 1997, and the three-for-one stock split in 1999. ** Adjusted for the two-for-one stock split in 1983, the two-for-one stock split in 1991, the two-for-one stock split in 1995, the two-for-one stock split in 1997, and the three-for-one stock split in 1999. *** Adjusted for the two-for-one stock split in 1991, the two-for-one stock split in 1995, the two-for-one stock split in 1997, and the three-for-one stock split in 1999. **** Adjusted for the two-for-one stock split in 1995, the two-for-one stock split in 1997, and the three-for-one stock split in 1999. ***** Adjusted for the two-for-one stock split in 1997 and the three-for-one stock split in 1999. ****** Adjusted for the three-for-one stock split in 1999. 2 4. PARTICIPATION IN PLAN a. Employees: All employees of the Company or its subsidiaries shall be eligible to participate in this Plan. From time to time, the Employee Compensation and Management Development Committee shall determine the employees who shall be granted options under the Plan, the number of shares of Common Stock to be optioned to each such employee, and whether such options shall be "incentive stock options" as defined in Section 422 of the Internal Revenue Code, non-qualified stock options, or Tandem Options as defined herein; and shall determine the individual employees who shall be granted stock appreciation rights under the Plan pursuant to Section 7; and who shall be awarded shares under the Plan pursuant to Section 8, as well as the number of shares of Common Stock to be so awarded, and the restrictions, if any, to be placed thereon and who shall be granted performance unit awards under the Plan pursuant to Section 9 and tandem awards under the Plan pursuant to Section 10; provided, however, that in the case of employees who are also directors of the Company or officers of the Company in categories designated by the Executive Compensation Committee, the Executive Compensation Committee shall make these determinations; and provided further, that the Executive Compensation Committee, or such other Committee as the Board of Directors may appoint, shall make all determinations with respect to all stock appreciation rights that are exercisable in cash or partly in stock and partly in cash and with respect to all options related thereto. b. Ineligible Persons: For any and all purposes under this Plan, the term "employee" shall not include a person hired as an independent contractor, leased employee, consultant or a person otherwise designated by the Company at the time of hire as not eligible to participate in or receive benefits under the Plan, even if such ineligible person is subsequently determined to be an "employee" by any governmental or judicial authority. 5. TERM OF PLAN No option with respect to shares authorized in or prior to 1969 under this Plan shall be granted pursuant to this Plan after December 31, 1978, no option with respect to shares authorized in 1972 shall be granted pursuant to this Plan after December 31, 1992, no option, stock appreciation right or stock award, with respect to shares authorized in 1975 shall be granted pursuant to this Plan after December 31, 1992, no option, stock appreciation right, stock award, performance unit award or tandem award with respect to shares authorized in 1980 shall be granted pursuant to this Plan after December 31, 1992, no option, stock appreciation right, stock award, performance unit award or tandem award with respect to shares authorized in 1983 shall be granted pursuant to this Plan after December 31, 1992, no option, stock appreciation right, stock award, performance unit award or tandem award with respect to shares authorized in 1986 shall be granted pursuant to this Plan after December 31, 1995, no option, stock appreciation right, stock award, performance unit award or tandem award with respect to shares authorized in 1989 shall be granted pursuant to this Plan after December 31, 1998, no option, stock appreciation right, stock award, performance unit award or tandem award with respect to shares authorized in 1992 shall be granted pursuant to this Plan after December 31, 2001, no option, stock appreciation right, stock award, performance unit award or tandem award with respect to shares authorized in 1996 shall be granted pursuant to this Plan after December 31, 2005, no option, stock appreciation right, stock award, performance unit award or 3 tandem award with respect to shares authorized in 1999 shall be granted pursuant to this Plan after December 31, 2008, but options, stock appreciation rights, performance unit awards, tandem awards and restrictions on awards may extend beyond such dates. 6. TERMS AND CONDITIONS OF OPTIONS All options under the Plan shall be subject to the following terms and conditions: (a) Option Price. The option price per share shall be not less than the fair market value of the Common Stock on the date the option is granted, as determined by the Committee in accordance with applicable provisions of the Internal Revenue Code and Treasury Department rulings and regulations thereunder. (b) Number of Shares. The option shall state the number of shares of Common Stock covered thereby. (c) Payment. At the time of the exercise of the option the option price shall be payable in cash and/or, if the option so provides, in shares of Common Stock valued at the market price at the time the option is exercised. The Committee may in its discretion require or permit payroll deductions or other suitable means to enable optionees to accumulate sufficient funds to exercise their options and pay the option price. (d) Term of Option. An incentive stock option shall provide that it shall not be exercisable after the expiration of ten years from the date such option is granted. A non-qualified option may be exercisable for a period greater than ten years if so provided in the terms of the option. (e) Exercise of Option. No option may be exercised during the first year of its term or such longer period as may be specified in the option; provided, however, in the event of a "Change of Control" of the Company, as that term is defined in Section 11(e), the Board may in its discretion make any options that are not yet exercisable immediately exercisable, and further provided the Committee may in its discretion make any options that are not yet exercisable immediately exercisable in cases where (i) an optionee's employment is to be terminated due to a divestiture or downsizing of a business, (ii) in the case of a retiring optionee who holds options with extended vesting provisions, or (iii) otherwise, where the Committee determines that such action is appropriate to prevent inequities with respect to an optionee. Thereafter, an optionee, subject to the terms of the option, may exercise the option in whole at any time or in part from time to time either by giving written notice thereof addressed to the Treasurer of the Company, or by using other methods of notice as the Committee shall adopt, specifying the number of shares to be purchased and accompanied by payment of the option price therefor. In the event of death, the person designated in the optionee's Will, or in the absence of such designation, the legal representative of an optionee, or if a legal representative of the optionee has not been appointed, the optionee's surviving spouse, may in like manner exercise the option provided the same was exercisable by the optionee at the time of his death, but such privilege shall expire, subject to Section 6(d) and 6(f) (iii) hereof, one year after the death of the optionee; provided, however, in any event that if the option is not exercised by the last day in which it is exercisable, the option shall be exercised and the proceeds paid to the deceased optionee's estate. 4 (f) Termination of Option. The option, to the extent not exercised, shall terminate upon its expiration as set forth in Section 6(d) hereof, its surrender as set forth in Section 11(c) hereof, or upon breach by the optionee of any provision of the option, or when the optionee ceases to be an employee for any reason including retirement, whichever event shall first occur; provided, however, that with respect to options granted during and subsequent to August 1997 which are otherwise exercisable in accordance with Section 6(e) hereof on the date of termination of employment, three months after the optionee ceases to be an employee for any reason including retirement, however, if the option so provides, the Committee in its discretion may permit the optionee to exercise the option for reasons of hardship up to twelve months after termination, assuming that the option was otherwise exercisable; further except that, subject to Section 6(d) hereof (i) the optionee, if his employment is terminated as a result of a disability, and provided the option was exercisable at the time of termination of employment, may elect to exercise the option, subject to Section 6(e) hereof, within twelve months after the date of termination, (ii) in the event of his death while an employee, the option shall terminate as provided in Section 6(e) hereof, and (iii) notwithstanding subsections (i) and (ii) above, if the option so provides, in the event that the optionee has retired or is eligible for retirement under Sections 4a., b. or d. of the Company's Retirement Annuity Plan, or as the same may be amended from time to time, or under any pension or retirement plan maintained by the Company or any of its subsidiaries, the optionee, or in the event of death, the person designated in the optionee's Will, or in the absence of such designation, the legal representative of such optionee, or if a legal representative of the optionee has not been appointed, the optionee's surviving spouse, may elect to exercise the option at any time until such option expires by its terms; provided, however, in any event that if the option is not exercised by the last day in which it is exercisable, the option shall be exercised and the proceeds paid to the deceased optionee's estate; any subsequent reemployment of the optionee by the Company shall not affect such optionee's right to exercise the option as provided in this subsection (iii). (g) Recapitalization. In the event of any change in the number or kind of outstanding shares of Common Stock of the Company by reason of a recapitalization, merger, consolidation, reorganization, separation, liquidation, stock split, stock dividend, combination of shares or any other change in the corporate structure or shares of stock of the Company, an appropriate adjustment will be made automatically, in accordance with applicable provisions of the Internal Revenue Code and Treasury Department rulings and regulations thereunder, in the number and kind of shares for which options may thereafter be granted both in the aggregate and as to each optionee, as well as in the number and kind of shares subject to options theretofore granted and the option price payable upon exercise of such options. (h) Transferability. The option shall provide that it will not be transferable by the optionee other than by Will or the laws of descent and distribution and shall be exercisable, during the optionee's lifetime, only by him; provided, however, that the Committee in its discretion may grant (or sanction by way of an amendment to an existing grant) non-qualified stock options which may be transferred by the optionee, solely as gifts during the optionee's lifetime, to any member of the optionee's immediate family or to a trust established for the exclusive benefit of one or more members of the optionee's immediate family, in which case the terms of such option shall so state. A transfer of an option pursuant to this subjection may be effected only by the Company at the written request of an optionee and shall become effective only when recorded in the Company's record of outstanding options. In the event an option is transferred as contemplated in this subsection, such option may not be subsequently transferred by the transferee other than by Will or the laws of descent and 5 distribution, such option shall continue to be governed by and subject to the terms and conditions of this Plan and the relevant grant, and the transferee shall be entitled to the same rights as the optionee as if no transfer had taken place. As used in this subsection, "immediate family" shall mean any spouse, child, stepchild or grandchild, and shall include relationships arising from legal adoption. (i) Applicable Law. The option shall contain a provision that it may not be exercised at a time when the exercise thereof or the issuance of shares thereunder would constitute a violation of any federal or state law or listing requirements of the New York Stock Exchange for such shares. The provisions of the Plan shall be construed, regulated and administered according to the laws of the State of New York without giving effect to principles of conflicts of laws, except to the extent superseded by any controlling Federal statute. (j) Incorporation by Reference. The option shall contain a provision that all the applicable terms and conditions of this Plan are incorporated by reference therein. (k) Tandem Award. Any option constituting a part of a tandem award authorized by Section 10 hereof shall be subject to the terms and conditions of such award. (l) Other Provisions. The option shall contain such provisions as the Committee shall deem advisable consistent with the terms of the Plan as herein set forth. In addition, the incentive stock options shall contain such other provisions as may be necessary to meet the requirements of the Internal Revenue Code and the Treasury Department rulings and regulations issued thereunder with respect to incentive stock options. 7. STOCK APPRECIATION RIGHTS The Committee may, in its discretion, grant stock appreciation rights to the holder of any incentive stock option or non-qualified stock option granted by the Company. Such appreciation rights shall be subject to such terms and conditions consistent with the Plan as the Committee shall impose from time to time, including the following: (a) An appreciation right may be made part of any such option at the time of its grant or at any time thereafter prior to its expiration; (b) Upon exercise of an appreciation right the holder shall be entitled to receive: (i) a number of shares of the Common Stock of the Company determined by dividing: (1) the number of shares which the optionee selects, not to exceed the total number of shares that the optionee is eligible to purchase as of the exercise date under the related option, multiplied by the amount, if any, by which the fair market value of a share of the Common Stock of the Company on the exercise date exceeds the option price provided in the related option, by (2) the fair market value of a share of the Common Stock of the Company on the exercise date; provided, however, that the total number of shares which 6 may be received pursuant to the exercise of an appreciation right shall not exceed the total number of shares subject to the related option; or (ii) if so provided in the award, (a) payment of cash equal to the aggregate fair market value on the date of such exercise of the number of shares of Common Stock determined under clause (i); or (b) in part cash and in part shares; all as determined by the Committee in its sole discretion; (c) No fractional share or cash in lieu thereof will be issued upon the exercise of any such right; and (d) Exercise of an appreciation right, in whole or in part, shall exhaust and terminate the related option with respect to the number of shares used in the calculation under subsection (b)(i)(1) of this Section 7 in determining the number of shares issued upon such exercise of the appreciation right (or which would have been issued but for any cash payment). Upon such exercise of an appreciation right, the number of shares subject to reallocation under Section 13 shall be equal to the difference between the number of shares used in the calculation under subsection (b)(i)(1) of this Section 7 and the number of shares issued to the optionee pursuant to such exercise (or which would have been issued but for any cash payment). 8. STOCK AWARDS Stock awards will consist of shares of Common Stock of the Company issued to participating employees as additional compensation for their services to the Company. Stock awards shall be subject to the provisions of Section 3, this Section 8, Section 11(a), (c) and (d) and, during the period in which the restrictions or the Company's right of reacquisition hereinafter referred to are in effect, Section 11(b). Other than for stock awards determined in accordance with the Company's Performance-Contingent Share Award Program and paid out under this Plan, as to which there shall be no waiting period, each stock award to a participant shall provide that the shares subject to such award may not be transferred or otherwise disposed of by the participant prior to the expiration of a period or periods specified therein, which shall not occur earlier than one year following the date of the award (except that the award may permit the earlier lapse of such restriction in the event of the participant's death or disability or retirement pursuant to any pension or retirement plan maintained by the Company or any of its subsidiaries), and that the Company shall have the right to reacquire such shares upon termination of the participant's employment with the Company while such restriction is in effect, such reacquisition to be upon the terms and conditions provided in the award. Stock awards shall also be subject to such other terms and conditions, not inconsistent therewith, as the Committee determines to be appropriate. 9. PERFORMANCE UNIT AWARDS Performance unit awards will consist of performance units credited to participating employees. Each award shall specify the initial value of each performance unit, such value to be determined by reference to the book or market value of the Common Stock of the Company or to the Company's earnings or such other criteria related to the Company's performance as the Committee may deem 7 appropriate. The award shall be payable in cash and/or Common Stock of the Company as the Committee shall determine in its sole discretion. Subject to the provisions of this Section 9 and of Section 11, the Committee shall have exclusive authority to determine additional terms and conditions of each performance unit award. Such terms and conditions may include, without limitation, provisions under which: (1) On the payment date prescribed in the award a participant shall become entitled to receive the full value of each such unit on such date, or such other amount as such award may specify; (2) Each unit may accrue earnings determined by reference to earnings per share or dividends paid per share on the Common Stock of the Company, or to the prime or another specified lending rate, or to other criteria specified in the award and payable at such time or times as may be specified therein; (3) The right of a participant to receive payments in respect of a performance unit may be made subject in whole or in part to the Company's attainment of earnings or other objectives specified in the award; and (4) The determination of all relevant valuation and other data pertaining to the award shall be in the sole judgment of the Committee. Without limitation of the foregoing, in the event that an amount payable in respect of an award is based in whole or in part on the Company's earnings or the book value of its Common Stock, the Committee may make such adjustments to the publicly reported amounts of the Company's consolidated earnings or of such book value as it deems appropriate for changes in accounting practices or principles, for material acquisitions or dispositions of stock or property, for recapitalizations or reorganizations or for any other events with respect to which the Committee determines such an adjustment to be appropriate in order to avoid distortion in the operation of the Plan. Each award shall be evidenced by a written instrument which shall set forth the number of performance units covered thereby, the initial dollar value of each such unit, the terms and conditions, if any, under which such value may change prior to the vesting of the unit, the terms and conditions under which each such unit will vest and such other matters as the Committee in its sole discretion may deem appropriate. The Committee may from time to time establish such rules as it deems appropriate regarding the manner and timing of payments of amounts due in respect of vested units. No performance unit award shall provide for the vesting in a participating employee of any performance unit covered thereby prior to the expiration of a period of one year after the date of the award, except that the award may provide for such vesting in the event of death or disability or retirement of the employee pursuant to a pension or retirement plan maintained by the Company or one of its subsidiaries prior to the expiration of such period. Each award shall provide that prior to the vesting of the units covered thereby they shall be subject to forfeiture (A) upon the termination of the recipient's employment with the Company, (B) as contemplated by Section 10 hereof, if such award is part of a tandem award, and (C) as may otherwise be specified in the award. No participant shall be entitled to receive in respect of a performance unit payments of amounts exceeding twice the original value established for such unit. 8 The maximum dollar value of performance units which may be initially awarded to participants may not exceed 1,500,000 "Reference Units" in the aggregate for all participants, and 50,000 Reference Units for any one participant. For purposes of this paragraph: (1) A Reference Unit shall be the equivalent of the greater of (a) the fair market value of one share of the Common Stock of the Company on the date as of which a particular award of performance units is made, or (b) the book value of a share of such Common Stock as at the end of the last completed fiscal year of the Company prior to such award date plus the cash dividends paid per share on such stock during such fiscal year; and (2) Crediting of an award of performance units shall exhaust and terminate a number of Reference Units equal to the number obtained by dividing the credited dollar value of such performance units by the greater of the amounts referred to in subclauses (a) and (b) of Clause 1 above, and except as provided in the following sentence, such terminated Reference Units shall not be utilized for subsequent awards. In the event that an award of performance units is forfeited or for any other reason the cash amount or the value of the shares of the Common Stock of the Company (as determined by the Committee in its sole judgment) ultimately delivered to a participant in payment for an award of performance units (other than amounts paid to the participant as earnings on the performance units) is less than the Reference Units originally exhausted and terminated upon the crediting of such award, a number of Reference Units equal to the dollar amount of such shortfall divided by the value originally assigned to such Reference Units shall be restored and become available for subsequent awards under the Plan. Nothing contained herein shall be deemed to limit the right of the Board of Directors or a duly appointed committee thereof to authorize the payment or award of compensation other than in stock to any employee otherwise than pursuant to the Plan, regardless of the fact that a particular form of compensation may be the same as or similar to that which the Committee may pay or award to participants under Section 9 of the Plan. 10. TANDEM AWARDS The Committee may, in its discretion, grant tandem awards to participating employees. A tandem award shall consist of a right of election by the employee among two or more of the following: (A) an option, which may include a stock appreciation right with respect thereto, (B) a performance unit award, and (C) a stock award. Subject to the provisions of Section 11, such right of election shall be upon such terms and conditions as the Committee may specify in the tandem award, which shall include the following: (a) The number of shares of the Common Stock of the Company covered by the option, the number of shares covered by the stock award and the number of performance units covered by the performance unit award; 9 (b) Provisions establishing the number of shares and performance units which will remain subject to each portion of the tandem award upon the exercise of the right of election in whole or in part; and (c) The date on which the right of election shall terminate unless earlier exercised or terminated pursuant to the terms of the tandem award. 11. CONDITIONS APPLICABLE TO ALL AWARDS (a) Recapitalization. In the event of any change in the number or kind of outstanding shares of Common Stock of the Company by reason of a recapitalization, merger, consolidation, reorganization, separation, liquidation, stock split, stock dividend, combination of shares or any other change in the corporate structure or shares of stock of the Company, an appropriate adjustment will be made automatically, in accordance with applicable provisions of the Internal Revenue Code and Treasury Department rulings and regulations thereunder, in the number and kind of shares and performance units subject to Sections 8, 9 and 10 and the maximum dollar value of performance units subject to Sections 9 and 10. (b) Transferability. Each award to a participant under Section 8, 9 or 10 shall provide that neither the award nor any right or interest of a participant therein shall be transferable by the participant other than by Will or the laws of descent and distribution, and that such award shall be exercisable, during the participant's lifetime, only by him. (c) Surrender. The Committee may require the surrender of an option, stock appreciation right, stock award or performance unit award granted under this Plan as a condition precedent to a grant of a new option, stock appreciation right, stock award or performance unit award for the same or a different number of shares or having the same or a different initial value in Reference Units as the option, stock appreciation right, stock award or performance unit award surrendered. Such new option, stock appreciation right, stock award or performance unit award shall be subject to the terms or conditions specified by the Committee at the time the new option, stock appreciation right, stock award or performance unit award is granted, all determined in accordance with the provisions of this Plan without regard to the price, period of exercise, or any other terms or conditions of the option, stock appreciation right, stock award or performance unit award surrendered. (d) Leave of Absence. If approved by the Committee, an employee's absence or leave because of military or governmental service, disability or other reason shall not be considered an interruption of employment for any purpose of the Plan. (e) Change of Control shall mean the occurrence of any of the following events: (a) at any time during the two-year period following the Effective Date, or the beginning of a renewal term as the case may be, at least a majority of the Company's Board of Directors shall cease to consist of "Continuing Directors" (meaning directors of the Company who either were directors at the beginning of such two-year period or who subsequently became directors and whose election, or nomination for election by the Company's stockholders, was approved by a majority of the then Continuing Directors); or (b) any "person" or "group" (as determined for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934), except any majority-owned subsidiary of the Company or any 10 employee benefit plan of the Company or any trust or investment manager thereunder, shall have acquired "beneficial ownership" (as determined for purposes of Securities and Exchange Commission ("SEC") Regulation 13d-3) of shares of Common Stock of the Company having 20% or more of the voting power of all outstanding shares of capital stock of the Company, unless such acquisition is approved by a majority of the directors of the Company in office immediately preceding such acquisition; or (c) a merger or consolidation occurs to which the Company is a party, whether or not the Company is the surviving corporation, in which outstanding shares of Common Stock of the Company are converted into shares of another company (other than a conversion into shares of voting common stock of the successor corporation or a holding company thereof representing 80% of the voting power of all capital stock thereof outstanding immediately after the merger or consolidation) or other securities (of either the Company or another company) or cash or other property; or (d) the sale of all, or substantially all, of the Company's assets occurs; or (e) the stockholders of the Company approve a plan of complete liquidation of the Company. 12. DEFINITIONS (a) Company. The term "Company" shall mean Pfizer Inc, a Delaware corporation. (b) Board of Directors. The term "Board of Directors" shall mean the Board of Directors of Pfizer Inc. (c) Employee Compensation and Management Development Committee. The term "Employee Compensation and Management Development Committee" shall mean the Employee Compensation and Management Development Committee of Pfizer Inc as constituted by resolution of the Board of Directors. (d) Executive Compensation Committee. The term "Executive Compensation Committee" shall mean the Executive Compensation Committee of Pfizer Inc as constituted by resolution of the Board of Directors. (e) Committee. The term "Committee" shall mean the Employee Compensation and Management Development Committee or such other committee referred to in the second proviso of the last sentence of Section 4 hereof, as may be appropriate. (f) Subsidiary. The term "subsidiary" shall mean a subsidiary corporation of the Company as defined in Section 424(f) of the Internal Revenue Code. (g) Common Stock. The term "Common Stock" shall mean the $.05 par value Common Stock of the Company, authorized but unissued, or issued and reacquired by the Company and held as Treasury Stock, or held by any trust established by the Company for the purpose of satisfying the Company's obligations for the issuance of Common Stock under the Plan. (h) Tandem Options. A "Tandem Option" shall mean an incentive stock option and a non-qualified option granted to an optionee, subject to the provision that the exercise of all or any part of either option will result in a reduction in the other option. 11 (i) Internal Revenue Code. The term "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 13. REALLOCATION OF UNUSED SHARES Any shares which are not purchased or awarded under an option, performance unit award or right of election which has terminated or lapsed, either by its terms or pursuant to the exercise, in whole or in part, of an award or right granted under the Plan, or shares which are reacquired by the Company pursuant to Section 8 hereof, may be used for the further grant of options or, if such shares were authorized in 1975, stock awards under the Plan, or if such shares were authorized in 1980 or after, stock awards, performance unit awards or tandem awards under the Plan. For purposes of this Section 13 the number of shares subject to a tandem award under Section 10 hereof which shall be deemed not to have been purchased or awarded as of the time such award terminated or lapsed shall equal the excess, if any, of (i) the maximum number of shares which the participant was entitled to receive under the tandem award over (ii) the number of shares which he in fact had received as of the time of such termination or lapse. 14. USE OF PROCEEDS The proceeds received by the Company from the sale of stock under the Plan shall be added to the general funds of the Company and shall be used for such corporate purposes as the Board of Directors shall direct. 15. AMENDMENT AND REVOCATION The Board of Directors shall have the right to alter, amend or revoke the Plan or any part thereof at any time and from time to time, provided, however, that without the consent of the participants affected no change may be made in any option or award theretofore granted, which will impair the rights of participants under outstanding options or awards; and provided further, that the Board of Directors may not, without the approval of the holders of a majority of the outstanding Common Stock, make any alteration or amendment to the Plan which increases the maximum number of shares of Common Stock which may be issued under the Plan or the number of shares of such stock which may be issued to any one participant, extends the term of the Plan or of options granted thereunder, reduces the option price below that now provided for in the Plan, or changes the conditions of exercise of options specified in Section 6(e). The Committee may make non-substantive administrative changes to the Plan so as to conform with or take advantage of governmental requirements, statutes or regulations. The Employee Compensation and Management Development Committee may delegate to another committee, as it may appoint, the authority to take any action consistent with the terms of the Plan, either before or after an option or award has been granted, which such other committee deems necessary or advisable to comply with any government laws or regulatory requirements of a foreign country, including but not limited to, modifying or amending the terms and conditions governing any options or awards, or establishing any local country plans as sub-plans to this Plan, each of which may be attached as an Appendix hereto. 12 16. COMPLIANCE WITH SECTION 16 With respect to Members subject to Section 16 of the Securities Exchange Act of 1934, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent that compliance with any Plan provision applicable solely to such Members is not required in order to bring a transaction by such Member into compliance with Rule 16b-3, it shall be deemed null and void as to such transaction, to the extent permitted by law and deemed advisable by the Plan administrators. To the extent any provision of the Plan or action by the Plan administrators involving such Members is deemed not to comply with an applicable condition of Rule 16b-3, it shall be deemed null and void as to such Members, to the extent permitted by law and deemed advisable by the Plan administrators. 13 APPENDIX A ---------- RULES OF THE PFIZER INC STOCK AND INCENTIVE PLAN FOR EMPLOYEES IN FRANCE 1. INTRODUCTION The Pfizer Inc Stock and Incentive Plan (hereinafter the "Plan" or the "U.S. Plan") specifically authorizes the Committee to establish rules applicable to options granted under the U.S. Plan, including options granted to employees in France, as the Committee deems advisable. The Committee has determined that it is advisable to establish a sub-plan for the purposes of permitting such options to qualify for favorable local tax and social security treatment in France. Therefore, the Company now establishes a sub-plan of the U.S. Plan for the purpose of granting options which qualify for the favorable tax and social security treatment in France applicable to options granted under the Law n(0) 70-1322 of December 31, 1970, as subsequently amended, to qualifying employees who are resident in France for French tax purposes. The terms of the U.S. Plan, of which this sub-plan is a part, shall constitute the Company's stock option plan for French Employees (the "French Plan"). Under the French Plan, the qualifying employees will be granted only stock options. In no case will they be granted substitute awards, e.g., stock bonuses, restricted stock, stock appreciation rights or other similar awards. 2. DEFINITIONS Terms used in the French Plan shall have the same meanings as set forth in the U.S. Plan. In addition, the term "Option" shall have the following meaning: a. Purchase options, that are rights to acquire shares repurchased by the Company prior to the grant of said options; or b. Subscription options, that are rights to subscribe newly issued shares. The term "Grant Date" shall be the date on which the Committee both (a) designates the optionee and (b) specifies the terms and conditions of the Option including the number of shares and the Option price. The term "Exercise Eligibility Date" shall mean the fifth anniversary of the Grant Date. 3. ENTITLEMENT TO PARTICIPATE Any salaried employee or corporate executive in France shall be eligible to receive options under the French Plan provided that he or she also satisfies the eligibility conditions of the U.S. Plan. Options may not be issued under the French Plan to employees or executives owning more 1 than ten percent (10%) of the Company's capital shares or to individuals other than employees and corporate executives of a French subsidiary of the Company. Options may not be issued to directors of a French subsidiary unless they are employed by such subsidiary. 4. CONDITIONS OF THE OPTION/OPTION PRICE Notwithstanding any provision in the U.S. Plan to the contrary, the conditions of the Options (option price, number of underlying shares and vesting period) will not be modified after the grant date, except as provided under Section 6 of the French Plan. In this respect, Options will not be repriced, re-granted, nor will the time at which Options may be exercised be accelerated. The option price per share of common stock payable pursuant to options issued hereunder shall be fixed by the Committee on the date the option is granted, but in no event shall the option price per share be less than the greater of: a. with respect to purchase options over the common stock, the higher of either 80% of the average quotation price of such common stock during the 20 days of quotation immediately preceding the grant date or 80% of the average purchase price paid for such common stock by the Company; b. with respect to subscription options over the common stock, 80% of the average quotation price of such common stock during the 20 days of quotation immediately preceding the grant date; and c. the minimum option exercise price permitted under the U.S. Plan. 5. EXERCISE OF AN OPTION Upon exercise of an option, the full option price will have to be paid either by check or credit transfer. The optionee may also give irrevocable instructions to a stockbroker to properly deliver the option price to the Company. The shares acquired upon exercise of an option will be recorded in an account in the name of the shareholder, or if the shares are held by a broker after exercise, in an account in the name of the shareholder with the broker. No Option can be exercised before the Exercise Eligibility Date. However, in the case of death of an optionee, outstanding options shall be immediately vested and exercisable under the conditions set forth by Section 7 of the French Plan. 6. CHANGES IN CAPITALIZATION In compliance with French law, the option price shall not be modified during the option's duration. Adjustments to the option exercise price or number of shares subject to an option issued hereunder shall be made to preclude the dilution or enlargement of benefits under such option only in the case of one or more of the following transactions by the Company: 2 a. an increase of corporate capital by cash contribution; b. an issuance of convertible or exchangeable bonds; c. a capitalization of retained earnings, profits, or issuance premiums; d. a distribution of retained earnings by payment in cash or shares; and e. a reduction of corporate capital by set off against losses. 7. DEATH In the event of the death of a French optionee, said individual's heirs may exercise the option within six months following the death, provided that any option which remains unexercised shall expire six months following the date of the optionee's death. 8. INTERPRETATION It is intended that options granted under the French Plan shall qualify for the favorable tax and social security treatment applicable to stock options granted under the Law n(0) 70-1322 of December 31, 1970, as subsequently amended, and in accordance with the relevant provisions set forth by French tax law and the French tax administration. The terms of the French Plan shall be interpreted accordingly and in accordance with the relevant provisions set forth by French tax and social security laws, as well as the French tax and social security administrations. 9. AMENDMENTS Subject to the terms of the U.S. Plan, the Committee reserves the right to amend or terminate the French Plan at any time. 10. ADOPTION The French Plan was adopted by the Board of Directors of the Company at a meeting held on August 27, 1998. 3 APPENDIX B ---------- SPECIAL PROVISIONS APPLICABLE TO EMPLOYEES IN THE UNITED KINGDOM 1. ADMINISTRATION; OPERATION AND EFFECT This Amendment to the Plan, which is effective as of June 26, 1986 sets forth the Employee Share Option (UK) Scheme (hereinafter referred to as "the Scheme"). In all respects, the Scheme will be administered by the Committee as provided in Section 2 of the Plan.***** No amendment to the Plan shall have effect in relation to the Scheme and no amendment to the Scheme shall have effect without the prior approval of the Board of Inland Revenue in the UK. The Committee shall be responsible for ensuring that all matters relating to the Scheme are in compliance with UK tax laws and codes. 2. STOCK Options granted under this Scheme shall be to purchase shares of the Company's authorized, but unissued or reacquired Common Stock (hereinafter referred to as "Scheme Shares") satisfying the requirements of paragraphs 7 to 11 of Schedule 10 to the Finance Act of 1984 (hereinafter referred to as "Schedule 10"). The total number of such shares with respect to which options may be granted under the Scheme is subject to the limits set out in the Plan* and the limits set out below. 3. ELIGIBILITY Persons eligible to receive options under the Scheme shall be employees or full time directors of the Company's UK subsidiaries who are employed at the time of the grant of the option and whom the Committee selects from time to time PROVIDED ALWAYS that at the date of the grant or exercise of the option, they are not ineligible to participate in the Scheme by virtue of paragraph 4(1)(b) of Schedule 10.***** 4. TERMS AND CONDITIONS OF OPTIONS (a) Grants of Options Offers of options may be sent as soon as practicable after approval of the Scheme by the UK Board of Inland Revenue, and thereafter at any time. All offers of options shall be evidenced by an option certificate and shall be made on the basis that participation in the Scheme will be deemed to constitute acceptance of the provisions set forth or incorporated by reference in this Amendment to the Plan. (b) Number of Shares The number of Scheme Shares subject to each option shall be stated. Such number shall be determined by the Committee, but their aggregate Market Value, as that term is defined in Schedule 10, and number of Shares shall not at any time exceed either: (i) the aggregate fair market value or the number of Shares as is determined for such option holder by the Committee in accordance with Section 3 of the Plan; or (ii) in total with subsisting options over shares granted under any scheme established by the Company or any associated company of the Company (not being a savings-related scheme) approved by the Board of Inland Revenue under Schedule 10, (pound)30,000.****** In calculating the limits stated above and the Market Value, sums denominated in US dollars shall be converted to sterling at the rate of exchange published by the Company's bankers (being a United Kingdom clearing bank) at 11 o'clock a.m. on the date of the grant of the relevant option. (c) Option Price and Payment of Option Price (i) The option price per share shall be no less than the mean between the high and the low selling prices on the composite tape of the New York Stock Exchange as reported by the New York Times for the date the option is granted. (ii) Upon the exercise of an option, the option price shall be payable in lawful money of the United States and may be paid in cash or by certified check or by bank draft. (d) Terms and Exercise of Options The times at which and the terms under which any option shall be exercisable shall (unless otherwise stated in accordance with the determination of the Committee and with prior approval of the Board of Inland Revenue) be as stated in Section 6(d), 6(e) AND 6(f)**, ***** of the Plan provided that the reference to Section 11(c) in Section 6 of the Plan shall be replaced by a reference to Clause 4(f) of the Scheme and in no event may an option be exercised more than 12 months after an option holder's death.***, ***** (e) Recapitalization Section 6(g)***** of the Plan shall apply to the Scheme provided that any adjustments made pursuant to that Section shall not be made automatically but shall be subject to the prior approval of the Board of Inland Revenue pursuant to Schedule 10 to the Finance Act and take effect only after such approval. 2 (f) Surrender The Committee may require the surrender of an option granted under the Scheme as a condition precedent to a grant of a new option for the same or a different number of shares surrendered. Such new options shall be subject to the terms and conditions specified by the Committee at the time the new option is granted, determined in accordance with the provisions of the Plan and the Scheme without regard to the price, period of exercise or any other terms or conditions of the options surrendered. (g) Transferability, Applicable Law and Leave of Absence Sections 6(h)*****, except the proviso thereto, 6(i)***** and, subject to Clause 3 hereof, 11(d) of the Plan shall apply to the Scheme. (h) Incorporation by Reference The option agreement shall contain a provision that all the terms and conditions of the Scheme are incorporated by reference therein. 5. REALLOCATION OF UNUSED SHARES Any shares which are not purchased under an option which has terminated or lapsed, either by its terms or pursuant to the exercise in whole or in part, may be used for the further grant of options, provided always that no options shall be granted to an employee at a time when his employment is interrupted. 6. AMENDMENT AND REVOCATION Section 15 of the Plan shall apply to the Scheme but no amendment may be made so as to have effect with respect to the Scheme or the Scheme Shares without the prior approval of the Board of Inland Revenue.****, ***** 7. DEFINITIONS (a) In the Scheme, the term the "Plan" shall mean the Company's Stock Option and Incentive Plan of 1965 as amended. (b) Section 12 of the Plan other than sub-sections (d) and (h) shall apply to the Scheme.***** 3 (FOOTNOTES FOR UK PLAN) * Section 3 of the Plan was amended by resolution of the shareholders on April 26, 1990 and has effect in relation to the Scheme with the approval of the Board of Inland Revenue in the UK given June 14, 1990. ** Section 6(e), 6(f) and 11 were amended with the approval of the shareholders on April 26, 1990. These amendments have effect in relation to the Scheme with the approval of the Board of Inland Revenue in the UK given on June 14, 1990 provided that the amendment to Section 6(e) to give the Board power to "make any options that are not yet exercisable immediately exercisable" shall not have effect with regard to subsisting options granted before June 14, 1990. *** Section 6(e) was further amended with the approval of the shareholders on April 22, 1993 by the insertion of the following words "and further provided the Committee may in its discretion make any options that are not yet exercisable immediately exercisable in cases where (i) an optionee's employment is to be terminated due to a divestiture or downsizing of a business, (ii) in the case of a retiring optionee who holds options with extended vesting provisions, or (iii) otherwise, where the Committee determines that such action is appropriate to prevent inequities with respect to an optionee" at the end of the second sentence. The amendment has effect in relation to the Scheme with the approval of the Board of Inland Revenue in the UK given on August 5, 1993 provided that the discretionary power conferred on the Committee "to make any options that are not yet exercisable immediately exercisable" shall not have effect with regard to subsisting options granted before August 5, 1993. **** Section 15 of the Plan was amended by resolution of the Board of Directors on December 18, 1989 and has effect in relation to the Scheme with the approval of the Board of Inland Revenue in the UK given June 14, 1990. ***** (i) Section 1 of the Plan was amended by resolution of the Board of Directors on October 22, 1998. (ii) Section 2 of the Plan was amended by resolution of the Employee Compensation and Management Development Committee dated December 15, 1997 and further by resolution of the Board of Directors dated October 22, 1998. (iii) Section 3 of the Plan was amended by resolutions of the Board of Directors dated April 27, 1995 and April 24, 1997, in each case as a result of a stock split to the Common Stock of the Company, and by resolution of the Board of Directors effective January 25, 1996 by the approval of the majority of the holders of the Common Stock of the Company. (iv) Section 4 of the Plan was amended by the Board of Directors on May 28, 1998. (v) Section 6(e) of the Plan was amended by resolution of the Board of Directors on October 22, 1998. 4 (vi) Section 6(f) of the Plan was amended by resolution of the Board of Directors on June 26, 1997. (vii) Section 6(g) of the Plan was amended by resolution of the Board of Directors on January 25, 1996. (viii) Section 6(h) of the Plan was amended by resolution of the Board of Directors on September 26, 1996. (ix) Section 6(i) of the Plan was amended by resolution of the Board of Directors on May 28, 1998. (x) Section 12(g) of the Plan was amended by resolution of the Board of Directors on June 23, 1994. (xi) Section 15 of the Plan was amended by resolution of the Board of Directors on October 22, 1998. The amendments listed, with the exception of the amendments to Section 6(h) noted at (viii) above and to Section 6(g) noted at (vii) above, have effect in relation to the Scheme with approval of the Board of Inland Revenue in the UK given on March 25, 1999 provided that the following amendments shall not have effect with regard to subsisting options granted before March 25, 1999: A the amendments to Section 2 mentioned at (ii) above B the amendments to Section 6(f) mentioned at (vi) above C the amendment to Section 6(i) mentioned at (ix) above ******Note Section 4 of the Scheme was amended on March 25, 1999 pursuant to Finance Act 1996 and without prejudice to options outstanding which were granted prior to July 17, 1995. 5 EX-10.(XV) 3 SUMMARY OF PFIZER ANNUAL INCENTIVE PLAN EXHIBIT 10(XV) SUMMARY OF PFIZER ANNUAL INCENTIVE PLAN The Annual Incentive Plan ("AIP") was established to provide a direct link between pay and performance, thereby supporting increased overall Company performance through increased individual performance. The purposes of the AIP are to help motivate employees and attract and retain the highest quality workforce. Management selects AIP participants, including executive officers who are not members of the Corporate Management Committee, and, in its discretion, sets the bonus potential for each participant based on level of responsibility within the Company. Annual incentive awards are based on an evaluation of either or both individual and Company performance against quantitative and qualitative measures and are subject to approval by senior management and, if appropriate, the Employee Compensation and Management Development Committee or the Executive Compensation Committee. Amounts paid to employees constitute part of the employee's annual cash compensation. 6 EX-12 4 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12 PFIZER INC. AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (millions of dollars, except ratios) DETERMINATION OF EARNINGS: Income from continuing operations before provision for taxes on income and minority interests $4,448 $2,594 $2,867 $2,528 $2,017 Less: Minority interests 5 2 10 6 7 ------ ------ ------ ------ ------ Adjusted income 4,443 2,592 2,857 2,522 2,010 Fixed charges 276 180 189 198 223 ------ ------ ------ ------ ------ TOTAL EARNINGS AS DEFINED $4,719 $2,772 $3,046 $2,720 $2,233 ====== ====== ====== ====== ====== FIXED CHARGES: Interest expense (a) $ 223 $ 136 $ 147 $ 161 $ 188 Rents (b) 53 44 42 37 35 ------ ------ ------ ------ ------ Fixed charges 276 180 189 198 223 Capitalized interest 13 7 2 5 13 ------ ------ ------ ------ ------ TOTAL FIXED CHARGES $ 289 $ 187 $ 191 $ 203 $ 236 ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES 16.3 14.8 15.9 13.4 9.5 ====== ====== ====== ====== ====== (a) Interest expense includes amortization of debt discount and expenses. (b) Rents included in the computation consist of one-third of rental expense which the Company believes to be a conservative estimate of an interest factor in its leases, which are not material. EX-13.A 5 FINANCIAL REVIEW FINANCIAL REVIEW Proposed Merger with Warner-Lambert Company On February 7, 2000, we announced an agreement to merge with Warner-Lambert Company (Warner-Lambert). Under terms of the merger agreement, which has been approved by the Board of Directors of both Pfizer and Warner-Lambert, we will exchange 2.75 shares of Pfizer voting common stock for each outstanding share of Warner-Lambert voting common stock in a tax-free transaction valued at $98.31 per Warner-Lambert share, or an equity value of $90 billion based on the closing price of our stock on February 4, 2000 of $35.75 per share. Customary and usual provisions will be made for outstanding options and warrants. The combined company, which will be called Pfizer Inc, is expected to have (excluding any impact of anticipated restructuring charges and transaction fees of $1.7 billion to $2.2 billion): o compounded annual revenue growth of 13% and earnings growth of 25% through 2002 o $4.7 billion in annual research and development expenses in 2000 o anticipated annual cost savings and efficiencies of $1.6 billion by 2002 ($200 million of these savings are expected to be achieved in 2000, $1 billion in 2001 and $1.6 billion in 2002) o diluted earnings per share of $.98 on a pro forma basis in 2000, $1.27 for 2001 and $1.56 for 2002 (these numbers include the $1.6 billion of cost savings phased in over this time period, but do not include any increased sales from collaborative activities and the $1.8 billion termination fee paid by Warner-Lambert to American Home Products Corporation) This transaction is subject to customary conditions, including the use of pooling-of-interests accounting, qualifying as a tax-free reorganization, shareholder approval at both companies and usual regulatory approvals. The transaction is expected to close in mid-2000. The following financial review reflects the results of operations and financial condition of Pfizer and does not consider the impact of the proposed merger with Warner-Lambert. Overview of Consolidated Operating Results In 1999, total revenues grew 20% to $16,204 million, reflecting the strong worldwide demand for our in-line products, as well as our alliance products. Our operating results in 1999 were impacted by the recording of a charge to write off certain Trovan inventories. Our 1998 operating results reflect: o the sale of our Medical Technology Group (MTG) o the recording of certain significant charges associated with adjustments to asset values, the exiting of certain product lines, plant rationalizations, severance payments, co-promotion payments to Searle, a contribution to The Pfizer Foundation and other miscellaneous charges Analysis of the Consolidated Statement of Income ================================================================================ % Change -------------- (millions of dollars) 1999 1998 1997 99/98 98/97 - -------------------------------------------------------------------------------- Net sales $ 14,133 $12,677 $10,739 11 18 Alliance revenue 2,071 867 316 139 175 - --------------------------------------------------------------- Total revenues 16,204 13,544 11,055 20 23 Cost of sales 2,528 2,094 1,776 21 18 Selling, informational and administrative expenses 6,351 5,568 4,401 14 27 % of total revenues 39.2% 41.1% 39.8% R&D expenses 2,776 2,279 1,805 22 26 % of total revenues 17.1% 16.8% 16.3% Other deductions--net 101 1,009 206 (90) 391 - --------------------------------------------------------------- Income from continuing operations before taxes $ 4,448 $ 2,594 $ 2,867 71 (10) % of total revenues 27.5% 19.2% 25.9% Taxes on income $ 1,244 $ 642 $ 775 94 (17) Effective tax rate 28.0% 24.8% 27.0% Income from continuing operations $ 3,199 $ 1,950 $ 2,082 64 (6) % of total revenues 19.7% 14.4% 18.8% Discontinued operations--net of tax (20) 1,401 131 -- 972 - --------------------------------------------------------------- Net income $ 3,179 $ 3,351 $ 2,213 (5) 51 % of total revenues 19.6% 24.7% 20.0% ================================================================================ PERCENTAGES MAY REFLECT ROUNDING ADJUSTMENTS. Total Revenues Total revenues increased 20% or $2,660 million in 1999 and 23% or $2,489 million in 1998. Revenue increases in both years were primarily due to sales volume growth of our in-line products and revenue generated from product alliances (alliance revenue). Revenue growth in 1999 was not significantly impacted by foreign exchange. Total revenues grew by 26% in 1998 excluding the impact of foreign exchange. 28 PFIZER INC AND SUBSIDIARY COMPANIES Elements of Total Revenue Growth Volume has been the major contributor to total revenue growth in each of the last three years. [BAR CHART OMITTED] 99 98 97 Volume 19.6% 24.8% 14.0% Price 0.5% 1.2% 1.6% Currency (0.5)% (3.5)% (3.5)% Percentage Change in Total Revenues ================================================================================ Analysis of % Change Total % ------------------------------- Change Volume Price Currency - -------------------------------------------------------------------------------- Pharmaceutical 1999 VS. 1998 21.5 21.1 0.5 (0.1) 1998 vs. 1997 25.8 28.1 1.0 (3.3) Animal Health 1999 VS. 1998 2.4 4.9 1.2 (3.7) 1998 vs. 1997 (1.1) 0.6 2.4 (4.1) Total 1999 VS. 1998 19.6 19.6 0.5 (0.5) 1998 vs. 1997 22.5 24.8 1.2 (3.5) ================================================================================ ================================================================================ Total Revenues by Business Segment [PIE CHART OMITTED] (% of total revenue) 1999 1998 1997 Animal Health 8% 10% 12% Pharmaceutical 92% 90% 88% 1999 1998 1997 - ----------------------- --------------------- ------------------------ (millions of dollars) % Change % Change % Change 99/98 98/97 97/96 $14,859 22 $12,230 26 $ 9,726 13 1,345 2 1,314 (1) 1,329 9 - -------------- ------------- ------------- Total $16,204 20 $13,544 23 $11,055 12 ================================================================================ PHARMACEUTICAL revenues increased 22% to $14,859 million in 1999 and 26% to $12,230 million in 1998. In the U.S. market, revenue growth was 21% in 1999 and 38% in 1998, while international growth was 22% in 1999 and 10% in 1998. The introduction of Viagra accounts for 12 percentage points of the 1998 U.S. growth. Pharmaceutical revenue growth in 1999 was not significantly impacted by foreign exchange. In 1998, pharmaceutical revenue grew 29% excluding the impact of foreign exchange. The currency impact on the 1998 revenue growth reflects the strengthening of the dollar relative to the Japanese yen, as well as several European and other Asian currencies. In 1999, we had seven products, including alliance products, with sales to third parties in excess of $1 billion each. The five Pfizer-discovered products in this group--Norvasc, Zoloft, Zithromax, Viagra and Diflucan--grew at a combined annual rate of 18% in 1999 and are patent-protected well into this decade, or beyond. Net Sales--Major Pharmaceutical Products ================================================================================ % Increase ------------- (millions of dollars) 1999 1998 1997 99/98 98/97 - -------------------------------------------------------------------------------- CARDIOVASCULAR DISEASES: $4,635 $4,186 $3,806 11 10 Norvasc 3,030 2,575 2,217 18 16 Cardura 794 688 626 15 10 INFECTIOUS DISEASES: 3,145 2,822 2,475 11 14 Zithromax 1,333 1,041 821 28 27 Diflucan 1,002 916 881 9 4 CENTRAL NERVOUS SYSTEM DISORDERS: 2,156 1,924 1,553 12 24 Zoloft 2,034 1,836 1,507 11 22 VIAGRA 1,033 788 -- 31 -- ALLERGY: 557 422 273 32 55 Zyrtec/Reactine 552 416 265 33 57 ================================================================================ CERTAIN PRIOR YEAR DATA HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT YEAR PRESENTATION. In June 1999, the European Union's Committee for Proprietary Medicinal Products suspended the European Union (EU) licenses of the oral and intravenous formulations of our antibiotic Trovan for 12 months. In the rest of the world, including the U.S., the use of Trovan is limited to serious infections in institutionalized patients. As a result of these limitations, Trovan net sales declined to $86 million in 1999 from $160 million in 1998. See "Cost of sales" for a discussion of a charge recorded in 1999 to write off certain Trovan inventories. Alliance revenue was $2,071 million in 1999, reflecting revenue associated with the co-promotion of Lipitor, Aricept and our new alliance product, Celebrex. In February 1999, we launched Celebrex with G.D. Searle & Co. (Searle), the pharmaceutical division of Monsanto Company, which discovered and developed the drug. Celebrex is used for the relief of symptoms of adult rheumatoid arthritis and osteoarthritis. During 1999, Celebrex achieved total global sales of approximately $1.5 billion. 29 PFIZER INC AND SUBSIDIARY COMPANIES Together with our alliance partner, the Parke-Davis Division of Warner-Lambert, the company that discovered and developed Lipitor, we co-promote this product in most major world markets. During 1999, Lipitor achieved third-party sales of approximately $3.7 billion. These alliances allow us to co-promote or license these products for sale in certain countries. Under the co-promotion 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 co-promotion agreements is reported in the Statement of Income as ALLIANCE REVENUE. Certain alliance agreements include additional provisions that enable our product alliance partners the right to negotiate to co-promote certain specified Pfizer-discovered products. Rebates under Medicaid and related state programs reduced revenues by $146 million in 1999, $150 million in 1998 and $99 million in 1997. The 1998 increase in rebates reflects growth of in-line products and the introduction in 1998 of two products--Trovan and Viagra. We also provided to the federal government legislatively mandated discounts of $95 million in 1999, $105 million in 1998 and $88 million in 1997. Performance-based contracts also provide rebates to several customers as a result of the increasing influence of managed care groups on the pricing of our products. In the fourth quarter of 1999, we sold the Bain de Soleil sun care product line for $26 million in cash to Schering-Plough HealthCare Products, Inc. Proceeds from the sale approximated the total of the carrying value of net assets associated with this product line and selling costs. The sale of Bain de Soleil will not have a material impact on our future results of operations. ANIMAL HEALTH net sales increased 2% to $1,345 million in 1999 and decreased 1% to $1,314 million in 1998. Excluding the impact of foreign exchange, net sales increased 6% in 1999 and 3% in 1998. The increase in net sales in 1999 was due to: o the performance of the companion animal business partially offset by o the continuing weakness in the livestock market in the U.S. and Europe o the decision of the European Commission to ban certain antibiotic feed additives, including Stafac (virginiamycin) in the EU after June 30, 1999 We do not expect the ban on sales of virginiamycin to have a material effect on our future results of operations. Sales of companion animal products increased by 30% in 1999 primarily due to the launch of Revolution and the growth of Rimadyl. Revolution was approved in the U.S. in July 1999 as the first and only topically applied medication for dogs and cats that is effective against heartworm, fleas and many other parasites. Rimadyl is a treatment for the relief of pain and inflammation associated with osteoarthritis in dogs. Net sales decreased 1% in 1998 due to a weak livestock market in the U.S. and poor Asian economies. ================================================================================ Total Revenues by Country [PIE CHART OMITTED] (% of total revenue) 1999 1998 1997 United States 61% 61% 55% Japan 8% 7% 9% All Other Countries 31% 32% 36% 1999 1998 1997 --------------------- ----------------- ----------------- (millions of dollars) % Change % Change % Change 99/98 98/97 97/96 United States $ 9,896 21 $ 8,205 35 $ 6,089 17 Japan 1,249 32 943 (1) 949 3 All Other Countries 5,059 15 4,396 9 4,017 7 ------------- --------- --------- Total $16,204 20 $13,544 23 $11,055 12 ================================================================================ Revenues were in excess of $100 million in each of 12 countries outside the U.S. in 1999. The U.S. was the only country to contribute more than 10% to total revenues. Percentage Change in Geographic Total Revenues by Business Segment ================================================================================ % Change in Total Revenues ----------------------------------------------------- U.S. International -------------------------- ------------------------- 99/98 98/97 99/98 98/97 - -------------------------------------------------------------------------------- Pharmaceutical 21 38 22 10 Animal Health 14 3 (7) (4) Total 21 35 18 8 ================================================================================ Product Developments We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing in-line and alliance products. Certain significant regulatory actions by, and filings pending with, the U.S. Food and Drug Administration (FDA) follow: U.S. FDA APPROVALS ================================================================================ Product Indication Date Approved - -------------------------------------------------------------------------------- Zoloft Posttraumatic stress disorder (PTSD) December 1999 Zoloft Oral liquid dosage form December 1999 Celebrex Familial adenomatous polyposis December 1999 (a rare and devastating hereditary disease that, left untreated, almost always leads to colorectal cancer) Tikosyn Atrial fibrillation October 1999 ================================================================================ 30 PFIZER INC AND SUBSIDIARY COMPANIES Zoloft is the first and only medicine to receive FDA approval for the treatment of PTSD. We have developed a comprehensive program to educate institutions and health care professionals on the required in-hospital initiation and dosing regimen for Tikosyn. We expect to launch Tikosyn in the U.S. in the first quarter of 2000, and it will be available to those prescribers and hospitals that have participated in this educational program. PENDING U.S. NEW DRUG APPLICATIONS ================================================================================ Product Indication Date Filed - -------------------------------------------------------------------------------- Relpax Migraine headaches October 1998 Zeldox Psychotic disorders-- December 1997 intramuscular dosage form Zeldox Psychotic disorders-- March 1997 oral dosage form ================================================================================ In October 1999, we received an approvable letter from the FDA for Relpax for the treatment of migraines. Regulatory review is continuing in Europe. We received a non-approvable letter from the FDA for Zeldox in 1998. Analysis and interpretation of the results of a recently completed study on the effects of Zeldox will be included in an amended New Drug Application, which we expect to file by midyear 2000. Ongoing or planned clinical trials for additional uses and dosage forms for our currently marketed products include: ================================================================================ Product Indication - -------------------------------------------------------------------------------- Norvasc Pediatric hypertension - -------------------------------------------------------------------------------- Zithromax Decrease cardiovascular risk in patients with atherosclerosis (a process in which fatty substances are deposited within blood vessels) caused by certain infections Treatment of mycobacterium avium complex Accelerated dosing regimen (three-day treatment) - -------------------------------------------------------------------------------- Viagra Female sexual arousal disorder - -------------------------------------------------------------------------------- Zoloft Pediatric depression Social phobia - -------------------------------------------------------------------------------- Zyrtec Decongestant formulation Pediatric - -------------------------------------------------------------------------------- Lipitor Broad cardiovascular-care clinical program - -------------------------------------------------------------------------------- Aricept Oral liquid dosage form - -------------------------------------------------------------------------------- Celebrex Sporadic adenomatous polyposis Pain ================================================================================ Together with Warner-Lambert, we are jointly exploring potential Lipitor line extensions and product combinations and other areas of mutual interest. This includes a program to develop a combination product that contains the cholesterol-lowering and antihypertensive medications in Lipitor and Norvasc--two of the world's most widely prescribed medicines. Ongoing or planned clinical trials for new product development programs include: ================================================================================ Product Indication - -------------------------------------------------------------------------------- lasofoxifene Prevention and treatment of osteoporosis Prevention of breast cancer Reduction of risk of coronary heart disease - -------------------------------------------------------------------------------- Vfend (voriconazole) Serious systemic fungal infections - -------------------------------------------------------------------------------- darifenacin Overactive bladder - -------------------------------------------------------------------------------- inhaled insulin Diabetes - -------------------------------------------------------------------------------- valdecoxib (under Osteoarthritis co-development Rheumatoid arthritis with Searle) Pain ================================================================================ Additional product development programs are in various stages of discovery. In 1998, we entered into worldwide agreements with Aventis Pharma to manufacture insulin and co-develop and co-promote inhaled insulin. Under the agreements, Aventis Pharma 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. Together with Aventis Pharma we are building a new insulin manufacturing plant in Frankfurt, Germany, to support the product currently in development. We have decided not to pursue further development of ezlopitant for the treatment of chemotherapy-induced nausea and vomiting in cancer patients, as well as Alond for the treatment of diabetic neuropathy. Costs and Expenses In 1999, we substantially completed the actions under the restructuring plans announced in 1998. In 1998, we recorded charges for the restructuring in addition to charges for certain asset impairments. These pre-tax charges were recorded in the 1998 Statement of Income as follows: ================================================================================ (millions of dollars) Total COS* SI&A* R&D OD* - -------------------------------------------------------------------------------- Restructuring charges $177 $68 $17 $1 $ 91 Asset impairments 213 18 -- -- 195 ================================================================================ * COS--COST OF SALES; SI&A--SELLING, INFORMATIONAL AND ADMINISTRATIVE EXPENSES; OD--OTHER DEDUCTIONS--NET. 31 PFIZER INC AND SUBSIDIARY COMPANIES The components of the 1998 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 17 16 - -------------------------------------------------------------------------------- Total $177 $116 $45 $16 ================================================================================ As a result of the restructuring, our workforce was reduced by approximately 500 manufacturing, sales and corporate personnel. In 1998, restructuring charges of $90 million are reflected in the pharmaceutical segment and $87 million are in the animal health segment. 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 resulted from significant changes in the marketplace and a revision of our strategies. As noted in our discussion of revenues, our animal health antibiotic feed additive Stafac was banned throughout the EU, resulting in 1998 asset impairment charges of $103 million ($85 million to adjust intangible asset values, primarily goodwill and trademarks, and $18 million to adjust the carrying value of machinery and equipment in the pharmaceutical segment). In 1999, revenues declined approximately $41 million as a result of exiting certain product lines. In 1999, as a result of the restructuring activities and the asset impairments, we realized cost savings of approximately $39 million and a reduction in amortization and depreciation expense of approximately $12 million. Cost of sales increased 21% in 1999 and 18% in 1998. Based on our evaluation of the actions noted in our discussion of revenues, we determined that it was unlikely that certain Trovan inventories of finished goods, bulk, work-in-process and raw materials will be used. Accordingly, in the third quarter of 1999, we recorded a charge of $310 million in COST OF SALES to write off Trovan inventories in excess of the amount required to support expected sales. Also included in COST OF SALES for 1999 is a benefit of $6.6 million related to the change in accounting for the cost of inventories from the "Last-in, first-out" method to the "First-in, first-out" method. Excluding the Trovan inventory charge and the benefit related to the accounting change for inventories in 1999 and the asset impairments and restructuring charges in 1998, cost of sales increased 11%, comparable to the increase in 1999 net sales. Excluding the 1998 asset impairments and restructuring charges, cost of sales increased 13% in 1998 as compared to an increase in net sales of 18%. SI&A increased 14% in 1999 and 27% in 1998. These increases reflect support for previously introduced products and new products. Such support included substantial global investments, begun in 1998, in our pharmaceutical sales force, including the creation of a new U.S. primary-care sales force and a new U.S. specialty sales force dedicated to rheumatology. In addition, personnel increases in other specialty sales forces in the U.S. and the expansion of international sales forces contributed to the increase in SI&A. Our past investments in SI&A are enabling us to maximize the financial return realized from our products. R&D increased 22% in 1999 and 26% in 1998. These expenditures were necessary to support the advancement of potential drug candidates in all stages of development (from initial discovery through final regulatory approval). In 2000, we expect total R&D spending to be about $3.2 billion. See "Proposed Merger with Warner-Lambert Company" for the expected R&D spending in 2000 of a combined Pfizer/Warner-Lambert entity. Other deductions--net decreased 90% in 1999 due to the absence of certain significant charges recorded in 1998 of $883 million. Other deductions--net increased substantially in 1998 primarily due to: o asset impairments--$195 million o restructuring charges--$91 million o co-promotion 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 Our overall effective tax rate was 28.1% in 1999 and 35.4% in 1998. This decrease was due mainly to the 1998 gain on the disposal of MTG being recognized in jurisdictions with higher tax rates. The effective tax rate for continuing operations was 28.0% in 1999 and 24.8% in 1998. Significant charges in both 1999 and 1998 were recorded in jurisdictions with higher tax rates. However, the level of these charges was greater in 1998 than in 1999. Excluding these charges in 1999 and 1998, the effective tax rate was 28.4% in 1999 and 28.0% in 1998. This increase in 1999 was primarily due to the mix of income by country. We have received and are protesting assessments from the Belgian tax authorities. For additional details, see note 9, "Taxes on Income," beginning on page 49. 32 PFIZER INC AND SUBSIDIARY COMPANIES Discontinued Operations In 1999, we agreed to pay a fine of $20 million to settle antitrust charges involving our former Food Science Group. This charge is reflected in DISCONTINUED OPERATIONS--NET OF TAX. For additional details, see note 18, "Litigation," beginning on page 54. 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 were 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 1999 decreased 5% from 1998. Diluted earnings per share were $.82 and decreased by 4% from 1998. Excluding the impact of the 1999 Trovan inventory charge and certain significant charges and discontinued operations in 1998, net income increased by 29% in 1999 over 1998. On that same basis, diluted earnings per share were $.87 in 1999 and increased by 30% over 1998. The 1998 pre-tax significant charges related to: o asset impairments--$213 million o restructuring charges--$177 million o co-promotion 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) 1999 1998 1997 - -------------------------------------------------------------------------------- Financial assets* $6,436 $5,835 $3,034 Short- and long-term debt 5,526 3,256 2,976 - -------------------------------------------------------------------------------- Net financial assets $ 910 $2,579 $ 58 - -------------------------------------------------------------------------------- *CONSISTS OF CASH AND CASH EQUIVALENTS, SHORT-TERM LOANS AND INVESTMENTS, AND LONG-TERM LOANS AND INVESTMENTS. Selected Measures of Liquidity and Capital Resources ================================================================================ 1999 1998 1997 - -------------------------------------------------------------------------------- Cash and cash equivalents and short-term loans and investments (millions of dollars)* $4,715 $4,079 $1,704 Working Capital (millions of dollars) 2,006 2,739 2,448 Current ratio 1.22:1 1.38:1 1.49:1 Shareholders' equity per common share** $ 2.36 $ 2.33 $ 2.10 ================================================================================ * CASH IS MANAGED JURISDICTIONALLY AND IS NOT ALWAYS AVAILABLE TO BE USED IN EVERY LOCATION THROUGHOUT THE WORLD. WHEN NECESSARY, WE UTILIZE SHORT-TERM BORROWINGS FOR VARIOUS CORPORATE PURPOSES. ** REPRESENTS SHAREHOLDERS' EQUITY DIVIDED BY THE ACTUAL NUMBER OF COMMON SHARES OUTSTANDING (WHICH EXCLUDES TREASURY SHARES AND THOSE HELD BY THE EMPLOYEE BENEFIT TRUSTS). The decrease in working capital from 1998 to 1999 was primarily due to the following: o Decrease in INVENTORIES--due to the writeoff of Trovan inventory o Increase in SHORT-TERM BORROWINGS--primarily to fund common stock purchases of $2.5 billion offset by o Net increase in CASH AND CASH EQUIVALENTS and SHORT-TERM INVESTMENTS-- mainly from profits earned overseas o Increase in ACCOUNTS RECEIVABLE--resulting from growth in sales volume and higher alliance revenue receivables due to sales growth of alliance products and the launch of Celebrex in February 1999 o Decrease in INCOME TAXES PAYABLE 33 PFIZER INC AND SUBSIDIARY COMPANIES The increase in working capital from 1997 to 1998 was primarily due to the following: o Increase in CASH AND CASH EQUIVALENTS and SHORT-TERM INVESTMENTS--due to the receipt of cash from the MTG divestiture o Increase in ACCOUNTS RECEIVABLE--due to the alliance revenue receivables and growth in sales volume o Increase in INVENTORIES--due to higher pharmaceutical inventory levels as a result of new products offset by o Decrease in NET ASSETS OF DISCONTINUED OPERATIONS--due to the sale of the MTG businesses o Increase in 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 Increase in DIVIDENDS PAYABLE--related to the first-quarter 1999 dividend declared in December 1998 o Increase in INCOME TAXES PAYABLE--primarily due to changes in operations and the divestiture of the MTG businesses o Increase in OTHER CURRENT LIABILITIES--primarily due to accrued charges associated with the divestiture of the MTG businesses and our plan to exit certain product lines The decline in the current ratio from 1998 to 1999 was primarily due to higher short-term borrowings due to an increase in funding for common stock purchases. The increase in shareholders' equity per common share in 1998 was primarily due to growth in net income. Summary of Cash Flows ================================================================================ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- Cash provided by/(used in): Operating activities $ 3,076 $ 3,282 $ 1,580 Investing activities (2,768) (335) (963) Financing activities (1,127) (2,277) (981) Discontinued operations (20) 4 118 Effect of exchange-rate changes on cash and cash equivalents 26 1 (27) - -------------------------------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents $ (813) $ 675 $ (273) ================================================================================ Net cash provided by operating activities decreased in 1999 primarily due to: o higher receivable levels related to increased sales and alliance revenue o higher taxes paid reduced by o higher income from continuing operations Net cash provided by operating activities increased in 1998 primarily due to: 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, co-promotion 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 Net cash used in investing activities in 1999 changed primarily due to: o the absence of proceeds from the sale of MTG which occurred in 1998 o increased purchases of property, plant and equipment in 1999 Net cash used in investing activities decreased 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 o increased purchases of property, plant and equipment Net cash used in financing activities decreased in 1999 primarily due to: o increased short-term borrowings for common stock purchases reduced by o higher dividend payments to our shareholders Net cash used in financing activities increased in 1998 primarily due to: 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 Under the current share-purchase program begun in September 1998, we are authorized to purchase up to $5 billion of our common stock. In 1999, we purchased approximately 65.6 million shares of our common stock in the open market for approximately $2.5 billion. Since the beginning of this program, we have purchased 80.4 million shares of our common stock for approximately $3 billion. In September 1998, we completed a program under which we purchased 79.2 million shares of our common stock at a total cost of $2 billion. 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 $1.5 billion at December 31, 1999. 34 PFIZER INC AND SUBSIDIARY COMPANIES Our short-term debt has been rated P1 by Moody's Investors Services (Moody's) and A-1+ 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 14 years. Moody's and S&P are the major corporate debt-rating organizations and these are their highest ratings. ================================================================================ Cash Dividends Paid Per Common Share The 1999 cash dividends paid represented the 32nd consecutive year of dividend increases. [BAR CHART OMITTED] (dollars) 95 $.17 1/3 96 $.20 97 $.22 2/3 98 $.25 1/3 99 $.30 2/3 ================================================================================ Dividends on Common Stock Our dividend payout ratio, which represents cash dividends paid per common share divided by diluted earnings per common share, was approximately 37% in 1999, 30% in 1998 and 40% in 1997. In 1999, excluding the effect on net income of the Trovan inventory charge, the dividend payout ratio was approximately 35%. In 1998, excluding the effects on net income of discontinued operations and charges for asset impairment, restructuring, co-promotion payments to Searle and the contribution to The Pfizer Foundation, the dividend payout ratio was 38%. In December 1999, the Board of Directors declared a first-quarter 2000 dividend of $.09. The first-quarter 2000 cash dividend will mark the 33rd 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 A-1+. 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 increasing interest rates, net income would increase. 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," beginning on page 44. 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 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, 1999, which will be filed at the end of March 2000. 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 October 3, 1999, and to the extent incorporated by reference therein, in our Form 10-K filing for 1998. 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 pharmaceutical products are subject to increasing pricing pressures, which could be significantly impacted by the current national debate over Medicare reform. 35 PFIZER INC AND SUBSIDIARY COMPANIES If the Medicare program provided outpatient pharmaceutical coverage for its beneficiaries, the federal government, through its enormous purchasing power under the program, could demand discounts from pharmaceutical companies that may implicitly create price controls on prescription drugs. On the other hand, a Medicare drug reimbursement provision may increase the volume of pharmaceutical drug purchases, offsetting at least in part these potential price discounts. In addition, managed care organizations, institutions and other government agencies continue to 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. 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. Generally, we do not use financial instruments for trading activities. 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 operations. For additional details on foreign exchange exposures, see note 4-D, "Derivative Financial Instruments--Instruments Outstanding," on page 47. 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 subsidiaries in Japan and in countries that are a member of the European Monetary Union. We do this through currency swaps and borrowing in Japanese yen and borrowing in euros. Our financial instrument holdings at year-end were analyzed to determine their sensitivity to foreign exchange rate changes. The fair values of these instruments were 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 rate 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 4-D, "Derivative Financial Instruments--Accounting Policies," on page 46. 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 and on euro 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. International Markets Thirty-nine percent of our 1999 revenues arise from international operations and we expect revenue and net income growth in 2000 to be impacted by changes in foreign exchange rates. Revenues from Asia comprised approximately 11% of total revenues in 1999, including 8% from Japan. European Currency A new European currency (euro) was introduced in January 1999 to replace the separate currencies of 11 individual countries. The major changes during its first year of existence have occurred in the banking and financial sectors. The impact at the commercial and retail level has been limited but is expected to increase during the next two years through December 31, 2001, when the separate currencies will cease to exist. We are modifying systems and commercial arrangements to deal with the new currency, including the availability of dual currency processes to permit transactions to be denominated in the separate currencies, as well as the euro. The cost of this effort is not expected to have a material effect on our businesses or results of operations. We continue to evaluate the economic and operational impact of the euro, including its impact on competition, pricing and foreign currency exchange risks. There is no guarantee, however, that all problems have been foreseen and corrected, or that no material disruption will occur in our businesses. 36 PFIZER INC AND SUBSIDIARY COMPANIES 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 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, and in 1999, it was further extended to June 30, 2004. Recently Issued Accounting Standards In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. This pronouncement requires us to adopt SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, on January 1, 2001. 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 SFAS No. 133 to have a material impact on our financial position, results of operations or cash flows. Year 2000 We have not experienced any operational problems as a result of Year 2000 issues, and Year 2000 had no material effect on our revenues. Although the transition from 1999 to 2000 did not adversely impact our company, there can be no assurances that we will not experience any negative effects or disruptions in our businesses in the future as a result of Year 2000 issues. The total cost of our Year 2000 Program was $130 million, of which we incurred $94 million in 1999, $31 million in 1998 and $5 million in 1997. These costs were expensed as incurred, except for capitalizable hardware of approximately $8 million in 1999, $4 million in 1998 and $1 million in 1997 and were funded through operating cash flows. Such costs did not include normal system upgrades and replacements. Immaterial costs may be incurred in 2000 to address remaining non-critical Year 2000 issues. 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, results of operations or cash flows, except where specifically commented on in note 18, "Litigation," beginning on page 54 and note 9, "Taxes on Income," beginning on page 49. ---------- Management's Report We prepared and are responsible for the financial statements that appear on pages 39 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. 37 PFIZER INC AND SUBSIDIARY COMPANIES 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/ L. V. Cangialosi - --------------------------- L. V. Cangialosi, PRINCIPAL ACCOUNTING OFFICER FEBRUARY 14, 2000 Audit Committee's Report The Audit Committee reviews the Company's financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. In this context, the Committee has met and held discussions with management and the independent auditors. Management represented to the Committee that the Company's consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Committee has reviewed and discussed the consolidated financial statements with management and the independent auditors. The Committee discussed with the independent auditors matters required to be discussed by Statement of Auditing Standards No. 61 (Communication With Audit Committees). In addition, the Committee has discussed with the independent auditors, the auditors' independence from the Company and its management, including the matters in the written disclosures required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). The Committee discussed with the Company's internal and independent auditors the overall scope and plans for their respective audits. The Committee meets with the internal and independent auditors, with and without management present, to discuss the results of their examinations, the evaluations of the Company's internal controls, and the overall quality of the Company's financial reporting. In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, for filing with the Securities and Exchange Commission. The Committee and the Board also have recommended, subject to shareholder approval, the selection of the Company's independent auditors. /s/ G. B. Harvey - --------------------------- G. B. Harvey, CHAIR, AUDIT COMMITTEE FEBRUARY 14, 2000 INDEPENDENT AUDITORS' REPORT [KPMG Logo] To the Shareholders and Board of Directors of Pfizer Inc: We have audited the accompanying consolidated balance sheets of Pfizer Inc and subsidiary companies as of December 31, 1999, 1998 and 1997 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, 1999, 1998 and 1997, 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 14, 2000 38 PFIZER INC AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF INCOME ================================================================================ Year ended December 31 ------------------------------- (millions, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------- Net sales $14,133 $12,677 $10,739 Alliance revenue 2,071 867 316 - -------------------------------------------------------------------------------- Total revenues 16,204 13,544 11,055 Costs and expenses: Cost of sales 2,528 2,094 1,776 Selling, informational and administrative expenses 6,351 5,568 4,401 Research and development expenses 2,776 2,279 1,805 Other deductions--net 101 1,009 206 - -------------------------------------------------------------------------------- Income from continuing operations before provision for taxes on income and minority interests 4,448 2,594 2,867 Provision for taxes on income 1,244 642 775 Minority interests 5 2 10 - -------------------------------------------------------------------------------- Income from continuing operations 3,199 1,950 2,082 Discontinued operations--net of tax (20) 1,401 131 - -------------------------------------------------------------------------------- Net income $ 3,179 $ 3,351 $ 2,213 - -------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE--BASIC Income from continuing operations $ .85 $ .51 $ .55 Discontinued operations--net of tax (.01) .37 .04 - -------------------------------------------------------------------------------- Net income $ .84 $ .88 $ .59 - -------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE--DILUTED Income from continuing operations $ .82 $ .49 $ .53 Discontinued operations--net of tax -- .36 .04 - -------------------------------------------------------------------------------- Net income $ .82 $ .85 $ .57 - -------------------------------------------------------------------------------- Weighted average shares-- basic 3,775 3,789 3,771 Weighted average shares-- diluted 3,884 3,945 3,909 ================================================================================ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 39 PFIZER INC AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET ================================================================================ December 31 ------------------------------ (millions, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 739 $ 1,552 $ 877 Short-term investments 3,703 2,377 712 Accounts receivable, less allowance for doubtful accounts: 1999--$68; 1998--$67; 1997--$35 3,864 2,914 2,220 Short-term loans 273 150 115 Inventories Finished goods 650 697 442 Work in process 711 890 808 Raw materials and supplies 293 241 211 - -------------------------------------------------------------------------------- Total inventories 1,654 1,828 1,461 - -------------------------------------------------------------------------------- Prepaid expenses and taxes 958 1,110 637 Net assets of discontinued operations -- -- 1,420 - -------------------------------------------------------------------------------- Total current assets 11,191 9,931 7,442 Long-term loans and investments 1,721 1,756 1,330 Property, plant and equipment, less accumulated depreciation 5,343 4,415 3,793 Goodwill, less accumulated amortization: 1999--$129; 1998--$109; 1997--$90 763 813 989 Other assets, deferred taxes and deferred charges 1,556 1,387 1,437 - -------------------------------------------------------------------------------- Total assets $20,574 $18,302 $14,991 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings, including current portion of long-term debt $ 5,001 $ 2,729 $ 2,251 Accounts payable 951 971 660 Dividends payable 349 285 -- Income taxes payable 869 1,162 729 Accrued compensation and related items 669 614 456 Other current liabilities 1,346 1,431 898 - -------------------------------------------------------------------------------- Total current liabilities 9,185 7,192 4,994 Long-term debt 525 527 725 Postretirement benefit obligation other than pension plans 346 359 394 Deferred taxes on income 301 197 127 Other noncurrent liabilities 1,330 1,217 818 - -------------------------------------------------------------------------------- Total liabilities 11,687 9,492 7,058 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock, without par value; 12 shares authorized, none issued -- -- -- Common stock, $.05 par value; 9,000 shares authorized; issued: 1999--4,260; 1998--4,222; 1997--4,165 213 210 207 Additional paid-in capital 5,416 5,506 3,101 Retained earnings 13,396 11,439 9,349 Accumulated other comprehensive expense (399) (234) (85) Employee benefit trusts (2,888) (4,200) (2,646) Treasury stock, at cost: 1999--413; 1998--339; 1997--283 (6,851) (3,911) (1,993) - -------------------------------------------------------------------------------- Total shareholders' equity 8,887 8,810 7,933 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $20,574 $18,302 $14,991 ================================================================================ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 40 PFIZER INC AND SUBSIDIARY COMPANIES Consolidated Statement of Shareholders' Equity
=================================================================================================================================== Addi- Employee Accum. Common Stock tional Benefit Trusts Treasury Stock Other Com- ----------------- Paid-In ------------------ --------------- Retained prehensive (millions) Shares Par Value Capital Shares Fair Value Shares Cost Earnings Inc./(Exp.) Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance January 1, 1997 1,378 $ 69 $1,693 (36) $(1,488) (87) $(1,482) $ 8,017 $ 145 $6,954 Restatement for the 1999 stock split 2,756 138 (138) (72) -- (175) -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance January 1, 1997, as restated 4,134 207 1,555 (108) (1,488) (262) (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 29 -- 343 13 68 411 Purchases of common stock (34) (586) (586) Employee benefit trusts transactions--net 1,177 1 (1,158) -- 7 26 Other 2 -- 26 26 - ----------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1997 4,165 207 3,101 (107) (2,646) (283) (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 55 3 745 -- (18) 730 Purchases of common stock (58) (1,912) (1,912) Employee benefit trusts transactions--net 1,633 5 (1,554) 2 12 91 Other 2 -- 27 27 - ----------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1998 4,222 210 5,506 (102) (4,200) (339) (3,911) 11,439 (234) 8,810 Comprehensive income: Net income 3,179 3,179 Other comprehensive expense-- net of tax: Currency translation adjustment (222) (222) Net unrealized gain on available- for-sale securities 81 81 Minimum pension liability (24) (24) ------------- Total other comprehensive expense (165) (165) ------------- Total comprehensive income 3,014 Cash dividends declared (1,222) (1,222) Stock option transactions 35 3 526 -- (16) 513 Purchases of common stock (66) (2,500) (2,500) Employee benefit trusts transactions--net (735) 13 1,312 (8) (424) 153 Other 3 -- 119 119 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1999 4,260 $213 $5,416 (89) $(2,888) (413) $(6,851) $13,396 $(399) $8,887 ===================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 41 PFIZER INC AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS ================================================================================ Year ended December 31 - -------------------------------------------------------------------------------- (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- OPERATING ACTIVITIES Income from continuing operations $ 3,199 $ 1,950 $ 2,082 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 542 489 428 Trovan inventory write-off 310 -- -- Asset impairments and restructuring charges -- 323 -- Deferred taxes and other 286 22 83 Changes in assets and liabilities, net of effect of businesses divested: Accounts receivable (978) (765) (477) Inventories (240) (439) (350) Prepaid and other assets 68 (350) (128) Accounts payable and accrued liabilities 61 628 (63) Income taxes payable (179) 951 (54) Other deferred items 7 473 59 - -------------------------------------------------------------------------------- Net cash provided by operating activities 3,076 3,282 1,580 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property, plant and equipment (1,561) (1,198) (878) Proceeds from disposals of property, plant and equipment 71 79 47 Purchases net of maturities of short-term investments (8,633) (5,845) (221) Proceeds from redemptions of short-term investments 7,309 4,209 28 Proceeds from sales of businesses--net 26 3,059 21 Purchases of long-term investments (322) (752) (74) Other investing activities 342 113 114 - -------------------------------------------------------------------------------- Net cash used in investing activities (2,768) (335) (963) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Repayments of long-term debt (4) (202) (269) Increase in short-term debt--net 2,083 402 325 Proceeds from stock issuances 62 -- -- Purchases of common stock (2,500) (1,912) (586) Cash dividends paid (1,148) (976) (881) Stock option transactions and other 380 411 430 - -------------------------------------------------------------------------------- Net cash used in financing activities (1,127) (2,277) (981) - -------------------------------------------------------------------------------- Net cash (used in)/provided by discontinued operations (20) 4 118 - -------------------------------------------------------------------------------- Effect of exchange-rate changes on cash and cash equivalents 26 1 (27) - -------------------------------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents (813) 675 (273) Cash and cash equivalents at beginning of year 1,552 877 1,150 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 739 $ 1,552 $ 877 ================================================================================ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 1,293 $ 1,073 $ 809 Interest 238 155 149 ================================================================================ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 42 PFIZER INC AND SUBSIDIARY COMPANIES 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 international 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. We made certain reclassifications to the 1998 and 1997 financial statements to conform to the 1999 presentation. In preparing the financial statements, we 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 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 In 1999, we changed the method of determining the cost of all of our remaining inventories previously on the "Last-in, first-out" (LIFO) method to the "First-in, first-out" (FIFO) method. Those inventories consisted of U.S. sourced pharmaceuticals and part of the animal health inventories. We believe that the change in accounting for inventories from LIFO to FIFO is preferable because inventory costs are stable and substantially unaffected by inflation. The change in the method of inventory costing resulted in a pre-tax benefit of $6.6 million included in COST OF SALES for 1999. D--Long-Lived Assets Long-lived assets include: o property, plant and equipment--These assets are recorded at original cost and increased by the cost of any significant improvements after purchase. We depreciate the cost evenly over the assets' estimated 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. We amortize goodwill evenly over periods not exceeding 40 years. The average amortization period is 37 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. We review long-lived assets to assess recoverability from future operations using undiscounted cash flows. When necessary, we record charges for impairments of long-lived assets for the amount by which the present value of future cash flows exceeds the carrying value of these assets. E--Foreign Currency Translation For most international 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 rates in effect when the items were first recorded) 43 PFIZER INC AND SUBSIDIARY COMPANIES F--Product Alliances We have agreements to promote pharmaceutical products developed by other companies. ALLIANCE REVENUE represents revenue recorded under these co-promotion agreements and is derived from the sale of products. The revenue is earned when our co-promotion partners ship the related goods and the sale is consummated with a third party. Such revenue is based in most cases upon a percentage of our co-promotion partners' net sales. SELLING, INFORMATIONAL AND ADMINISTRATIVE EXPENSES in most cases includes 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. G--Stock-Based Compensation In accordance with Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, we elected to account for our stock-based compensation under Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The exercise price of stock options granted equals the market price on the date of grant. In general, there is no recorded expense related to stock options. 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 are deferred until the advertising first occurs Advertising expense totaled $1,310 million in 1999, $1,139 million in 1998, and $898 million in 1997. 2 Discontinued Operations In 1999, we agreed to pay a fine of $20 million to settle antitrust charges involving our former Food Science Group, divested in 1996. For additional details, see note 18, "Litigation." In 1998, we completed the sale of the Medical Technology Group (MTG) segment. Accordingly, the consolidated financial statements and related notes reflect the results of operations and net assets of the MTG businesses--Valleylab, Schneider, American Medical Systems (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 and Howmedica are recorded as NET ASSETS OF DISCONTINUED OPERATIONS at December 31, 1997. The net cash flows of our discontinued operations are reported as NET CASH (USED IN)/PROVIDED BY DISCONTINUED OPERATIONS. Net assets of discontinued operations consisted of the following: ================================================================================ (millions of dollars) 1997 - -------------------------------------------------------------------------------- Net current assets $ 397 Property, plant and equipment--net 383 Other net noncurrent assets and liabilities 640 - -------------------------------------------------------------------------------- Net assets of discontinued operations $1,420 ================================================================================ Discontinued operations--net of tax were as follows: ================================================================================ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- Net sales $ -- $1,160 $1,449 - -------------------------------------------------------------------------------- Pre-tax income/(loss) $(20) $ 92 $ 232 Provision for taxes on income -- 57 93 - -------------------------------------------------------------------------------- Income/(loss) from operations of discontinued businesses--net of tax (20) 35 139 - -------------------------------------------------------------------------------- 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 $(20) $1,401 $ 131 ================================================================================ 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) 1999 1998 1997 - -------------------------------------------------------------------------------- Cash and interest-bearing deposits $114 $103 $115 Loans--net 380 433 408 Other assets 13 15 8 - -------------------------------------------------------------------------------- Total assets $507 $551 $531 - -------------------------------------------------------------------------------- Certificates of deposit and other liabilities $ 24 $ 97 $ 73 Shareholders' equity 483 454 458 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $507 $551 $531 - -------------------------------------------------------------------------------- 44 PFIZER INC AND SUBSIDIARY COMPANIES Condensed Statement of Income ================================================================================ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- Interest income $ 27 $ 30 $ 29 Interest expense (2) (2) (2) Other income--net 8 1 13 - -------------------------------------------------------------------------------- Net income $ 33 $ 29 $ 40 ================================================================================ 4 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) 1999 1998 1997 - -------------------------------------------------------------------------------- Trading securities $ 113 $ 99 $-- - -------------------------------------------------------------------------------- Amortized cost and fair value of held-to-maturity debt securities:* Corporate debt 3,624 2,306 626 Certificates of deposit 445 670 655 Municipals -- -- 56 Other 19 21 104 - -------------------------------------------------------------------------------- Total held-to-maturity debt securities 4,088 2,997 1,441 - -------------------------------------------------------------------------------- Cost and fair value of available-for-sale debt securities* 686 686 686 - -------------------------------------------------------------------------------- Cost of available-for-sale equity securities 60 54 81 Gross unrealized gains 230 106 106 Gross unrealized losses -- (8) (4) - -------------------------------------------------------------------------------- Fair value of available-for-sale equity securities 290 152 183 - -------------------------------------------------------------------------------- Total investments $5,177 $ 3,934 $ 2,310 ================================================================================ *GROSS UNREALIZED GAINS AND LOSSES ARE NOT SIGNIFICANT. These investments are in the following captions in the Balance Sheet: ================================================================================ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- Cash and cash equivalents $ 443 $ 660 $ 636 Short-term investments 3,703 2,377 712 Long-term loans and investments 1,031 897 962 - -------------------------------------------------------------------------------- Total investments $5,177 $3,934 $2,310 - -------------------------------------------------------------------------------- The contractual maturities of the held-to-maturity and available-for-sale debt securities as of December 31, 1999, 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 $3,590 $ 34 $ -- $-- $3,624 Certificates of deposit 443 2 -- -- 445 Other -- 2 8 9 19 Available-for-sale debt securities: Certificates of deposit -- 370 75 -- 445 Corporate debt -- 91 150 -- 241 - -------------------------------------------------------------------------------- Total debt securities $4,033 $499 $233 $ 9 $4,774 Available-for-sale equity securities 290 Trading securities 113 - -------------------------------------------------------------------------------- Total investments $5,177 ================================================================================ B--Short-Term Borrowings The weighted average effective interest rate on short-term borrowings outstanding at December 31 was 4.3% in 1999, 3.7% in 1998 and 2.9% in 1997. We had approximately $1.5 billion available to borrow under lines of credit at December 31, 1999. C--Long-Term Debt ================================================================================ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- Floating-rate unsecured notes $491 $491 $686 Other borrowings and mortgages 34 36 39 - -------------------------------------------------------------------------------- Total long-term debt $525 $527 $725 - -------------------------------------------------------------------------------- Current portion not included above $ 2 $ 4 $ 4 ================================================================================ 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 6.1% at December 31, 1999. 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. Long-term debt outstanding at December 31, 1999, matures as follows: ================================================================================ After (millions of dollars) 2001 2002 2003 2004 2004 - -------------------------------------------------------------------------------- Maturities $ 131 $ 161 $ -- $ -- $ 233 ================================================================================ 45 PFIZER INC AND SUBSIDIARY COMPANIES 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 AND TAXES includes: o purchased currency options OTHER CURRENT LIABILITIES includes: o fair value of forward-exchange contracts o net amounts payable related to interest rate swap contracts OTHER NONCURRENT LIABILITIES includes: o net amounts payable related to currency swap contracts ACCUMULATED OTHER COMPREHENSIVE EXPENSE includes 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 includes: o changes in the fair value of foreign exchange contracts and changes in foreign currency 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 must: o relate to a foreign currency asset, liability or an anticipated transaction that is probable and whose characteristics and terms have been identified o involve the same currency as the hedged item o reduce the risk of foreign currency exchange movements on our operations Interest rate instruments must: o relate to an asset or a liability o 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 1999 1998 1997 - -------------------------------------------------------------------------------- Forward-exchange Foreign currency contracts assets and liabilities .5 .5 .5 - -------------------------------------------------------------------------------- Currency swaps Net investments 4 5 -- Loans .3 1 2 - -------------------------------------------------------------------------------- Purchased Inventory purchases currency options and sales .9 1 1 - -------------------------------------------------------------------------------- Interest rate swaps Debt interest 4 5 1 ================================================================================ 46 PFIZER INC AND SUBSIDIARY COMPANIES 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) 1999 1998 1997 - -------------------------------------------------------------------------------- Foreign currency contracts: Commitments to sell foreign currencies, primarily in exchange for U.S. dollars: Euro* $1,050 $ -- $ -- U.K. pounds 781 482 548 Japanese yen 412 298 224 Irish punt* 91 61 107 Australian dollars 76 98 59 German marks* 39 50 158 Netherlands guilders* -- 316 4 French francs* -- 216 134 Other currencies 192 201 240 Commitments to purchase foreign currencies, primarily in exchange for U.S. dollars: Euro* 339 -- -- U.K. pounds 101 53 60 Irish punt* 50 532 92 German marks* 47 67 73 Netherlands guilders* -- 156 4 Swiss francs -- 8 187 Other currencies 196 144 136 - -------------------------------------------------------------------------------- Total forward-exchange contracts $3,374 $2,682 $2,026 ================================================================================ Currency swaps: Japanese yen $ 829 $ 754 $ -- U.K. pounds 40 40 40 - -------------------------------------------------------------------------------- Total currency swaps $ 869 $ 794 $ 40 - -------------------------------------------------------------------------------- Purchased currency options, primarily for U.S. dollars: Japanese yen $ 393 $ 364 $ 198 German marks -- -- 130 French francs -- -- 46 Belgian francs -- -- 29 Other currencies 30 25 61 - -------------------------------------------------------------------------------- Total purchased currency options $ 423 $ 389 $ 464 ================================================================================ Interest Rate Swap Contracts: Japanese yen $ 353 $ 321 $ 814 Swiss francs -- -- 405 - -------------------------------------------------------------------------------- Total interest rate swaps $ 353 $ 321 $1,219 ================================================================================ * ON JANUARY 1, 1999, MEMBERS OF THE EUROPEAN MONETARY UNION WERE PERMITTED TO USE THE NEW CURRENCY, THE EURO, OR THEIR OLD CURRENCY. 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 1999, 1998 and 1997 o the Swiss franc debt at 2.1% in 1997 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. 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 of our derivative and other financial instruments were not material at December 31, 1999, 1998 and 1997, except for a difference of $230 million at December 31, 1999 for available-for-sale equity securities. 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, 1999. 47 PFIZER INC AND SUBSIDIARY COMPANIES 5 Comprehensive Income Changes in accumulated other comprehensive income/ (expense) 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, 1997 $ 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) Period change (222) 81 (24) (165) - -------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1999 $(375) $ 139 $(163) $(399) ================================================================================ * INCOME TAX BENEFIT FOR OTHER COMPREHENSIVE EXPENSE WAS $76 MILLION IN 1997, $116 MILLION IN 1998 AND $33 MILLION IN 1999. 6 Inventories In June 1999, the European Union's Committee for Proprietary Medicinal Products suspended the European Union licenses of the oral and intravenous formulations of Trovan for 12 months. Based on our evaluation of these events and related matters, we determined that it was unlikely that certain Trovan inventories of finished goods, bulk, work-in-process, and raw materials will be used. Accordingly, in the third quarter of 1999, we recorded a charge of $310 million ($205 million after-tax, or $.05 after-tax per diluted share) in COST OF SALES to write off Trovan inventories in excess of the amount required to support expected sales. 7 Property, Plant and Equipment The major categories of property, plant and equipment follow: ================================================================================ Useful Lives (millions of dollars) (years) 1999 1998 1997 - -------------------------------------------------------------------------------- Land -- $ 174 $ 151 $ 126 Buildings 33 1/3 2,008 1,669 1,534 Machinery and equipment 8-20 3,040 2,685 2,459 Furniture, fixtures and other 3-12 1/2 1,618 1,383 1,232 Construction in progress -- 1,197 956 516 - -------------------------------------------------------------------------------- 8,037 6,844 5,867 Less: accumulated depreciation 2,694 2,429 2,074 - -------------------------------------------------------------------------------- Total property, plant and equipment $5,343 $4,415 $3,793 ================================================================================ 8 Other Deductions--Net The components of other deductions--net follow: ================================================================================ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- Interest income $(301) $ (185) $(156) Interest expense 236 143 149 Interest expense capitalized (13) (7) (2) - -------------------------------------------------------------------------------- Net interest income (78) (49) (9) Co-promotion payments to Searle -- 240 -- Contribution to The Pfizer Foundation -- 300 -- Legal settlements involving the brand-name prescription drug antitrust litigation 2 57 -- Amortization of goodwill and other intangibles 43 45 48 Net exchange (gains)/losses (20) (16) 26 Other, net 154 432 141 - -------------------------------------------------------------------------------- Other deductions--net $ 101 $ 1,009 $ 206 ================================================================================ In 1999, we substantially completed the actions under the restructuring plans announced in 1998. In 1998, we recorded charges for the restructuring in addition to charges for certain asset impairments. The components of these pre-tax charges follow: ================================================================================ (millions of dollars) Total COS* SI&A* R&D OD* - -------------------------------------------------------------------------------- Restructuring charges $177 $68 $17 $1 $ 91 Asset impairments 213 18 -- -- 195 ================================================================================ * COS--COST OF SALES; SI&A--SELLING, INFORMATIONAL AND ADMINISTRATIVE EXPENSES; OD--OTHER DEDUCTIONS-NET. 48 PFIZER INC AND SUBSIDIARY COMPANIES The components of the 1998 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 17 16 - -------------------------------------------------------------------------------- Total $177 $116 $45 $16 ================================================================================ These charges resulted from a 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 exited certain product lines including certain lines associated with our animal health business and certain of our fermentation operations. We wrote off assets related to the product lines we exited, including inventory, intangible assets--primarily goodwill--as well as certain buildings, machinery and equipment which we do not plan to use or sell. As a result of the restructuring, our work force was reduced by approximately 500 manufacturing, sales and corporate personnel. 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. 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 resulted from 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 In 1998, 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). 9 Taxes on Income Income from continuing operations before taxes consisted of the following: ================================================================================ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- United States $2,557 $1,184 $1,215 International 1,891 1,410 1,652 - -------------------------------------------------------------------------------- Total income from continuing operations before taxes $4,448 $2,594 $2,867 ================================================================================ The provision for taxes on income from continuing operations consisted of the following: ================================================================================ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- United States: Taxes currently payable: Federal $ 621 $ 344 $ 344 State and local 38 24 9 Deferred income taxes (72) (162) (23) - -------------------------------------------------------------------------------- Total U.S. tax provision 587 206 330 - -------------------------------------------------------------------------------- International: Taxes currently payable 606 550 462 Deferred income taxes 51 (114) (17) - -------------------------------------------------------------------------------- Total international tax provision 657 436 445 - -------------------------------------------------------------------------------- Total provision for taxes on income $ 1,244 $ 642 $ 775 ================================================================================ Amounts are reflected in the preceding tables based on the location of the taxing authorities. As of December 31, 1999, we have not made a U.S. tax provision of approximately $1.9 billion for approximately $8.2 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. 49 PFIZER INC AND SUBSIDIARY COMPANIES Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows: ================================================================================ (percentages) 1999 1998 1997 - -------------------------------------------------------------------------------- U.S. statutory income tax rate 35.0 35.0 35.0 Effect of partially tax-exempt operations in Puerto Rico (1.5) (2.2) (1.8) Effect of international operations (4.8) (5.5) (5.0) All other--net (0.7) (2.5) (1.2) - -------------------------------------------------------------------------------- Effective tax rate for continuing operations 28.0 24.8 27.0 ================================================================================ 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). The tax effects of the major items recorded as deferred tax assets and liabilities are: ================================================================================ 1999 1998 1997 Deferred Tax Deferred Tax Deferred Tax ---------------- ---------------- -------------- (millions of dollars) Assets Liabs. Assets Liabs. Assets Liabs. - -------------------------------------------------------------------------------- Prepaid/deferred items $ 361 $ 197 $ 411 $ 169 $ 252 $189 Inventories 471 109 322 72 218 60 Property, plant and equipment 22 514 39 433 30 350 Employee benefits 544 131 391 97 297 113 Restructurings and special charge* 244 -- 301 -- 133 -- Foreign tax credit carryforwards 181 -- 117 -- 159 -- Other carryforwards 165 -- 97 -- 135 -- Unremitted earnings -- 335 -- 335 -- -- All other 121 170 169 73 119 76 - -------------------------------------------------------------------------------- Subtotal 2,109 1,456 1,847 1,179 1,343 788 Valuation allowance (27) -- (30) -- (27) -- - -------------------------------------------------------------------------------- Total deferred taxes $ 2,082 $1,456 $ 1,817 $1,179 $ 1,316 $788 - -------------------------------------------------------------------------------- Net deferred tax asset $ 626 $ 638 $ 528 ================================================================================ *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) 1999 1998 1997 - -------------------------------------------------------------------------------- Prepaid expenses and taxes $ 744 $ 809 $ 425 Other assets, deferred taxes and deferred charges 183 26 230 Deferred taxes on income (301) (197) (127) - -------------------------------------------------------------------------------- Net deferred tax asset $ 626 $ 638 $ 528 ================================================================================ 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 or deemed to be paid by subsidiaries to the parent company between 1997 and 1999. We can carry these credits forward for five years from the year of actual payment and apply them to certain U.S. tax liabilities. The Internal Revenue Service (IRS) has completed and closed its audits of our tax returns through 1992. The IRS completed its audits in January 2000 of our tax returns for 1993 through 1995. We are awaiting the agent's final report for those years. We do not expect any material adjustments to be proposed. 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. 10 Benefit Plans Our pension plans cover most employees worldwide. Our postretirement plans provide medical and life insurance benefits to retirees and their eligible dependents. Information regarding our pension and postretirement benefit obligation follows: ================================================================================ Pension Postretirement ---------------------- ------------------ (percentages) 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------- Weighted-average assumptions: Discount rate: U.S. plans 7.5 6.8 7.0 7.5 6.8 7.0 International plans 5.1 5.3 5.9 Rate of compensation increase: U.S. plans 4.5 4.5 4.5 International plans 3.7 3.4 3.9 ================================================================================ 50 PFIZER INC AND SUBSIDIARY COMPANIES 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) 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $3,177 $2,674 $2,130 $ 286 $ 287 $ 285 Service cost 169 151 105 7 10 7 Interest cost 192 181 145 18 20 19 Employee contributions 9 6 6 Plan amendments 13 15 274 2 -- -- Plan net (gains)/losses 87 354 240 (30) (3) (7) Foreign exchange impact 28 36 (103) Acquisitions -- -- 3 -- -- -- Divestitures (42) (26) -- -- -- -- Curtailments -- (26) (1) -- (10) -- Settlements (1) (10) (1) -- -- -- Benefits paid (221) (178) (124) (20) (18) (17) - -------------------------------------------------------------------------------- Benefit obligation at end of year $3,411 $3,177 $2,674 $ 263 $ 286 $ 287 - -------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year $3,194 $2,793 $2,410 Actual return on plan assets 464 530 491 Company contributions 76 63 50 Employee contributions 9 6 6 Foreign exchange impact 26 3 (57) Acquisitions -- -- 1 Divestitures (34) (23) -- Settlements (1) (13) (1) Benefits paid (206) (165) (107) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year $3,528 $3,194 $2,793 - -------------------------------------------------------------------------------- Funded status: Plan assets in excess of/(less than) benefit obligation $ 117 $ 17 $ 119 $(263) $(286) $(287) Unrecognized: Net transition asset (4) (4) (10) -- -- -- Net (gains)/ losses (75) 1 (86) (56) (26) (24) Prior service costs/(gains) 240 248 310 (27) (47) (83) - -------------------------------------------------------------------------------- Net amount recognized $ 278 $ 262 $ 333 $(346) $(359) $(394) ================================================================================ The components in the balance sheet consist of: - ------------------------------------------------------------------------------- Pension Postretirement ---------------------- ---------------------- (millions of dollars) 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------- Prepaid benefit cost $ 537 $ 504 $ 499 $ -- $ -- $ -- Accrued benefit liability (655) (562) (362) (346) (359) (394) Intangible asset 79 71 53 -- -- -- Accumulated other comprehensive income 317 249 143 -- -- -- - -------------------------------------------------------------------------------- Net amount recognized $ 278 $ 262 $ 333 $(346) $(359) $(394) ================================================================================ Information related primarily to International plans: ================================================================================ Pension ------------------------ (millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------- Pension plans with an accumulated benefit obligation in excess of plan assets: Fair value of plan assets $400 $323 $294 Accumulated benefit obligation 752 693 553 Pension plans with a benefit obligation in excess of plan assets: Fair value of plan assets $496 $435 $422 Benefit obligation 949 901 774 ================================================================================ At December 31, 1999, the major U.S. pension plan held approximately 6.8 million shares of our common stock with a fair value of approximately $220 million. The Plan received approximately $2 million in dividends on these shares in 1999. The assumptions used and the annual cost related to these plans follow: ================================================================================ Pension Postretirement ---------------------- --------------------- (percentages) 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------- Weighted average assumptions: Expected return on plan assets: U.S. plans 10.0 10.0 10.0 International plans 7.3 8.1 7.5 ================================================================================ (millions of dollars) - -------------------------------------------------------------------------------- Service cost $ 169 $ 151 $ 105 $ 7 $ 10 $ 7 Interest cost 192 181 145 18 20 19 Expected return on plan assets (275) (249) (208) Amortization of: Prior service costs/ (gains) 19 24 34 (18) (24) (24) Net transition asset (5) (6) (5) -- -- -- Net losses/(gains) 12 10 2 -- (1) (1) Curtailments and settlements--net* -- 28 -- -- (22) -- - -------------------------------------------------------------------------------- Net periodic benefit cost/(gain) $ 112 $ 139 $ 73 $ 7 $(17) $ 1 ================================================================================ * INCLUDES APPROXIMATELY $12 MILLION OF SPECIAL TERMINATION PENSION BENEFITS FOR CERTAIN MTG EMPLOYEES IN 1998. 51 PFIZER INC AND SUBSIDIARY COMPANIES An average increase of 6.9% in the cost of health care benefits was assumed for 2000 and is projected to decrease over the next five years to 5.2% 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, 1999: ================================================================================ (millions of dollars) 1% Increase 1% Decrease - -------------------------------------------------------------------------------- Total of service and interest cost components $ 1 $ (1) Postretirement benefit obligation 13 (12) ================================================================================ 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 $50 million in 1999, $48 million in 1998 and $43 million in 1997. 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 $158 million in 1999, $131 million in 1998 and $127 million in 1997. This table shows future minimum rental commitments under noncancellable leases at December 31, 1999: ================================================================================ After (millions of dollars) 2000 2001 2002 2003 2004 2004 - -------------------------------------------------------------------------------- Lease commitments $54 $45 $40 $29 $27 $286 ================================================================================ 12 Common Stock We effected a three-for-one stock split of our common stock in the form of a 200% stock dividend in 1999 and a two-for-one split of our common stock in the form of a 100% stock dividend in 1997. All share and per share information in this report reflects both splits. Per share data may reflect rounding adjustments as a result of the three-for-one split. Under the current share-purchase program begun in September 1998, we are authorized to purchase up to $5 billion of our common stock. In 1999, we purchased approximately 65.6 million shares of our common stock in the open market at an average price of $38 per share. Since the beginning of this program, we have purchased 80.4 million shares of our common stock for approximately $3 billion. In September 1998, we completed a program under which we purchased 79.2 million shares of our common stock at a total cost of $2 billion. In 1998, we purchased approximately 57.8 million shares of our common stock at an average price of $33 per share under these share-purchase programs. Of the 57.8 million shares repurchased in 1998, 14.8 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 120 million shares of treasury stock to the Pfizer Inc. Grantor Trust in exchange for a $600 million note. The Trust was established primarily to fund our employee benefit plans. In February 1999, the Trust transferred 10 million shares to us to satisfy the balance due on its note and contributed its remaining 90 million shares to the newly established Pfizer Inc. Employee Benefit Trust (EBT). The Grantor Trust was then dissolved and the shares of the EBT will now be used to fund employee benefit plans. The Balance Sheet reflects the fair value of the shares owned by the EBT as a reduction of SHAREHOLDERS' EQUITY. 52 PFIZER INC AND SUBSIDIARY COMPANIES 15 Earnings Per Share The weighted average common shares used in the computations of basic earnings per common share and earnings per common share assuming dilution were as follows: ================================================================================ (millions, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------- Earnings: Income from continuing operations $3,199 $1,950 $2,082 Discontinued operations--net of tax (20) 1,401 131 - -------------------------------------------------------------------------------- Net income $3,179 $3,351 $2,213 - -------------------------------------------------------------------------------- Basic: Weighted average number of common shares outstanding 3,775 3,789 3,771 - -------------------------------------------------------------------------------- Earnings per common share Income from continuing operations $.85 $.51 $.55 Discontinued operations--net of tax (.01) .37 .04 - -------------------------------------------------------------------------------- Net income $.84 $.88 $.59 - -------------------------------------------------------------------------------- Diluted: Weighted average number of common shares outstanding 3,775 3,789 3,771 Common share equivalents-- stock options and stock issuable under employee compensation plans 109 156 138 - -------------------------------------------------------------------------------- Weighted average number of common shares and common share equivalents 3,884 3,945 3,909 - -------------------------------------------------------------------------------- Earnings per common share Income from continuing operations $.82 $.49 $.53 Discontinued operations--net of tax -- .36 .04 - -------------------------------------------------------------------------------- Net income $.82 $.85 $.57 ================================================================================ Options to purchase 115 million shares were outstanding during 1999 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. 16 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 1999, shareholders approved amendments to increase the shares available in the Plan and to extend its term through 2008. The following table summarizes information concerning options outstanding under the Plan at December 31, 1999: ================================================================================ (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 12/31/99 Term (years) Price at 12/31/99 Price - -------------------------------------------------------------------------------- $ 0 - $10 85,308 4.0 $ 6.40 84,401 $ 6.38 10 - 15 36,677 6.6 12.42 34,439 12.42 15 - 20 35,486 7.7 18.34 21,145 18.35 20 - 40 48,730 8.7 35.18 14,114 35.18 over 40 66,904 9.2 42.07 -- -- ================================================================================ 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, 1997 105,042 259,284 $ 7.21 Granted (42,612) 42,612 18.35 Exercised -- (46,983) 5.38 Cancelled 1,959 (2,016) 12.89 - -------------------------------------------------------------------------------- Balance December 31, 1997 64,389 252,897 9.39 Granted (52,860) 52,860 35.21 Exercised -- (54,888) 7.04 Cancelled 1,212 (1,257) 19.91 - -------------------------------------------------------------------------------- Balance December 31, 1998 12,741 249,612 15.32 Authorized 165,000 -- -- Granted (67,963) 67,963 42.07 Exercised -- (41,524) 9.57 Cancelled 2,928 (2,946) 35.41 - -------------------------------------------------------------------------------- Balance December 31, 1999 112,706 273,105 22.63 ================================================================================ OPTIONS GRANTED IN 1999 INCLUDE OPTIONS FOR 450 SHARES GRANTED TO EVERY ELIGIBLE EMPLOYEE WORLDWIDE IN CELEBRATION OF OUR 150TH ANNIVERSARY. THE TAX BENEFITS RELATED TO CERTAIN STOCK OPTION TRANSACTIONS WERE $228 MILLION IN 1999, $274 MILLION IN 1998 AND $88 MILLION IN 1997. The weighted-average fair value per stock option granted was $13.57 for 1999 options, $11.31 for 1998 options and $5.59 for the 1997 options. We estimated the fair values using the Black-Scholes option pricing model, modified for dividends and using the following assumptions: ================================================================================ 1999 1998 1997 - -------------------------------------------------------------------------------- Expected dividend yield 1.02% 1.02% 1.76% Risk-free interest rate 5.26% 5.23% 6.23% Expected stock price volatility 25.98% 26.29% 25.56% Expected term until exercise (years) 5.75 5.75 5.50 ================================================================================ 53 PFIZER INC AND SUBSIDIARY COMPANIES The following table summarizes results as if we had recorded compensation expense for the 1999, 1998 and 1997 option grants: ================================================================================ (millions of dollars, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------- Net income: As reported $ 3,179 $ 3,351 $ 2,213 Pro forma 2,750 3,149 2,087 Basic earnings per share: As reported $ .84 $ .88 $ .59 Pro forma .73 .83 .55 Diluted earnings per share: As reported $ .82 $ .85 $ .57 Pro forma .71 .80 .53 ================================================================================ 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 120 million shares may be awarded. We awarded approximately 2,276,000 shares in 1999, approximately 1,959,000 shares in 1998 and approximately 1,347,000 shares in 1997. At December 31, 1999, program participants had the right to earn up to 12.3 million additional shares. Compensation expense related to the Program was $64 million in 1999, $202 million in 1998 and $74 million in 1997. We entered into two forward-purchase contracts in 1998 and on maturity they were extended. These contracts offset the potential impact on net income of our liability under the Program. 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. Other contract terms are as follows: ================================================================================ Maximum Maturity in Years ----------------------- Number of Shares (thousands) Per Share 1999 1998 - -------------------------------------------------------------------------------- 3,000 $33.73 -- .9 3,017 33.75 .9 -- ================================================================================ The financial statements include the following items related to these contracts: PREPAID EXPENSES AND TAXES includes: o fair value of these contracts OTHER DEDUCTIONS--NET includes: o changes in the fair value of these contracts 17 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. 18 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. In 1999, the Company pleaded guilty to one count of price fixing of sodium erythorbate from July 1992 until December 1994, and one count of market allocation of maltol from December 1989 until December 1995, and paid a total fine of $20 million. The activities at issue involved the Company's former Food Science Group, a division that manufactured food additives and that the Company divested in 1996. The Department of Justice has stated that no further antitrust charges will be brought against the Company relating to the former Food Science Group, that no antitrust charges will be brought against any current director, officer or employee of the Company for conduct related to the products of the former Food Science Group, and that none of the Company's current directors, officers or employees was aware of any aspect of the activity that gave rise to the violations. Five purported class action suits involving these products have been filed against the Company; two in California State Court, and three in New York Federal Court. The Company does not believe that this plea and settlement, or civil litigation involving these products, will have a material effect on its business or results of operations. 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. On December 17, 1999, Mylan received final approval from the FDA for its 30 mg. extended-release nifedipine tablet. On March 16, 1999, the United States District Court granted Mylan's motion to file an amended answer and antitrust counterclaims. All discovery on the antitrust counterclaims is stayed pending resolution of the patent misuse claims. On March 29, 1999, Mylan filed a motion for summary judgment based on an adverse decision against Bayer in Bayer's litigation against Elan Pharmaceutical Research Corp. which involved the same nifedipine particle size 54 PFIZER INC AND SUBSIDIARY COMPANIES patent. Discovery has been essentially completed and the parties dispositive motions were filed by an extended deadline of July 19, 1999, including Pfizer and Bayer's summary judgment motion seeking to dismiss Mylan's patent misuse defenses and counterclaims. On December 13, 1999, Mylan filed its opposition to plaintiffs' motion for summary judgment dismissing Mylan's patent misuse defense and counterclaim, and Bayer and the Company filed their opposition to Mylan's motion for summary judgment of non-infringement. The parties reply memoranda in support of their motions were filed on December 28, 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 Laboratories 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 12, 1999, Biovail filed a motion for summary judgment also based in part on the summary judgment motion granted to Elan in the Bayer v. Elan litigation in the Northern District of Georgia. Pfizer and Bayer's response was filed on April 26, 1999. On September 20, 1999, the United States District Court in Puerto Rico denied Biovail's motion for summary judgment without prejudice to their refiling after completion of discovery in the Procardia XL patent-infringement litigation. The court set an expedited discovery schedule with a deadline of December 30, 1999, to complete discovery of parties and fact witnesses and February 29, 2000, to complete discovery of expert witnesses. On December 20, 1999, the court extended the date to complete fact discovery to January 28, 2000, and that of expert discovery to March 15, 2000. A status conference with the court is scheduled for March 17, 2000. 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 responded to this motion and oral argument has been held in abeyance pending a settlement conference. In September 1999, a settlement agreement was entered into among the parties staying this litigation until the expiration of U.S. Patent No. 4,412,986 on November 2, 2000. On February 10, 1999, the Company received a notice from Lek U.S.A. of its filing of an ANDA for a 90 mg. formulation of nifedipine alleged to be bioequivalent to Procardia XL. On March 25, 1999, Bayer and Pfizer commenced suit against Lek for infringement of the same two Bayer patents originally asserted against Lek's 60 mg. formulation. This case was also the subject of a settlement conference. In September, 1999, a settlement agreement was entered into among the parties staying this litigation until the expiration of U.S. patent No. 4,412,986 on November 2, 2000. 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. Martec filed its response to this complaint on February 26, 1999. A hearing to determine claim scope is scheduled for June 1, 2000. 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 the osmotic pump mechanism of Procardia XL constitute different dosage forms 55 PFIZER INC AND SUBSIDIARY COMPANIES 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. On July 16, 1999, the D.C. Court of Appeals dismissed the appeal on the ground that since the FDA had not approved any ANDA referencing Procardia XL that uses a different extended-release mechanism than the osmotic pump mechanism of Procardia XL, it was premature to maintain this action, stating that Pfizer has the right to bring such an action if, and when, the FDA approves such an ANDA. Subsequent to FDA's final approval of Mylan's ANDA, on December 18, 1999 Pfizer filed suit against FDA in the United States District Court for the District of Delaware. The suit alleges that FDA unlawfully approved Mylan's 30 mg. extended release product because FDA had not granted an ANDA suitability petition reflecting a difference in dosage form from Procardia XL. On March 31, 1999, the Company received notice from TorPharm of its filing, through its U.S. agent Apotex Corp., of an ANDA for 1 mg., 2 mg., 4 mg. and 8 mg. tablets alleged to be bioequivalent to Cardura (doxazosin mesylate). The notice letter alleges that Pfizer's patent on doxazosin is invalid in view of certain prior art references. Following a review of these allegations, suit was filed in the United States District Court for the Northern District of Illinois against TorPharm and Apotex Corp. on May 14, 1999. The defendants requested a 90-day period in which to file their answer. The request was granted and TorPharm/Apotex's answer was filed by August 19, 1999. Discovery is in progress. On June 2, 1999, FDA was notified that given the patent litigation and pursuant to provisions of the Federal Food Drug and Cosmetic Act, the FDA may not approve the TorPharm application for thirty months from filing or resolution of the litigation. On May 5, 1999, the Company filed an action against Sibia Neurosciences, Inc. in the United States District Court for the District of Delaware seeking a declaratory judgment that two Sibia patents claiming reporter gene drug screening assays are invalid, not infringed by the Company, and unenforceable due to Sibia's misuse of its patent rights in seeking certain license terms. On May 27, 1999, Sibia Neurosciences, Inc. filed an answer to the Company's declaratory judgment action in which Sibia denies that a prior case or controversy existed, but admits that a case or controversy does now exist regarding at least one patent in suit, denies the invalidity, unenforceability and non-infringement of the patents in suit, and asserts various jurisdictional and equitable defenses, affirmative defenses, and lack of standing by the Company to assert patent misuse. Sibia Neurosciences also filed a counterclaim alleging willful infringement by the Company of one of the patents in suit. A reply to that counterclaim denying Sibia's allegation has been filed. The parties submitted a joint status report to the court on December 14, 1999, in which the parties agreed to complete fact discovery by August 21, 2000, and commence trial on January 8, 2001. On May 19, 1999, Abbott Laboratories filed an action against the Company in the United States District Court of the Northern District of Illinois alleging that the Company's use, sale or manufacture of trovafloxacin infringes Abbott's United States Patent No. 4,616,019 claiming naphthyriding antibiotics and seeking a permanent injunction and damages. An answer denying these allegations was filed on June 9, 1999. Discovery is in progress. On December 17, 1999, the Company received notice of the filing of an ANDA by Zenith Goldline Pharmaceuticals for 50 mg. and 100 mg. tablets of sertraline hydrochloride alleged to be bioequivalent to Zoloft. Zenith has certified to the FDA that it will not engage in the manufacture, use or sale of sertraline hydrochloride until the expiration of Pfizer's U.S. Patent 4,536,518, which covers sertraline per se and expires December 30, 2005. Zenith has also alleged in its certification to the FDA that the manufacture, use and sale of Zenith's product will not infringe Pfizer's U.S. Patent 4,962,128, which covers methods of treating an anxiety-related disorder or Pfizer's U.S. Patent 5,248,699, which covers a crystalline polymorph of sertraline hydrochloride. These patents expire in November 2009 and August 2012, respectively. On January 28, 2000, the Company filed a patent infringement action against Zenith Goldline and its parent Ivax Corporation in the United States District Court for the District of New Jersey for infringement of the '128 and '699 patents. On February 1, 2000, the Company received notice of the filing of an ANDA by Novopharm Limited for 50 mg, 100 mg, 150 mg and 200 mg tablets of fluconazole alleged to be bioequivalent to DIFLUCAN. Novopharm has certified to the FDA its position that the Company's U.S. Patent 4,404,216, which covers fluconazole, is invalid. This patent expires in January 2004. The Company is evaluating Novopharm's notice. In pre-existing litigation between Pioneer Hi-Bred International, Inc. and DeKalb Genetics Corporation in the United States District Court for the Southern District of Iowa, the court granted on October 8, 1999 Pioneer's motion to add additional parties, including Pfizer Inc. and Monsanto Co. (the present owner of DeKalb Genetics Corporation), as codefendant parties. The amended complaint, which claims violations of the federal Lanham Act and Iowa state law stemming from the codefendants' alleged use of Pioneer's corn seed germplasm in the development of competitive corn seed products, was served on the Company on October 19. The Company filed its answer on December 15, 1999. On September 22, 1999, the jury in a trademark-infringement litigation brought against the Company by Trovan Ltd. and Electronic Identification Devices, Ltd. relating to use of the TROVAN mark for trovafloxacin issued a verdict in favor of the plaintiffs with respect to liability, holding that the Company had infringed Trovan Ltd.'s mark and had acted in bad faith. Following a further damage trial, on October 12, 1999, the jury awarded Trovan Ltd. a total of $143 million in 56 PFIZER INC AND SUBSIDIARY COMPANIES damages, comprised of $5 million actual damages, $3 million as a reasonable royalty and $135 million in punitive damages. The court held a hearing on December 27, 1999, on whether to award the plaintiffs profits based on the Company's sales of Trovan and, if so, the amount of same. The Company's motion for mistrial remains outstanding. 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. 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 sixteen 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. As of January 29, 2000, there were 57,328 personal injury claims pending against Quigley and 26,890 such claims against the Company (excluding those that are inactive or have been settled in principle), 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, 57 PFIZER INC AND SUBSIDIARY COMPANIES 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 against excess insurance carriers seeking damages and/or declaratory relief to secure their coverage obligations has now been largely resolved, although claims against several of such insureds do remain pending. 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. In 1993, 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, alleging that the manufacturers violated the Sherman Act by agreeing not to give retailers certain discounts and that the failure to give such discounts violated the Robinson Patman Act. A class action was brought on the Sherman Act claim, as well as additional actions by approximately 3,500 individual retail pharmacies and a group of chain and supermarket pharmacies (the "individual actions") on both the Sherman Act and Robinson Patman Act claims. A retailer class was certified in 1994 (the "Federal Class Action"). In 1996, fifteen manufacturer defendants, including the Company, settled the Federal Class Action. The Company's share was $31.25 million, payable in four annual installments without interest. 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 appealed and, on July 13, 1999, the Court of Appeals upheld most of the dismissal but remanded on one issue, while expressing doubts that the plaintiffs could prove any damages. Retail pharmacy cases also have been filed in state courts in five states, and consumer class actions were filed in state courts in fourteen states and the District of Columbia alleging injury to consumers from the failure to give discounts to retail pharmacy companies. 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, California and North Dakota), 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, which has been approved by the Court there. 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 opened 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 responded. A second subpoena was issued to the Company for documents in May 1997 and the Company again responded. We are not aware of any further activity. 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. Since December 1998, four actions have been filed, in state courts in Houston, San Francisco, Chicago and New Orleans, purportedly on behalf of statewide (California) or nationwide (Houston, Chicago and New Orleans) 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 voluntarily dismissed and proceedings in the San Francisco, Chicago and New Orleans cases are still in early stages of the proceedings. The Company believes the complaints are without merit. In December, 1999 and January, 2000, two suits were filed in California state courts against the Company and other manufacturers of zinc oxide-containing powders. The first suit was filed by the Center for Environmental Health and the second was filed by an individual plaintiff on behalf of a 58 PFIZER INC AND SUBSIDIARY COMPANIES purported class of purchasers of baby powder products. The suits generally allege that the label of Desitin powder violates California's "Proposition 65" by failing to warn of the presence of lead, which is alleged to be a carcinogen. In January, 2000, the Company received a notice from a California environmental group alleging that the labeling of Desitin ointment and powder violates Proposition 65 by failing to warn of the presence of cadmium, which is alleged to be a carcinogen. Several other manufacturers of zinc oxide-containing topical baby products have received similar notices. The Company believes that the labeling for Desitin complies with applicable legal requirements. 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 review of the Company's new procedures was undertaken by FDA in 1999. The Company and Agency met to review the findings of this review and agreed that commitments and remedial measures undertaken by the Company related to the Warning Letter have been accomplished. The Company agreed to keep the Agency informed of its activities as it continues to modify its processes and procedures. During May and June, 1999, the FDA and the European Union's Committee for Proprietary Medicinal Products (CPMP) reconsidered the approvals to market Trovan, a broad-spectrum antibiotic, following post-market reports of severe adverse liver reactions to the drug. On June 9, the Company announced that, regarding the marketing of Trovan in the United States, it had agreed to restrict the indications, limit product distribution, make certain other labeling changes and to communicate revised warnings to health care professionals in the United States. On July 1, Pfizer received the opinion of the CPMP recommending a one-year suspension of the licenses to market Trovan in the European Union. The CPMP opinion has been finalized in a Final Decision by the European Commission. Since June, 1999, three suits and several claims have been received by the Company alleging liver injuries due to the ingestion of Trovan. The majority of these claims have been resolved without litigation. In June and July, 1999, two of the lawsuits were filed in the Circuit Court, Hampton County, South Carolina on behalf of a purported class of all persons who received Trovan, seeking compensatory and punitive damages and injunctive relief. One of the suits, seeking injunctive relief, has been dismissed. No substantive proceedings have yet occurred in the other suit and the Company believes that it is not properly maintainable as a class action, and will defend against it accordingly. In October 1999 the Company was sued in an action seeking unspecified damages, costs and attorney's fees on behalf of a purported class of people whose dogs had suffered injury or death after ingesting Rimadyl, an antiarthritic medication for older dogs. The suit, which was filed in state court in South Carolina, is in the early pretrial stages. The Company believes it is without merit. 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. These cases have now been resolved. 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. Most of these claims, along with a number of filed and unfiled claims from other jurisdictions, have now been resolved. 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 sought the award of moral, economic and personal damages to individuals and the payment to a public reserve fund. In February 1996, the trial court issued a decision holding Pfizer Brazil liable. The trial court's opinion also established the amount of moral damages for individuals who might make claims later in the proceeding and set out a formula for calculating the payment into the public reserve fund which could have resulted in a sum of approximately $88 million. Pfizer Brazil appealed this decision. In September 1999, the appeals court issued a ruling upholding the trial court's decision as to liability. However, the appeals court decision overturned the trial court's decision concerning damages, ruling that criteria to apply in the calculation of damages, both as to individuals and as to payment of any amounts to the reserve fund, should be established only in a later stage of the proceeding. The Company believes that this action 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 19 Segment Information and Geographic Data 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, 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 1999, sales to our two largest wholesalers accounted for 14% and 12% 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 1999. 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 ================================================================================ Pharma- Animal Corporate/ (millions of dollars) ceutical Health Other Consolidated - -------------------------------------------------------------------------------- Total revenues 1999 $14,859 $1,345 $ -- $16,204 1998 12,230 1,314 -- 13,544 1997 9,726 1,329 -- 11,055 - -------------------------------------------------------------------------------- Segment profit 1999 4,898(1) 67 (517)(2) 4,448(3) 1998 3,574 (77) (903)(2) 2,594(3) 1997 3,129 112 (374)(2) 2,867(3) - -------------------------------------------------------------------------------- Identifiable assets(4) 1999 9,723 2,144 8,707 20,574 1998 7,987 2,109 8,206 18,302 1997 6,464 2,197 6,330(5) 14,991 - -------------------------------------------------------------------------------- Property, plant and equipment additions(4) 1999 1,387 90 84 1,561 1998 991 97 110 1,198 1997 687 69 122 878 - -------------------------------------------------------------------------------- Depreciation and amortization(4) 1999 438 74 30 542 1998 386 82 21 489 1997 337 75 16 428 ================================================================================ Geographic Data ================================================================================ All United Other (millions of dollars) States(6) Japan Countries Consolidated - -------------------------------------------------------------------------------- Total revenues 1999 $9,896 $1,249 $5,059 $16,204 1998 8,205 943 4,396 13,544 1997 6,089 949 4,017 11,055 - -------------------------------------------------------------------------------- Long-lived assets 1999 3,430 487 2,750 6,667 1998 2,905 369 2,499 5,773 1997 2,910 283 2,155 5,348 ================================================================================ (1) INCLUDES $310 MILLION CHARGE TO WRITE OFF TROVAN INVENTORIES. (2) INCLUDES INTEREST INCOME/(EXPENSE) AND CORPORATE EXPENSES. CORPORATE ALSO INCLUDES OTHER INCOME/(EXPENSE) OF THE FINANCIAL SUBSIDIARIES (SEE NOTE 3, "FINANCIAL SUBSIDIARIES") AND CERTAIN PERFORMANCE-BASED COMPENSATION EXPENSES NOT ALLOCATED TO THE OPERATING SEGMENTS. (3) CONSOLIDATED TOTAL EQUALS INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR TAXES ON INCOME AND MINORITY INTERESTS. (4) 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. (5) INCLUDES NET ASSETS OF DISCONTINUED OPERATIONS. (6) INCLUDES OPERATIONS IN PUERTO RICO. 20 Subsequent Event On February 7, 2000, we announced an agreement to merge with Warner-Lambert Company (Warner-Lambert). Under terms of the merger agreement, which has been approved by the Board of Directors of both Pfizer and Warner-Lambert, we will exchange 2.75 shares of Pfizer voting common stock for each outstanding share of Warner-Lambert voting common stock in a tax-free transaction valued at $98.31 per Warner- Lambert share, or an equity value of $90 billion based on the closing price of our stock on February 4, 2000 of $35.75 per share. Customary and usual provisions will be made for outstanding options and warrants. This transaction is subject to customary conditions, including the use of pooling-of-interests accounting, qualifying as a tax-free reorganization, shareholder approval at both companies and usual regulatory approvals. The transaction is expected to close in mid-2000. 60 PFIZER INC AND SUBSIDIARY COMPANIES QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------------------------------------------------- Quarter ---------------------------------------------------- (millions of dollars, except per share data) First Second Third Fourth - ---------------------------------------------------------------------------------------- 1999 Net sales $3,524 $3,298 $3,423 $3,887 Alliance revenue 403 481 569 619 - ---------------------------------------------------------------------------------------- Total revenues 3,927 3,779 3,992 4,506 Costs and expenses 2,778 2,751 3,025 3,202 - ---------------------------------------------------------------------------------------- Income from continuing operations before provision for taxes on income and minority interests 1,149 1,028 967 1,304 Provision for taxes on income 333 298 265 348 Minority interests 1 1 1 2 - ---------------------------------------------------------------------------------------- Income from continuing operations 815 729 701 954 Discontinued operations--net of tax -- (20) -- -- - ---------------------------------------------------------------------------------------- Net income $ 815 $ 709 $ 701 $ 954 - ---------------------------------------------------------------------------------------- Earnings per common share--basic Income from continuing operations $ .22 $ .19 $ .19 $ .25 Discontinued operations--net of tax -- (.01) -- -- - ---------------------------------------------------------------------------------------- Net income $ .22 $ .18 $ .19 $ .25 - ---------------------------------------------------------------------------------------- Earnings per common share--diluted Income from continuing operations $ .21 $ .18 $ .18 $ .25 Discontinued operations--net of tax -- -- -- -- - ---------------------------------------------------------------------------------------- Net income $ .21 $ .18 $ .18 $ .25 - ---------------------------------------------------------------------------------------- Cash dividends paid per common share $ .07 1/3 $ .07 1/3 $ .08 $ .08 - ---------------------------------------------------------------------------------------- Stock prices High $ 48 11/64 $ 50 3/64 $ 40 11/16 $ 42 1/4 Low $ 36 33/64 $ 31 35/64 $ 32 $ 32 3/16 ======================================================================================== 1998 Net sales $2,886 $3,114 $3,110 $3,567 Alliance revenue 150 198 220 299 - ---------------------------------------------------------------------------------------- Total revenues 3,036 3,312 3,330 3,866 Costs and expenses 2,294 2,468 2,628 3,560 - ---------------------------------------------------------------------------------------- Income from continuing operations before provision for taxes on income and minority interests 742 844 702 306 Provision for taxes on income 206 249 186 1 Minority interests 1 1 1 (1) - ---------------------------------------------------------------------------------------- Income from continuing operations 535 594 515 306 Discontinued operations--net of tax 157 34 882 328 - ---------------------------------------------------------------------------------------- Net income $ 692 $ 628 $1,397 $ 634 - ---------------------------------------------------------------------------------------- Earnings per common share--basic Income from continuing operations $ .14 $ .16 $ .13 $ .08 Discontinued operations--net of tax .04 .01 .24 .08 - ---------------------------------------------------------------------------------------- Net income $ .18 $ .17 $ .37 $ .16 - ---------------------------------------------------------------------------------------- Earnings per common share--diluted Income from continuing operations $ .14 $ .15 $ .13 $ .07 Discontinued operations--net of tax .04 -- .23 .09 - ---------------------------------------------------------------------------------------- Net income $ .18 $ .15 $ .36 $ .16 - ---------------------------------------------------------------------------------------- Cash dividends paid per common share $ .06 1/3 $ .06 1/3 $ .06 1/3 $ .06 1/3 - ---------------------------------------------------------------------------------------- Stock prices High $ 32 1/2 $ 40 37/64 $ 40 13/64 $ 42 63/64 Low $ 23 11/16 $ 32 1/8 $ 30 43/64 $ 28 43/64 - ----------------------------------------------------------------------------------------
ALL DATA REFLECTS THE 1999 THREE-FOR-ONE STOCK SPLIT. AS OF JANUARY 31, 2000, THERE WERE 149,747 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) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 14,133 12,677 10,739 9,864 8,684 6,825 6,080 5,816 5,352 4,757 4,220 Alliance revenue 2,071 867 316 -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 16,204 13,544 11,055 9,864 8,684 6,825 6,080 5,816 5,352 4,757 4,220 Research and development 2,776 2,279 1,805 1,567 1,340 1,036 880 776 654 545 449 Other costs and expenses 8,980 8,671 6,383 5,769 5,327 4,212 3,822 3,829 3,675 3,288 3,045 Divestitures, restructuring and unusual items-- net(1) -- -- -- -- -- -- 741 (141) 300 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations before taxes and minority interests $ 4,448 2,594 2,867 2,528 2,017 1,577 637 1,352 723 924 726 Provision for taxes on income $ 1,244 642 775 758 609 445 106 368 141 235 171 Income from continuing operations before cumulative effect of accounting changes $ 3,199 1,950 2,082 1,764 1,401 1,127 529 981 579 684 551 Discontinued operations--net of tax (20) 1,401 131 165 172 171 129 113 143 117 130 Cumulative effect of accounting changes -- -- -- -- -- -- -- (283)(2) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 3,179 3,351 2,213 1,929 1,573 1,298 658 811 722 801 681 - ------------------------------------------------------------------------------------------------------------------------------------ Effective tax rate--continuing operations 28.0% 24.8% 27.0% 30.0% 30.2% 28.2% 16.6% 27.2% 19.5% 25.4% 23.6% Depreciation $ 473 420 363 309 277 236 206 209 183 167 160 Property, plant and equipment additions 1,561 1,198 878 690 635 620 575 592 505 466 388 Cash dividends paid 1,148 976 881 771 659 594 536 487 437 397 364 - ------------------------------------------------------------------------------------------------------------------------------------ As of December 31 - ------------------------------------------------------------------------------------------------------------------------------------ Working capital(3) $ 2,006 2,739 2,448 1,914 1,787 1,582 1,875 2,749 1,978 1,920 2,026 Property, plant and equipment--net 5,343 4,415 3,793 3,456 3,113 2,747 2,320 1,994 2,061 1,808 1,565 Total assets(3) 20,574 18,302 14,991 14,251 12,339 10,797 8,986 9,346 9,387 8,782 8,099 Long-term debt 525 527 725 681 828 604 571 571 393 189 181 Long-term capital(4) 9,738 9,551 8,819 7,907 6,518 5,150 4,643 5,453 5,725 5,643 5,034 Shareholders' equity 8,887 8,810 7,933 6,954 5,506 4,324 3,866 4,719 5,026 5,092 4,536 - ------------------------------------------------------------------------------------------------------------------------------------ Per common share data: Basic: Income from continuing operations before effect of accounting changes $ .85 .51 .55 .47 .38 .31 .14 .25 .15 .17 .14 Discontinued operations--net of tax (.01) .37 .04 .05 .05 .04 .03 (.04)(2) .03 .03 .03 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ .84 .88 .59 .52 .43 .35 .17 .21 .18 .20 .17 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted: Income from continuing operations before effect of accounting changes $ .82 .49 .53 .46 .37 .30 .14 .24 .14 .17 .14 Discontinued operations--net of tax -- .36 .04 .04 .05 .05 .03 (.04)(2) .04 .03 .03 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ .82 .85 .57 .50 .42 .35 .17 .20 .18 .20 .17 - ------------------------------------------------------------------------------------------------------------------------------------ Market value per share (December 31) $ 32.44 41.67 24.85 13.83 10.50 6.44 5.75 6.04 7.00 3.37 2.90 Return on shareholders' equity 35.9% 40.0% 29.7% 31.0% 32.0% 31.7% 15.3% 16.6% 14.3% 16.6% 15.4% Cash dividends paid per share $.30 2/3 .25 1/3 .22 2/3 .20 .17 1/3 .15 2/3 .14 .12 1/3 .11 .10 .09 1/3 Shareholders' equity per share $ 2.36 2.33 2.10 1.85 1.48 1.18 1.04 1.21 1.27 1.29 1.14 Current ratio 1.22:1 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 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average shares used to calculate: Basic earnings per share amounts 3,775 3,789 3,771 3,743 3,687 3,670 3,785 3,948 3,963 3,966 3,972 Diluted earnings per share amounts 3,884 3,945 3,909 3,864 3,777 3,729 3,845 4,038 4,072 4,046 4,073 Employees of continuing operations (thousands) 51 46 41 39 37 34 33 33 35 33 33 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues per employee (thousands) $ 318 292 269 256 238 202 184 177 154 145 129 ====================================================================================================================================
All financial information reflects the divestitures of our MTG and food science businesses as discontinued operations. We have restated all common share and per share data for the 1999, 1997, 1995 and 1991 stock splits. (1) Divestitures, restructuring and unusual items--net includes 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--charge of $313 million or $.08 per share; SFAS No. 109--credit of $30 million or $.01 per share. Per share amounts of accounting changes are included in per share amounts presented for discontinued operations. (3) Includes net assets of discontinued operations of our MTG businesses through 1997. (4) Defined as long-term debt, deferred taxes on income, minority interests and shareholders' equity. 62 EX-21 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE COMPANY The following is a list of subsidiaries of the Company as of December 31, 1999, omitting some subsidiaries which, considered in THE AGGREGATE, WOULD NOT CONSTITUTE A SIGNIFICANT SUBSIDIARY. NAME WHERE INCORPORATED A S Ruffel (Mozambique) Limitada.......................... Mozambique A S Ruffel (Private) Ltd.................................. Zimbabwe A.S. Ruffel (Proprietary) Limited......................... South Africa A/O Pfizer................................................ Russia AMS Medical Systems AG.................................... Switzerland Adforce Inc............................................... United States Anaderm Research Corp..................................... United States Bioindustria Farmaceutici S.p.A........................... Italy Biomedical Sensors (Holdings) Limited..................... United Kingdom Blue Cross S.r.l.......................................... Italy C.P. Pharmaceuticals International C.V.................... Netherlands Charwell Pharmaceuticals Limited.......................... United Kingdom Community Care Health Solutions Inc....................... United States Community Health Care Solutions LLC ...................... United States Compania Distribuidora Del Centro, S.A. de C.V............ Mexico Dental Zement G.m.b.H..................................... Germany Disease Management Sciences Inc........................... United States Duchem Laboratories Limited............................... India Farkemo S.r.l............................................. Italy Farminova, Produtos Farmaceuticos de Inovacao, Lda........ Portugal HII Holding, LLC.......................................... United States Harmag, Inc............................................... Panama Health Care Ventures, Inc................................. United States Heinrich Mack Nachf. G.m.b.H. & Co. KG.................... Germany Howmedica France S.C.A.................................... France Invicta Farma, S.A........................................ Spain Irkafarm S.r.l............................................ Italy Laboratoire Beral, S.A.................................... France Laboratoires Pfizer S.A................................... Morocco Laboratorios Pfizer Lda................................... Portugal Laboratorios Pfizer Ltda.................................. Brazil Laboratorios Pfizer de Venezuela, S.A..................... Venezuela Leema Chemicals & Cosmetics Pvt. Ltd...................... India MED Urological, Inc....................................... United States MTG Divestitures Handels GmbH............................. Austria MTG Divestitures Inc...................................... United States MTG Divestitures Limited.................................. United Kingdom MTG Divestitures Pty Ltd.................................. Australia Measureaim................................................ United Kingdom Nefox Farma, S.A.......................................... Spain Nostrum Farma, S.A........................................ Spain Orsim, S.A................................................ France PFIZER, S.A., S. en C..................................... Spain PQI Inc................................................... Canada PT. Pfizer Indonesia...................................... Indonesia Pfizer (Ireland) Limited.................................. Ireland Pfizer (Malaysia) Sendirian Berhad........................ Malaysia Pfizer (Namibia) (Proprietary) Limited.................... Namibia Pfizer A.B................................................ Sweden Pfizer A.G................................................ Switzerland Pfizer A/S................................................ Denmark Pfizer A/S................................................ Norway Pfizer Africa & Middle East Company for Pharmaceuticals, Animal Health & Chemicals S.A.E.......... Egypt Pfizer Agricare Pty. Ltd.................................. Australia Pfizer Algerie Sante et Nutrition Animale s.p.a........... Algeria Pfizer Animal Health B.V.................................. Netherlands Pfizer Animal Health Korea Ltd............................ South Korea Pfizer Animal Health S.A.................................. Belgium Pfizer Antilles Holdings N.V.............................. Netherlands Antilles Pfizer B.V................................................ Netherlands Pfizer Beteiligungs G.m.b.H............................... Germany Pfizer Bioquimicos S.A.................................... Venezuela Pfizer Canada Inc......................................... Canada Pfizer Chemical Corp. Ltd................................. Isle of Man Pfizer Cia Ltda........................................... Ecuador Pfizer Commercial Holdings Limited........................ Isle of Man Pfizer Consumer Healthcare S.r.l.......................... Italy Pfizer Coordination Center................................ Morocco Pfizer Corporation........................................ Panama Pfizer Corporation Austria G.m.b.H........................ Austria Pfizer Dental Products Corp............................... United States Pfizer Distribution Company............................... Ireland Pfizer Egypt S.A.E........................................ Egypt Pfizer Enterprises Inc.................................... United States Pfizer European Service Center N.V........................ Belgium Pfizer Export Company..................................... Ireland Pfizer G.m.b.H............................................ Germany Pfizer Global Holdings B.V................................ Netherlands Pfizer Group Limited...................................... United Kingdom Pfizer H.C.P. Corporation................................. United States Pfizer Health Solutions Inc............................... United States Pfizer Hellas, A.E........................................ Greece Pfizer Holding France..................................... France Pfizer Holding Mexico, S. de R.L. de C.V.................. Mexico Pfizer Holding und Verwaltungs G.m.b.H.................... Germany Pfizer Holdings B.V....................................... Netherlands Pfizer Holdings Europe.................................... Ireland Pfizer Holdings Ireland................................... Ireland Pfizer Ilaclari A.S....................................... Turkey Pfizer International Bank Europe.......................... Ireland Pfizer International Corporation.......................... Panama 2 Pfizer International Holdings Limited..................... Ireland Pfizer International Inc.................................. United States Pfizer Italiana S.p.A..................................... Italy Pfizer Laboratories (Proprietary) Limited................. South Africa Pfizer Laboratories Korea Limited......................... South Korea Pfizer Laboratories Limited............................... Kenya Pfizer Laboratories Limited............................... New Zealand Pfizer Laboratories Limited............................... Pakistan Pfizer Limitada........................................... Angola Pfizer Limited............................................ Ghana Pfizer Limited............................................ India Pfizer Limited............................................ Tanzania Pfizer Limited............................................ Thailand Pfizer Limited............................................ Uganda Pfizer Limited............................................ United Kingdom Pfizer Ltd................................................ Taiwan Pfizer Manufacturing Ireland.............................. Ireland Pfizer Manufacturing LLC.................................. United States Pfizer Med-Inform Beratungs G.m.b.H....................... Austria Pfizer Medical Systems, Inc............................... United States Pfizer Medical Technology Group (Belgium) N.V............. Belgium Pfizer Medical Technology Group (Netherlands) B.V. ....... Netherlands Pfizer Medical Technology Group Aktiebolag................ Sweden Pfizer Medical Technology Group Limited................... United Kingdom Pfizer Medical Technology Group Pension Trustees Limited.. United Kingdom Pfizer Netherlands L.P.................................... United States Pfizer Overseas, Inc...................................... United States Pfizer Oy................................................. Finland Pfizer Pension Trustees (Ireland) Limited................. Ireland Pfizer Pension Trustees Ltd............................... United Kingdom Pfizer Pharm Algerie SPA.................................. Algeria Pfizer Pharmaceutical Trading Limited Liability Company (a/k/a Pfizer Kft. or Pfizer LLC) ................... Hungary Pfizer Pharmaceuticals B.V................................ Netherlands Pfizer Pharmaceuticals Inc. [a/k/a Pfizer Seiyaku Kabushiki Kaisha (PSK)] ....... Japan Pfizer Pharmaceuticals Jersey Limited..................... Isle of Jersey Pfizer Pharmaceuticals Korea Limited...................... South Korea Pfizer Pharmaceuticals LLC................................ United States Pfizer Pharmaceuticals Ltd................................ People's Republic of China Pfizer Pharmaceuticals Production Corporation............. Panama Pfizer Pharmaceuticals Production Corporation (Partnership) .............................. Ireland Pfizer Pharmaceuticals Production Corporation Limited..... Isle of Man Pfizer Pharmaceuticals, Inc............................... United States Pfizer Pharmaceutics Israel Ltd........................... Israel Pfizer Pigments Inc....................................... United States Pfizer Polska Sp. z.o.o................................... Poland Pfizer Private Limited.................................... Singapore Pfizer Production LLC..................................... United States Pfizer Products Inc....................................... United States Pfizer Pty. Ltd........................................... Australia Pfizer Research and Development Company N.V. / S.A........ Belgium / Ireland Pfizer Ringaskiddy Production Company..................... Isle of Man Pfizer S.A................................................ Peru 3 Pfizer S.A................................................ Belgium Pfizer S.A................................................ Colombia Pfizer S.A................................................ Costa Rica Pfizer S.A................................................ France Pfizer S.A................................................ Venezuela Pfizer S.G.P.S. Lda....................................... Portugal Pfizer S.R.L.............................................. Argentina Pfizer Saidal Manufacturing............................... Algeria Pfizer Service Company Ireland............................ Ireland Pfizer Servicios de Mexico, S.A. de C.V................... Mexico Pfizer Shoji Co., Ltd..................................... Japan Pfizer Specialties Limited................................ Nigeria Pfizer Technologies Ltd................................... United Kingdom Pfizer Trading Corp....................................... Taiwan Pfizer Tunisie............................................ Tunisia Pfizer Ventures Limited................................... Isle of Jersey Pfizer Zona Franca S.A.................................... Costa Rica Pfizer s.r.o.............................................. Czech Republic Pfizer, Inc............................................... Philippines Pfizer, S.A. [a/k/a Pfizer Pharmaceutical]................ Spain Pfizer, S.A. de C.V....................................... Mexico Programmable Pump Technologies, Inc....................... United States Quigley Company Inc....................................... United States Radiologic Sciences, Inc.................................. United States Roerig A.B................................................ Sweden Roerig B.V................................................ Netherlands Roerig Farmaceutici Italiana S.p.A........................ Italy Roerig S.A................................................ Chile Roerig, Produtos Farmaceuticos, Lda....................... Portugal Roerig, S.A............................................... Venezuela S.D. Investments Pty. Ltd................................. Australia Shiley Incorporated....................................... United States Shiley International...................................... United States Shiley Ltd................................................ United Kingdom Site Realty, Inc.......................................... United States SmithKline Animal Health (Proprietary) Limited............ South Africa SmithKline Animal Health (SWA) (Pty) Ltd.................. Namibia SmithKline Beecham Animal Health (Singapore) Private Limited......................................... Singapore SmithKline Beecham Animal Health (Taiwan) Limited......... Taiwan Taylor Kosmetik G.m.b.H................................... Germany The Kodiak Company Ltd.................................... Bermuda Unicliffe Limited......................................... United Kingdom VMI Acquisition Corp...................................... United States Vinci Farma, S.A. ........................................ Spain 4 EX-23 7 CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Pfizer Inc.: We consent to incorporation herein by reference of our report dated February 14, 2000 on the consolidated balance sheets of Pfizer Inc. and Subsidiary Companies as of December 31, 1999, 1998 and 1997 and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended, as contained in the Pfizer Inc. 1999 Annual Report to Shareholders. These consolidated financial statements and our report thereon are incorporated by reference in this Annual Report on Form 10-K for the year ended December 31,1999. We also consent to incorporation by reference of our report in the following Registration Statements: o Form S-15 dated December 13, 1982 (File No. 2-80884), o Form S-8 dated October 27, 1983 (File No. 2-87473), o Form S-8 dated March 22, 1990 (File No. 33-34139), o Form S-8 dated January 24, 1991 (File No. 33-38708), o Form S-8 dated November 18, 1991 (File No.33-44053), o Form S-3 dated May 27, 1993 (File No. 33-49629), o Form S-8 dated May 27, 1993 (File No. 33-49631), o Form S-8 dated May 19, 1994 (File No. 33-53713), o Form S-8 dated October 5, 1994 (File No. 33-55771), o Form S-3 dated November 14, 1994 (File No. 33-56435), o Form S-8 dated December 20, 1994 (File No. 33-56979), o Form S-4 dated February 14, 1995 (File No. 33-57709), o Form S-8 dated March 29, 1996 (File No. 33-02061), o Form S-8 dated September 25, 1997 (File No. 333-36371), o Form S-8 dated April 22, 1999 (File No. 333-76839), and o Form S-4 dated March 9, 2000 (File No. 333-90975). s/KPMG LLP New York, New York March 24, 2000 EX-27.1 8 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PFIZER INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1999 DEC-31-1999 739 3,703 3,932 (68) 1,654 11,191 8,037 (2,694) 20,574 9,185 525 0 0 213 18,812 20,574 14,133 16,204 2,528 2,528 2,776 32 223 4,448 1,244 3,199 (20) 0 0 3,179 .84 .82 Financial data schedules for periods other than the years ended December 31, 1998 and 1997 and the six-month period ended June 28, 1998 have not been restated to reflect the three-for-one stock split distributed June 30, 1999.
EX-27.2 9 FDS
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PFIZER INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1998 RESTATED TO REFLECT THE JUNE 1999 THREE-FOR-ONE STOCK SPLIT IN THE FORM OF A 200 PERCENT STOCK DIVIDEND. THIS RESTATED SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS RESTATED AS DESCRIBED ABOVE. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 1,552 2,377 2,981 (67) 1,828 9,931 6,844 (2,429) 18,302 7,192 527 0 0 210 16,945 18,302 12,677 13,544 2,094 2,094 2,279 40 136 2,594 642 1,950 1,401 0 0 3,351 .88 .85 Financial data schedules for periods other than the years ended December 31, 1998 and 1997 and the six-month period ended June 28, 1998 have not been restated to reflect the three-for-one stock split distributed June 30, 1999.
EX-27.3 10 FDS
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PFIZER INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1997 RESTATED TO REFLECT THE JUNE 1999 THREE-FOR-ONE STOCK SPLIT IN THE FORM OF A 200 PERCENT STOCK DIVIDEND. THIS RESTATED SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS RESTATED AS DESCRIBED ABOVE. 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 877 712 2,255 (35) 1,461 7,442 5,867 (2,074) 14,991 4,994 725 0 0 207 12,450 14,991 10,739 11,055 1,776 1,776 1,805 5 147 2,867 775 2,082 131 0 0 2,213 .59 .57 Financial data schedules for periods other than the years ended December 31, 1998 and 1997 and the six-month period ended June 28, 1998 have not been restated to reflect the three-for-one stock split distributed June 30, 1999.
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